Legislature(2009 - 2010)BARNES 124

03/10/2010 01:00 PM House RESOURCES

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 6:00 pm --
Heard & Held
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
Moved CSHB 369(RES) Out of Committee
         HB 337-OIL AND GAS PROD. TAX: CREDITS/INTEREST                                                                     
                [Contains discussion of HB 308]                                                                                 
1:06:26 PM                                                                                                                    
CO-CHAIR JOHNSON  announced that the  first order of  business is                                                               
HOUSE  BILL NO.  337, "An  Act  relating to  interest on  certain                                                               
underpayments  or overpayments  for  the oil  and gas  production                                                               
tax,  to certificates  for  certain oil  and  gas production  tax                                                               
credits for  qualified capital  expenditures, and  to alternative                                                               
tax credits for expenditures for  certain oil and gas development                                                               
and exploration  activities for the  oil and gas  production tax;                                                               
relating  to the  use  of the  oil  and gas  tax  credit fund  to                                                               
purchase certain  tax credit certificates;  and providing  for an                                                               
effective date."                                                                                                                
1:06:34 PM                                                                                                                    
PAT   GALVIN,   Commissioner,   Department  of   Revenue   (DOR),                                                               
introduced HB  337 on  behalf of Governor  Parnell, saying  it is                                                               
the administration's bill  regarding oil and gas taxes.   He said                                                               
HB 337 would introduce four  distinct concepts, the first being a                                                               
30 percent credit for all  well-related work.  Under current law,                                                               
capital  credits  are 20  percent  for  capital expenditures  and                                                               
exploration incentive credits are 30  or 40 percent for work done                                                               
outside of existing  fields.  This first concept would  make it a                                                               
30  percent  credit for  all  well-related  work, including  well                                                               
workovers and  other well work  within existing fields  that does                                                               
not currently qualify for a  credit under the existing production                                                               
tax.  In  response to Co-Chair Neuman, he said  this credit would                                                               
apply to  all well-related work  statewide and would  include the                                                               
re-conditioning of old wells.                                                                                                   
COMMISSIONER  GALVIN said  the  second concept  of  HB 337  would                                                               
allow for  these credits  to be  applied in  the first  year, the                                                               
year  in which  they are  earned, as  opposed to  current law  in                                                               
which the credits are spread over two years.                                                                                    
1:09:12 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that  the purpose  of credits  is to                                                               
stimulate work  and the taking of  risk.  Given that  looking for                                                               
new reservoirs is riskier than  work done within existing fields,                                                               
he  said it  seems to  him  that this  differential incentive  is                                                               
being eliminated.  He inquired  whether making these two types of                                                               
work  equal will  stimulate  workover  within current  reservoirs                                                               
instead of exploration beyond the current reservoirs.                                                                           
COMMISSIONER  GALVIN responded  he does  not believe  the premise                                                               
behind  the current  differential  in credits  is to  incentivize                                                               
exploration  at  the  expense  of   in-field  work.    The  state                                                               
recognizes  that  risk is  an  inherent  aspect of  the  economic                                                               
analysis.   Because  of  the  uncertainty of  the  reward of  any                                                               
particular investment,  the state's  current system has  a higher                                                               
credit on  the exploration side  because those risks  are higher.                                                               
However, it  does not mean  that the  decisions on whether  to do                                                               
in-field  work are  not  driven by  an  economic evaluation  that                                                               
would be impacted  by adding credits.  In other  words, there are                                                               
likely investment decisions  for in-field well work  that are not                                                               
at a decision-making threshold under  the current system, but for                                                               
which  additional credits  would  become a  "green  light".   The                                                               
intent is  to move the  bar to get more  well work than  would be                                                               
done  without the  credit  and  is not  being  seen as  diverting                                                               
investment  away from  exploration  towards in-field  work.   The                                                               
intent is to  enhance the in-field work in  addition to enhancing                                                               
CO-CHAIR  JOHNSON encouraged  Representative Seaton  to ask  this                                                               
question of industry representatives  when they present testimony                                                               
to the committee.                                                                                                               
1:13:33 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG noted  that HB 337 would  provide for a                                                               
pre-drilling conference  between the taxpayer and  the Department                                                               
of Natural Resources (DNR).  He asked whether this occurs now.                                                                  
COMMISSIONER   GALVIN  replied   yes,   it   happens  under   the                                                               
exploration incentive credit program.                                                                                           
1:14:09 PM                                                                                                                    
COMMISSIONER GALVIN continued his  introduction of HB 337, noting                                                               
the  third component  of the  bill would  eliminate the  existing                                                               
requirement that a company make  additional investments in future                                                               
years to  qualify for state reimbursement  of a credit.   This is                                                               
for   companies  that   do  not   have  current   production  tax                                                               
obligations  to put  their credits  against and  are looking  for                                                               
ways to  get compensated for  those credits.  Companies  that are                                                               
currently working in the state  immediately get the full value of                                                               
that credit by  writing it off on their  current tax obligations.                                                               
Thus, there  is a disparity in  the value that this  credit holds                                                               
for  these   participants.    A   company  that  is   looking  to                                                               
potentially partner  as just an  investor in an  exploration well                                                               
may  be  looking   at  the  outcome  of  that   investment  as  a                                                               
determining factor  in whether to invest  again in Alaska.   If a                                                               
company does  not know  whether it  will get  the full  value for                                                               
that credit,  the company will  discount the  value of it  in its                                                               
economic analysis on whether to  invest in this exploration well.                                                               
That is  not in the  state's interest because  at the end  of the                                                               
day it is going to reduce  the state's revenue by the same dollar                                                               
amount.   By eliminating that  reinvestment risk, the  state gets                                                               
the  same impact  to  itself  while boosting  the  value of  that                                                               
credit to these potential investors.                                                                                            
1:16:40 PM                                                                                                                    
COMMISSIONER GALVIN  said the  fourth component  of HB  337 would                                                               
provide for the  waiver of interest charged  on tax underpayments                                                               
that  are a  result of  retroactive regulations  implementing the                                                               
[2007] Alaska's Clear and Equitable  Share (ACES) legislation.  A                                                               
provision in ACES provided that  the regulations implementing the                                                               
bill  would be  retroactive to  the effective  date of  the bill.                                                               
Currently, the  Department of  Revenue can  waive a  penalty that                                                               
may apply to an underpayment  if the department determines a good                                                               
faith effort was made by the  company to fully pay its obligation                                                               
while not yet aware of what  the regulation would say at the time                                                               
payment was  made.  However,  current statute does not  allow the                                                               
department   to  waive   interest   that  may   accrue  on   that                                                               
underpayment.   This provision  would provide  for the  waiver of                                                               
that interest when  it is the result of  a retroactive regulation                                                               
and the department finds the taxpayer  in good faith made what it                                                               
believed was a full payment.                                                                                                    
CO-CHAIR  JOHNSON noted  there are  elements in  HB 337  that are                                                               
similar to HB 308.                                                                                                              
1:18:52 PM                                                                                                                    
REPRESENTATIVE SEATON inquired whether  the interest applies only                                                               
to the production tax credit.                                                                                                   
COMMISSIONER GALVIN answered  yes and the provision  can be found                                                               
in Section 1 of the bill.                                                                                                       
1:19:27 PM                                                                                                                    
REPRESENTATIVE  SEATON referenced  the standard  deduction clause                                                               
that was in  effect until December 2009 and  inquired whether the                                                               
proposed  change in  law  is  only from  12/31/09  until now  and                                                               
whether it excludes Prudhoe Bay and Kuparuk.                                                                                    
COMMISSIONER GALVIN  responded that a number  of regulations have                                                               
been put in place as a  result of ACES beyond just the definition                                                               
of qualified lease  expenditures.  He presumed that  that is what                                                               
Representative Seaton is referring to  as being of less impact to                                                               
those at Prudhoe Bay and  Kuparuk that had the so-called standard                                                               
deduction that  drove their operating  expenditures.  There  is a                                                               
large  range of  regulations  having to  do  with production  tax                                                               
liability,  he  said, and  given  the  nature of  the  regulation                                                               
development  process, he  does  not  expect there  to  be a  wide                                                               
deviation between  what companies  paid in tax  and what  will be                                                               
the actual tax due as a result of the regulation change.                                                                        
1:21:51 PM                                                                                                                    
REPRESENTATIVE SEATON  requested the  committee be  provided with                                                               
an  indication of  the anticipated  difference  between what  was                                                               
paid and the actual tax that becomes due.                                                                                       
COMMISSIONER GALVIN replied  the Department of Revenue  is not in                                                               
the  position  to  estimate  what  that number  would  be.    The                                                               
department  expects the  taxpayers  had a  good understanding  of                                                               
what the tax would be and  would have prepared their taxes at the                                                               
time  based upon  that  expectation.   Now  that the  retroactive                                                               
regulations  have  been   prepared,  he  said  it   may  be  more                                                               
appropriate  to ask  the question  of the  taxpayers to  see what                                                               
they think the difference will be.                                                                                              
CO-CHAIR  JOHNSON pointed  out that  the  penalties and  interest                                                               
would be  additional income  to the state,  not a  liability, and                                                               
therefore the state is not put in any sort of jeopardy.                                                                         
COMMISSIONER GALVIN added that the  Department of Revenue did not                                                               
include anything in  the fiscal note in regard  to this provision                                                               
because  anticipated  interest  payments  or  penalties  are  not                                                               
incorporated  into   revenue  projections.     Additionally,  the                                                               
department is not  in a position to identify that  there would be                                                               
any particular  impact as a result  of this.  The  department put                                                               
this  provision  in the  bill  as  an  element of  fairness,  not                                                               
because a significant dollar swing is expected.                                                                                 
1:24:50 PM                                                                                                                    
CO-CHAIR JOHNSON  held over HB  337 and noted the  committee will                                                               
decide which vehicle to advance - HB  337 or HB 308.  He said the                                                               
committee will work  with the administration to take  the best of                                                               
both bills and advance something that everyone can live with.                                                                   
               HB 308-OIL AND GAS PRODUCTION TAX                                                                            
                [Contains discussion of HB 337]                                                                                 
1:25:58 PM                                                                                                                    
CO-CHAIR NEUMAN  announced that the  second order of  business is                                                               
HOUSE BILL NO.  308, "An Act relating to the  tax rate applicable                                                               
to the  production of  oil and gas;  relating to  credits against                                                               
the oil  and gas production  tax; and  relating to the  period in                                                               
which oil  and gas  production taxes may  be assessed."   [Before                                                               
the committee  was Version E,  the proposed  committee substitute                                                               
for HB 308, labeled 26-LS1328\E, Bullock, 2/5/10.]                                                                              
CO-CHAIR NEUMAN opened public testimony.                                                                                        
The committee  took an  at-ease from  1:27 p.m.  to 1:28  p.m. to                                                               
deal with technical difficulties in the teleconference system.                                                                  
1:29:44 PM                                                                                                                    
MARILYN  CROCKETT,   Executive  Director,  Alaska  Oil   and  Gas                                                               
Association  (AOGA),  noted  that  AOGA is  a  trade  association                                                               
composed of  14 member  companies with interest  in Alaska.   She                                                               
thanked the sponsor  for introducing HB 308 and said  the bill is                                                               
an important  first step  in a  comprehensive review  of Alaska's                                                               
Clear and Equitable Share (ACES) legislation [enacted in 2007].                                                                 
1:31:44 PM                                                                                                                    
MS. CROCKETT  began her PowerPoint  presentation by  stating that                                                               
AOGA sees three problems with ACES  [slide 3], the first being an                                                               
excessive tax  rate.   While many  presentations have  been given                                                               
about the  amount of  industry investment in  Alaska, she  said a                                                               
more telling statistic is the  amount of new in-field drilling in                                                               
Alaska [slide 4].  New in-field  wells decreased from 166 in 2007                                                               
to 147  in 2009.   She related  that North Slope  operator, "BP",                                                               
has publically  said its in-field  drilling will be more  than 50                                                               
percent lower in  2010 than it was in 2007.   She further related                                                               
that  according to  a "ConocoPhillips"  presentation at  a recent                                                               
conference,  about 450  million  barrel-of-oil equivalents  (BOE)                                                               
were added  to North Slope reserves  in the last five  years, but                                                               
only 35  million since ACES  was enacted.  The  telling component                                                               
of that  is that giant fields  have the worst fiscal  terms under                                                               
ACES.   The news for  exploration wells  is not good  either, she                                                               
added.   The  number of  exploration wells  drilled on  the North                                                               
Slope has declined from 11 in 2007 to only 8 in 2009.                                                                           
1:33:08 PM                                                                                                                    
MS. CROCKETT said her recollection  of the companies operating in                                                               
Alaska does not agree with  the 2/16/10 testimony of Kevin Banks,                                                               
Director of  the Division of Oil  & Gas, in which  he stated that                                                               
independents  are  flocking  to   Alaska.    She  maintained  the                                                               
independent  companies  conducting  exploratory drilling  on  the                                                               
North Slope  have been around for  a couple of years  and are not                                                               
new players that  have arrived since the enactment of  ACES.  She                                                               
added  that Mr.  Banks' testimony  also prompts  the question  of                                                               
what companies  are out there  that could be investing  in Alaska                                                               
but are  not, and noted that  of the 20 largest  U.S. drillers by                                                               
footage in 2009, only 7 have  operations in Alaska or interest in                                                               
fields in Alaska [slide 5].                                                                                                     
MS. CROCKETT said another disturbing  trend is the closure of oil                                                               
and  gas  leases   [slide  6].    She  related   that  last  year                                                               
"ConocoPhillips" relinquished 800,000 acres of  its leases in the                                                               
National Petroleum Reserve-Alaska (NPR-A).   A total of 2 million                                                               
acres  of  state and  federal  leases  on  the North  Slope  were                                                               
released  in 2009  and over  1.2 million  acres were  released in                                                               
1:35:33 PM                                                                                                                    
MS.  CROCKETT, in  response to  Representative P.  Wilson, stated                                                               
that the  company names shown in  black on slide 5  are companies                                                               
that operate  in Alaska or  have working interest ownership  in a                                                               
field in Alaska ["XTO,  Anadarko, ConocoPhillips, BP, ExxonMobil,                                                               
Shell, Marathon"].   The company names shown in blue  do not have                                                               
operations in  Alaska, have  not participated  in lease  sales in                                                               
Alaska,  and  are  not  drilling   exploratory  wells  in  Alaska                                                               
["Chesapeake,  EOG  Resources,  EnCana,  Devon,  Noble,  Questar,                                                               
Williams   Production,   Ultra   Resources,   Concho   Resources,                                                               
Southwestern Energy, Apache, Petrohawk, Laredo Petroleum"].                                                                     
1:36:38 PM                                                                                                                    
REPRESENTATIVE TUCK,  in regard to  slide 5, surmised  that while                                                               
only 7  of the  20 largest  drillers in the  U.S. are  in Alaska,                                                               
there are other smaller companies that are drilling in Alaska.                                                                  
MS.  CROCKETT  responded  correct.     She  understood  that  two                                                               
companies  not  on this  top-20  list,  but that  are  conducting                                                               
exploration activities in Alaska, will  be testifying today.  The                                                               
point of slide 5  relates to the question of why  are not more of                                                               
these 20  largest U.S. drillers conducting  operations in Alaska.                                                               
She clarified that the seven  companies shown in black are either                                                               
explorers, producers,  or working interest owners  in a currently                                                               
producing field.   In further response, she noted  there are only                                                               
three companies  conducting exploration  on the North  Slope that                                                               
are not on this list of 20 largest drillers.                                                                                    
1:38:23 PM                                                                                                                    
MS. CROCKETT,  in response to Representative  Kawasaki, explained                                                               
that the  companies shown  on slide  5 are  explorers as  well as                                                               
producers.  She  clarified that the company names  shown in black                                                               
have operations  in Alaska  and the company  names shown  in blue                                                               
are  not exploring  or active  in Alaska  but are  active in  the                                                               
Lower  48.   She said  these  are the  top 20  companies for  the                                                               
amount of  footage drilled, so  they are the 20  largest drillers                                                               
in the U.S. for the year 2009.                                                                                                  
1:39:34 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired  which  of  these  20  companies                                                               
operates exclusively in coalbed methane or shale natural gas.                                                                   
MS. CROCKETT replied she does  not know because she is unfamiliar                                                               
with some of the companies.   However, she does know that some of                                                               
these 20  are actively  pursuing shale  gas opportunities  in the                                                               
Lower 48, but that is not their sole interest.                                                                                  
1:40:11 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  noted that  numerous things  would add                                                               
to the  figures being shown,  such as  the total number  of wells                                                               
drilled,  whether it  is private  or public  land, or  that wells                                                               
drilled in  Alaska tend to  be deeper  than elsewhere.   He asked                                                               
whether another slide will speak to this.                                                                                       
MS. CROCKETT answered  she does not have a slide  in this regard,                                                               
but the  compelling thing  for AOGA is  that these  companies are                                                               
very  active and  are drilling  lots of  wells in  the Lower  48.                                                               
However, the companies  shown in blue are not  drilling any wells                                                               
in Alaska and have not bid on  any lease sales in Alaska, and the                                                               
question is why.                                                                                                                
CO-CHAIR NEUMAN concurred with Ms. Crockett.                                                                                    
REPRESENTATIVE  KAWASAKI said  he  would  appreciate getting  the                                                               
aforementioned  information   offered  by   Ms.  Crockett.     He                                                               
understood shale gas  requires the drilling of  hundreds of wells                                                               
as compared  to reservoir gas  and he  does not think  Alaska has                                                               
any shale gas plays.                                                                                                            
MS. CROCKETT agreed to provide this information.                                                                                
1:42:23 PM                                                                                                                    
MS.  CROCKETT returned  to her  presentation, reiterating  that a                                                               
great deal  of lease  acreage has been  released by  companies in                                                               
Alaska [slide 6].                                                                                                               
CO-CHAIR JOHNSON presumed that released  means the lease has been                                                               
given back  to the  state because  the company  does not  plan to                                                               
develop that acreage.                                                                                                           
MS. CROCKETT responded correct.                                                                                                 
1:43:26 PM                                                                                                                    
MS. CROCKETT said AOGA entitles  the second problem with ACES the                                                               
impossible plight of non-operators [slide  7].  She recalled that                                                               
in testimony before the legislature  in 2007 regarding ACES, AOGA                                                               
expressed its  concern about future  conflicts that  could result                                                               
from the  [Department of  Revenue] not  using the  joint interest                                                               
billings  in working  interest ownership  and in  fields where  a                                                               
company  has  other  partners.    A  non-operator  is  a  working                                                               
interest  owner  that  is  not   the  operator  of  a  particular                                                               
oilfield.    A  non-operator  pays  the  operator  from  a  joint                                                               
interest billing  and uses that  invoice to file its  tax return.                                                               
The problem is  that a non-operator does not have  access to some                                                               
of the detailed information that the operator has.                                                                              
MS.  CROCKETT  explained that  the  level  of detail  complicates                                                               
things  even  further.    Over  20,000 cost  codes  are  used  to                                                               
allocate  cost in  the Prudhoe  Bay unit,  but the  Department of                                                               
Revenue's regulations  for implementing  ACES only have  336 cost                                                               
code  categories  in  which  a   company  can  deduct  its  lease                                                               
operating costs.   Thus,  there is a  great deal  of uncertainty,                                                               
especially  for  non-operators,  about  what  can  or  cannot  be                                                               
deducted.   There  is virtually  no way  for a  Prudhoe Bay  non-                                                               
operator to  determine which of  the 20,000 cost codes  fits into                                                               
the 336  categories.  Additionally, one  part of a cost  code may                                                               
fit into one category and another part into another category.                                                                   
MS. CROCKETT  said the point is  that ACES is a  very complicated                                                               
and complex production  tax system and the  regulations that have                                                               
been  developed  and that  are  continuing  to be  developed  are                                                               
equally complicated.   When making  investment decisions  for the                                                               
future, neither  the operator  nor the  non-operator will  have a                                                               
great deal  of confidence in what  the actual taxes will  be, and                                                               
this will complicate and influence investment decisions.                                                                        
1:46:21 PM                                                                                                                    
CO-CHAIR  NEUMAN surmised  that  an investment  may  not be  made                                                               
because of this uncertainty.                                                                                                    
MS.  CROCKETT  replied correct;  the  question  is what  kind  of                                                               
influence this  has when a company  sits down to make  a decision                                                               
for investments in the future.                                                                                                  
1:47:33 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI recalled  that  during consideration  of                                                               
ACES  there was  discussion about  the complexity  that would  be                                                               
added  by going  from a  simple gross  system to  a profits-based                                                               
system.   Some members at  the table  today voted for  a standard                                                               
deduction, he  related, the  idea being  to simplify  the system.                                                               
He  inquired whether  AOGA  is advocating  for  something like  a                                                               
standard deduction system.                                                                                                      
MS. CROCKETT answered  no, AOGA is not advocating  for a standard                                                               
deduction  system.   Her point  is that  a complicated  system is                                                               
already  in place  through the  joint interest  billings and  the                                                               
unit  operating  agreements, and  this  system  is a  well-tested                                                               
system of accounts that everyone is  familiar with.  She said the                                                               
Department of  Revenue actually  has the ability  to rely  on the                                                               
joint interest billings  because this ability was  not removed by                                                               
ACES.  However, the department  also had the flexibility to adopt                                                               
another system,  which is what it  did, and that is  the point of                                                               
the comments  she is making.   Creating another  more complicated                                                               
system  instead of  using information  that is  readily available                                                               
does not seem to be productive from AOGA's point of view.                                                                       
1:49:58 PM                                                                                                                    
MS. CROCKETT  continued her presentation,  noting that  the third                                                               
problem  with ACES  is the  inability of  taxpayers to  determine                                                               
with certainty  the amount of  tax [slide  8].  She  related that                                                               
the Department of Revenue's regulations  have a set of provisions                                                               
that the company  can use in determining its  tax; however, those                                                               
regulations  will also  state that  the department  can determine                                                               
something else.  Therefore, the  taxpayer does not have any great                                                               
deal of  certainty even though  it has  gone through the  list of                                                               
provisions spelled out in the  regulations; this, then, gets back                                                               
to the investment decisions.                                                                                                    
1:51:06 PM                                                                                                                    
MS.  CROCKETT discussed  the six  provisions proposed  by HB  308                                                               
[slide 9].   Regarding the  Alaska hire provision, she  said AOGA                                                               
believes the Alaska  industry already has a good  track record of                                                               
Alaska  hire because  it  makes  good business  sense  to do  so.                                                               
Should  this  provision  is  adopted,   she  would  suggest  that                                                               
Department of  Labor and Workforce Development  standards be used                                                               
rather than  creating a new and  substantially different process.                                                               
She further  cautioned that while the  rebate is a good  idea, it                                                               
would create additional complexity and ambiguity.                                                                               
1:52:12 PM                                                                                                                    
MS. CROCKETT,  in regard to the  progressivity provision, allowed                                                               
it  is  no  secret  that AOGA  has  opposed  progressivity  since                                                               
Governor  Frank Murkowski  first introduced  it in  the Petroleum                                                               
Production Tax.   While AOGA  continues to  oppose progressivity,                                                               
it acknowledges that  lessening the steepness of  the slope would                                                               
reduce its negative effects; so,  to that extent, Version E would                                                               
represent an improvement over the present situation.                                                                            
MS. CROCKETT offered  AOGA's support for the  proposed 30 percent                                                               
tax credit for well-related expenditures.                                                                                       
1:52:48 PM                                                                                                                    
MS.  CROCKETT said  AOGA endorses  the proposal  in Version  E to                                                               
change  the  statutory  rate  of  interest  because  the  present                                                               
interest rate  is punitive in  purpose and bears little,  if any,                                                               
relation  to either  the state's  or the  taxpayer's actual  harm                                                               
from not having had the money.                                                                                                  
MS. CROCKETT stated AOGA agrees  with the proposed provision that                                                               
there  be   no  interest  on   tax  underpayments   arising  from                                                               
retroactive application of new regulations.   It is highly unfair                                                               
to have interest accrue on  tax underpayments that arise directly                                                               
from the retroactivity of a  newly adopted tax regulation.  Also,                                                               
in light  of the  punitively high rate  of the  current statutory                                                               
interest,  the  accrual  of  interest  on  such  an  underpayment                                                               
starting  from the  date  the  original tax  was  due would  also                                                               
present constitutional  issues.  In response  to Co-Chair Neuman,                                                               
she said  AOGA recommends that  Version E's proposed  time period                                                               
of 30  days for a  taxpayer to  determine and pay  any additional                                                               
tax that is due after  a retroactive regulation becomes effective                                                               
be changed to the second calendar  month after the month in which                                                               
the  retroactive regulation  becomes effective,  except when  the                                                               
regulation becomes effective  in the first quarter  in which case                                                               
it should be  May 1 because the  beginning of the year  is a busy                                                               
time when true-up payments are being determined.                                                                                
1:54:53 PM                                                                                                                    
MS.  CROCKETT  further  stated that  AOGA  supports  Version  E's                                                               
proposed change to the statute  of limitations.  She concluded by                                                               
saying that Version  E would not eliminate all  the problems that                                                               
ACES has, but it would be a good first step in improving ACES.                                                                  
MS. CROCKETT, in  response to Representative Tuck,  said that the                                                               
last  paragraph  on page  6  of  her written  testimony  provides                                                               
AOGA's  suggestions  for improving  the  provision  in Version  E                                                               
regarding no  interest on tax  underpayments that arise  from the                                                               
retroactive application of new regulations.                                                                                     
The committee took an at-ease from 1:56 p.m. to 1:57 p.m.                                                                       
1:57:06 PM                                                                                                                    
GREG  VIGIL,   Executive  Vice  President,  Savant   Alaska,  LLC                                                               
("Savant"),  began his  PowerPoint  presentation  by noting  that                                                               
Savant is a  relatively small company founded in 2006,  but it is                                                               
an Alaska-only  company in  terms of its  focus and  scope [slide                                                               
2].  He  said Savant has licensed  quite a bit of  seismic in the                                                               
state as  a result of the  charter agreement between some  of the                                                               
"majors" in  the state, and  is focused primarily on  the eastern                                                               
side of the North Slope east of Prudhoe Bay Field.                                                                              
MR. VIGIL  said Savant  drilled an  offshore exploration  well in                                                               
2006 called "Kupcake #1", which was  a dry hole.  Following that,                                                               
the company entered into a  farmout agreement with BP Exploration                                                               
(Alaska)  Inc., which  provided Savant  with exclusive  access to                                                               
the  Badami  Unit.    A  year  ago  Savant  opened  an  Anchorage                                                               
operations  office staffed  by several  Alaska-resident employees                                                               
who  deal with  field operations.    In March  2009, the  company                                                               
commenced the Red  Wolf exploration well from Badami  gravel.  An                                                               
apparent discovery  has been made in  two zones of that  well and                                                               
flow tests will be conducted this summer.                                                                                       
MR. VIGIL  stated that to date  Savant has invested or  caused to                                                               
be  invested   over  $43  million   in  Alaska   exploration  and                                                               
development.    The  company just  finished  drilling  its  first                                                               
Badami re-redevelopment well, which  is a horizontal sidetrack in                                                               
the existing Badami Sand Participation Area.                                                                                    
1:59:41 PM                                                                                                                    
MR.  VIGIL said  Savant came  to Alaska  because the  North Slope                                                               
contains a prolific hydrocarbon  system that has multiple stacked                                                               
pays available  in that  geologic section [slide  3].   The North                                                               
Slope's lightly  developed east  side presents  opportunities for                                                               
Savant.    Under ACES,  the  current  45  cents per  dollar  from                                                               
qualified  capital expenditure  and net  operating loss  provides                                                               
Savant  with significant  incentive  and is  instrumental to  the                                                               
company's  continued  investment  in  the state.    The  existing                                                               
Badami  infrastructure is  also  very advantageous  to Savant  in                                                               
that it provides  a competitive advantage in  terms of turnaround                                                               
times for production from first drilling.                                                                                       
MR. VIGIL summarized  Savant's tax credits under  ACES [slide 4].                                                               
He said  the company has  redeemed about $3.4 million  in credits                                                               
to date in cash from the  state.  Savant currently has credits of                                                               
about  $8 million  that will  be redeemed  the second  quarter of                                                               
2010,  and tomorrow  it will  be filing  an application  for $6.6                                                               
million of tax  credits.  From its inception to  date, Savant has                                                               
acquired, earned,  or redeemed approximately $19  million in ACES                                                               
tax credits.   He said the secondary market for  ACES tax credits                                                               
is relatively thin at best, and  he believes that both HB 337 and                                                               
HB 308 attempt to correct this unintended consequence.                                                                          
2:01:38 PM                                                                                                                    
MR. VIGIL  reviewed Savant's plans  for the next year  [slide 5].                                                               
He  said  the company  will  finish  its drilling  operations  at                                                               
Badami in the  next 30 days or  so.  This summer  it will restart                                                               
production  at the  Badami plant,  resuming some  production from                                                               
the existing wells along with the  two new wells that it drilled.                                                               
Results of  the two  new wells will  be evaluated  and additional                                                               
delineation  and development  wells will  potentially be  drilled                                                               
winter 2011.   He said  Savant is transitioning from  an explorer                                                               
to a  producer, which  means that  Savant is for  real and  is in                                                               
Alaska to stay.                                                                                                                 
MR. VIGIL  offered Savant's  view of the  ACES tax  credit system                                                               
[slide 6].   In  regard to exploration  incentives, he  said this                                                               
tax credit  system has provided meaningful  inducement for Savant                                                               
to take risk  in the state.  Any enhancements  to the ACES system                                                               
would only  improve the company's  ability to  continue exploring                                                               
and  investing   in  Alaska.    Savant   generally  supports  the                                                               
governor's  proposed  amendments  [HB  337]  because  they  would                                                               
improve  some of  these exploration  incentives,  which would  be                                                               
beneficial to  his company.   Speaking  to prior  testimony about                                                               
other independents  that explore in  the Lower 48, he  said these                                                               
credits  are little  known  or  understood in  the  Lower 48  and                                                               
getting the word out would be to the state's benefit.                                                                           
2:03:48 PM                                                                                                                    
MR. VIGIL, in  regard to the progressivity feature  of ACES, said                                                               
Savant Alaska, LLC  has remained silent on this  issue because it                                                               
is  not  yet   a  producer.    However,  now  that   it  will  be                                                               
transitioning   to  production   mode   in   2010,  Savant   sees                                                               
progressivity as a disincentive to itself,  as well as to all the                                                               
producers in the state, in  that it results in diminishing return                                                               
per incremental barrel produced.                                                                                                
MR. VIGIL  explained that  slide 7  is a  pictorial graph  of the                                                               
ACES progressivity disincentive that  Savant sees in its economic                                                               
models.    Under  the  ACES  disincentive  to  success,  Savant's                                                               
economic models drive the company  to under-perform as opposed to                                                               
over-perform  under certain  economic assumptions,  which is  not                                                               
good policy in Savant's opinion.                                                                                                
2:04:53 PM                                                                                                                    
MR.  VIGIL,  in  response  to  Representative  Seaton,  said  the                                                               
vertical axis  on the graph in  slide 7 represents the  oil rate,                                                               
or offtake, from  development at Badami.  In  response to further                                                               
questions  from   Representative  Seaton,   he  noted   that  the                                                               
progressivity under  ACES is  on a net  income per  barrel basis.                                                               
As a  constant price, there  is an incentive to  under-produce on                                                               
rate because  it results in  lower overall net income  per barrel                                                               
for the development  and therefore a lower  overall severance tax                                                               
liability.  Under  the current system, an  optimization model can                                                               
take place that  dissuades a company from  peak-producing a field                                                               
and to instead  slowly develop the field over time  to incur less                                                               
overall severance  tax liability.   He said  he is  pointing this                                                               
out because Savant  thinks there should not be  a disincentive to                                                               
develop  a field,  and progressivity,  as currently  constructed,                                                               
creates a disincentive.                                                                                                         
2:07:44 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG  presumed  that  the  calculation  Mr.                                                               
Vigil  is   talking  about   would  occur   with  any   level  of                                                               
MR. VIGIL responded yes.  The  slope of that progressivity has an                                                               
impact  on  any  given  economic   model.    Changing  only  that                                                               
variable, such as  making the slope shallower or  the hurdle rate                                                               
lower, definitely affects  the outcome of the model.   The nature                                                               
of  progressivity  is  such  that  it is  going  to  create  this                                                               
2:08:30 PM                                                                                                                    
REPRESENTATIVE  GUTTENBERG surmised  that  even if  there was  no                                                               
progressivity a company would still  have to determine whether it                                                               
needs to  produce more oil  today or tomorrow, assuming  that the                                                               
prices would be different.                                                                                                      
MR.  VIGIL  replied  that  under  a  constant  prices  and  costs                                                               
economic  analysis, lack  of progressivity  would lead  Savant to                                                               
develop  a field,  at  least  on the  maximum  net present  value                                                               
analysis or  discounted cash  flow rate  of return;  thus, Savant                                                               
would be  inclined to  try to  develop the  field as  quickly and                                                               
efficiently as  possible to  maximize net  present value  for all                                                               
2:09:36 PM                                                                                                                    
MR.  VIGIL, in  response to  Representative Tuck,  explained that                                                               
the assumption used in  the graph on slide 7 is  that for a given                                                               
quantity of  oil, the area  under the red  curve is equal  to the                                                               
area under  the green curve.   Using a constant prices  and costs                                                               
economic  analysis,  the  graph  shows  that  under  the  current                                                               
progressivity of ACES,  there is more benefit to  the producer to                                                               
produce a field or  a well along the lines of  the green curve as                                                               
opposed to  the red curve.   Due  to the progressivity  nature, a                                                               
lower  net  present  value  is   derived  by  over-achieving  and                                                               
following a  true net  present value  approach because  a company                                                               
would have a  higher severance tax liability under  the red curve                                                               
development as opposed  to the green curve development.   This is                                                               
especially  true for  a company  that is  crossing over  from the                                                               
explorer phase into the producer phase.                                                                                         
2:11:36 PM                                                                                                                    
REPRESENTATIVE TUCK asked Mr. Vigil  to provide an example of how                                                               
many years it would take for the two lines to cross.                                                                            
MR. VIGIL  answered it would depend  on the profile of  any given                                                               
well or  field; in  Savant's case,  it would be  on the  order of                                                               
five years.                                                                                                                     
REPRESENTATIVE  TUCK presumed  this would  be proportionally  the                                                               
same regardless  of whether the  scenario is five,  ten, fifteen,                                                               
or twenty years.                                                                                                                
MR. VIGIL responded yes; the intent  of the slide is to show that                                                               
this progressivity  feature creates  this incentive  when looking                                                               
at two different economic models.                                                                                               
2:12:39 PM                                                                                                                    
REPRESENTATIVE  TUCK inquired  whether  Savant  Alaska, LLC  also                                                               
participates in operations outside of Alaska.                                                                                   
MR. VIGIL  replied yes; the  original parent company name  in the                                                               
Lower 48  is Savant  Resources, LLC.   The  nature of  the parent                                                               
company's  business  is  to form  specific-purpose  entities  for                                                               
different  plays in  basins  that  it gets  involved  in; it  has                                                               
developed resources from Washington State to Kentucky.                                                                          
REPRESENTATIVE TUCK  asked what  percentage the  Alaska operation                                                               
is of the parent company's overall operations in the U.S.                                                                       
MR.  VIGIL answered  it  is about  50:50 right  now  in terms  of                                                               
2:13:40 PM                                                                                                                    
REPRESENTATIVE  SEATON, in  regard to  the slide  7 graph,  asked                                                               
whether this would  not also be a factor that  would occur on any                                                               
profits-based tax.  For example,  a company that produces more at                                                               
one time  would have higher profits  so more taxes would  be paid                                                               
versus  spreading production  out  over time  which would  create                                                               
less profit margin and thus less tax.                                                                                           
MR. VIGIL responded  yes, that is a fair statement.   In response                                                               
to  another question  from Representative  Seaton,  he said  that                                                               
since its  inception in  Alaska, Savant  Alaska, LLC  has drilled                                                               
about 35,000 feet of hole between its 3 wells.                                                                                  
2:15:29 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  inquired whether  Savant Alaska,  LLC is                                                               
part of  any of the closed  leases that were mentioned  in AOGA's                                                               
MR. VIGIL  replied that  Savant dropped a  few leases  around the                                                               
Kupcake exploratory  well that was  a dry hole, although  he does                                                               
not  have an  exact number  of acres.   He  said the  acreage was                                                               
dropped because Savant felt like it had condemned that acreage.                                                                 
2:16:23 PM                                                                                                                    
REPRESENTATIVE SEATON noted  that the original version  of HB 308                                                               
had  a  provision  that  would have  let  the  Alaska  Retirement                                                               
Management (ARM)  Board purchase  the tax credit  certificates at                                                               
an 8  percent discount  from the  price.   He asked  whether this                                                               
rate would be attractive to Savant at the secondary market.                                                                     
MR.  VIGIL answered  Savant has  never  sold its  credits on  the                                                               
secondary  market; it  has always  redeemed them  with the  state                                                               
because of the company's forward spend.   However, to the best of                                                               
his knowledge, those terms would  be the most competitive that he                                                               
is aware of.                                                                                                                    
2:17:25 PM                                                                                                                    
CO-CHAIR JOHNSON  inquired whether Savant Resources,  LLC has run                                                               
across regimes similar to Alaska's in  any of the Lower 48 states                                                               
where it is  conducting business.  He further asked  Mr. Vigil to                                                               
rank Alaska in terms of ability and complexity to do business.                                                                  
MR. VIGIL  responded that in  regard to severance tax,  Alaska is                                                               
unique with  its progressivity feature,  and the  state's overall                                                               
take is certainly  the highest and most regressive.   His company                                                               
typically deals in constant severance  tax terms in the Lower 48,                                                               
meaning  the severance  tax  is fixed  regardless  of the  amount                                                               
2:18:16 PM                                                                                                                    
CO-CHAIR JOHNSON  inquired whether Savant Resources,  LLC expects                                                               
to continue its 50:50 investment in Alaska.                                                                                     
MR.  VIGIL replied  Savant  Alaska has  a  significant amount  of                                                               
money  in the  ground  and is  committed to  get  this plant  re-                                                               
started  and   make  this  project   work.     [Savant  Alaska's]                                                               
investment decisions  are not  the same  as a  major oil  and gas                                                               
company which  has a portfolio  of investment projects.   [Savant                                                               
Resources, LLC] formed this company  and financed it accordingly,                                                               
so those  investment decisions have  already been made  and those                                                               
dollars  are committed  to the  project and  will be  invested in                                                               
CO-CHAIR NEUMAN presumed it is a make-or-break situation.                                                                       
MR. VIGIL answered correct.                                                                                                     
2:19:06 PM                                                                                                                    
MARK  LANDT, Executive  Vice President  - Land  & Administration,                                                               
Renaissance Alaska,  LLC ("Renaissance"), noted he  is commenting                                                               
on both  HB 308 and  HB 337.  He  said Renaissance was  formed in                                                               
November  2006,  is  headquartered  in Houston,  Texas,  and  has                                                               
completed  the initial  funding of  a business  plan that  solely                                                               
focuses on growth  in Alaska.  His company's major  area of focus                                                               
is  the Umiat  oil  field  on the  North  Slope.   ARC  Financial                                                               
Corporation,  a private  investment  management  firm located  in                                                               
Calgary,  Alberta, is  the lead  investor on  the project  and is                                                               
focused  exclusively on  the energy  sector with  currently about                                                               
$1.4 billion under capital.                                                                                                     
MR. LANDT noted  that the Renaissance team has  extensive oil and                                                               
gas industry experience and over  80 years of experience directly                                                               
working in  Alaska.  The team  is composed of proven  oil finders                                                               
and value creators  in Alaska and other basins  worldwide.  Under                                                               
previous employers,  the team members have  identified, captured,                                                               
funded,  and   developed  oil  and  gas   projects  resulting  in                                                               
cumulative recoverable reserves of over  a billion barrels.  Many                                                               
of  the  team  members  worked  together  on  the  discovery  and                                                               
development of  the Alpine oil field  on the North Slope.   Since                                                               
its  formation,  Renaissance has  acquired  U.S.  Bureau of  Land                                                               
Management and state  oil and gas leases on  19,358 acres located                                                               
on the Umiat  oil field in the  National Petroleum Reserve-Alaska                                                               
and the Gubik gas field on the North Slope.                                                                                     
2:21:15 PM                                                                                                                    
MR. LANDT informed members that  since 2006 Renaissance has spent                                                               
in excess  of $40 million  completing exploration  and evaluation                                                               
operations in  Alaska.  A  significant amount of these  funds was                                                               
focused  on evaluating  the existing  oil field  in Umiat  with a                                                               
modern three-dimensional survey.   He said the  tax credits under                                                               
ACES  are a  significant  reason why  Renaissance  has stayed  in                                                               
Alaska,  and  the  availability  of those  credits  will  play  a                                                               
critical role  in attracting the  required investment  to develop                                                               
the  Umiat oil  field.   To date  Renaissance has  applied for  a                                                               
total of  $19.2 million  in tax  credits:   it has  received $1.3                                                               
million from the  state based on the  future-spend, $7.45 million                                                               
from   North   Slope  taxpayers,   and   has   $7.6  million   in                                                               
certificates.     A  majority   of  the   $7.6  million   in  tax                                                               
certificates was received  in July 2009, but  to date Renaissance                                                               
has been unable to monetize those certificates.                                                                                 
2:22:07 PM                                                                                                                    
MR.  LANDT pointed  out that  Umiat is  a known  oil accumulation                                                               
with potential  for near-term development and  a potential supply                                                               
of  meaningful oil  to the  Trans-Alaska Pipeline  System (TAPS).                                                               
He said  Renaissance believes it  is on a path  to commerciality,                                                               
based upon  its work  and the activities  being conducted  by the                                                               
State of Alaska.  In these  types of developments it is common to                                                               
have  a  lull  in  spending  for two  to  three  years  for  pre-                                                               
engineering and permitting of the  project before commencement of                                                               
development  drilling.    Therefore,  Renaissance  will  need  to                                                               
monetize  its  existing tax  credits  with  one of  the  existing                                                               
producers on  the North  Slope.  However,  none of  the producers                                                               
are  currently  willing,  on reasonable  terms,  to  acquire  tax                                                               
credits  from Renaissance.   There  is no  liquid market  for the                                                               
credits, and  one producer has  indicated it would  only consider                                                               
acquiring the credit at 50 cents  on the dollar, he related.  The                                                               
other producers have indicated they  are not acquiring credits at                                                               
this time  for various  reasons, including a  lack of  clarity on                                                               
the regulations.                                                                                                                
2:23:32 PM                                                                                                                    
MR.  LANDT  said Renaissance  supports  the  increased access  to                                                               
capital  credits for  new explorers.   Renaissance  also supports                                                               
the repeal of  AS 43.55.028(e)(2) and AS  43.55.028(e)(3), as set                                                               
forth in Section 12 of HB 337.   He said this statute requires an                                                               
explorer to  have future  spend within  24 months  after applying                                                               
for  the tax  credit  for the  State of  Alaska  to purchase  the                                                               
explorer's certificate.  Renaissance  supports the repeal of this                                                               
statute  because  it  would provide  greater  certainty  for  new                                                               
investors   in  Alaska.     Financial   institutions  and   other                                                               
investors,  including ARC  Financial  Corporation,  need to  have                                                               
greater certainty on  when the tax credits can  be received, from                                                               
whom, and  on what  terms in  order for  value to  be determined;                                                               
otherwise it is not an incentive.   The playing field needs to be                                                               
leveled between the  new and existing operators.   The state pays                                                               
100 percent  of the tax credits  regardless, so it does  not cost                                                               
the  state any  additional money.   He  urged elimination  of the                                                               
unfair  double standard  in  which the  state  rewards the  North                                                               
Slope producers with  discounts that they have  received from the                                                               
2:24:54 PM                                                                                                                    
REPRESENTATIVE  SEATON  asked  whether Mr.  Landt  would  support                                                               
letting  the Alaska  Retirement Management  (ARM) Board  purchase                                                               
unlimited quantities  of tax credits  on the secondary  market at                                                               
an 8 percent discount.                                                                                                          
MR.  LANDT responded  he  is supportive  of  anything that  would                                                               
expand the  market for  the tax  credits.   Based upon  the terms                                                               
Renaissance has  considered before  from the tax  producers, that                                                               
would  be a  better  term.   However, since  the  state is  still                                                               
paying 100 percent for the tax  certificates, he does not see why                                                               
Renaissance must go through a third party market.                                                                               
2:26:01 PM                                                                                                                    
MR. LANDT,  in response to  Representative Guttenberg,  agreed to                                                               
provide members with a copy of his written statement.                                                                           
REPRESENTATIVE  KAWASAKI  commented   that  the  exploration  tax                                                               
credit has  been in effect  since October  2009 and in  regard to                                                               
clarity there should be an explanation forthcoming soon.                                                                        
REPRESENTATIVE  TUCK inquired  what  percentage of  Renaissance's                                                               
new  investments since  2006  have been  in  Alaska versus  other                                                               
operations in the Lower 48.                                                                                                     
MR.  LANDT  said  his  company's   business  model  is  to  focus                                                               
exclusively in  Alaska, so every  penny of capital that  has been                                                               
expended has been in either the Cook Inlet or Umiat.                                                                            
2:27:42 PM                                                                                                                    
REPRESENTATIVE KAWASAKI said  the state is pushing for  a road to                                                               
Umiat,  which  he  thinks  will  help  in  monetizing  known  oil                                                               
resources.   He  requested Mr.  Landt to  expand on  his previous                                                               
statement about Renaissance being on "a path to commerciality".                                                                 
MR. LANDT  replied that  since acquiring the  leases in  2006 and                                                               
2007,  Renaissance has  been de-risking  the process  by bringing                                                               
modern  technology  to  the  project,  which  included  a  three-                                                               
dimensional seismic  program covering  the entirety of  the Umiat                                                               
structure.   A number of  engineering studies have now  been done                                                               
to  provide cost  estimates  based  upon facilities,  development                                                               
drilling,  and  a  pipeline over  to  the  Trans-Alaska  Pipeline                                                               
System (TAPS).   Renaissance is  trying to narrow the  cost range                                                               
in terms  of what this  project is  ultimately going to  cost, as                                                               
well as de-risk  the reserves.  With the tax  credits and support                                                               
on the  road, he said  Renaissance thinks  it has a  project that                                                               
could move  forward.  Current  plans are to start  the permitting                                                               
process  on  the  field  development   itself.    That  will  run                                                               
simultaneously with  the environmental  impact statement  for the                                                               
transportation corridor over to TAPS.                                                                                           
2:30:28 PM                                                                                                                    
MARK   HANLEY,  Public   Affairs   Manager,  Anadarko   Petroleum                                                               
Corporation  ("Anadarko"),  stated   Anadarko  is  partners  with                                                               
ConocoPhillips and has 22 percent  ownership in the Alpine field;                                                               
thus, Anadarko  has production.   Anadarko is  participating with                                                               
ConocoPhillips in  most of the  NPR-A exploration,  including the                                                               
CD-5 drill pad  that was just denied a permit.   Anadarko is also                                                               
exploring for gas  in the Foothills where it has  access to about                                                               
4  million gross  exploration  acres, which  is  1.3 million  net                                                               
acres to Anadarko.  On  a worldwide basis, Anadarko is considered                                                               
a  relatively large  independent, with  about 50  percent of  its                                                               
business in the U.S.                                                                                                            
2:32:00 PM                                                                                                                    
MR. HANLEY  said he thinks it  is a given that  production on the                                                               
North Slope is  declining and eventually the  immense Kuparuk and                                                               
Prudhoe  Bay fields  will be  depleted.   The goal  for both  the                                                               
state and  his company is to  make money, so keeping  the decline                                                               
rate as low  as possible is critical to everyone.   The issue and                                                               
question  is  whether  the  investment is  enough  to  keep  that                                                               
decline rate slow  or even reverse it, and he  suggests not.  For                                                               
example, just to offset one  year of decline requires bringing on                                                               
one  new project  every year  or two  that produces  about 20,000                                                               
barrels a day at its peak,  given that projects generally come on                                                               
for five  years to reach their  peak and then decline.   If there                                                               
is not enough investment, something  needs to be done to increase                                                               
it.  As a company, Anadarko  will invest where it can make money.                                                               
Overall,  something is  not  right,  and one  thing  that can  be                                                               
controlled is the tax rate, unlike distance from infrastructure.                                                                
2:34:57 PM                                                                                                                    
MR. HANLEY  addressed the positives  under the current  system of                                                               
Alaska's  Clear  and  Equitable  Share  (ACES),  saying  Anadarko                                                               
thinks the  net system  is a  good system  because it  takes into                                                               
account higher-cost  fields and newer exploration.   However, any                                                               
system, even a  net system, can have tax that  is still too high.                                                               
Anadarko also  thinks the  credits are a  good thing  because the                                                               
credits help with  the net present value by cutting  the costs in                                                               
half.   He  cautioned, however,  that some  in the  industry view                                                               
this  as going  to  a store  that has  doubled  its prices  while                                                               
holding  a  50-percent-off  sale.    He  explained  that  in  the                                                               
Foothills Anadarko  is lucky  to drill  one 10,000-foot  well per                                                               
year looking for  gas.  To gain an understanding  of one prospect                                                               
can take four  wells, which takes four to five  years.  The costs                                                               
in  Alaska are  generally more  than double  than elsewhere;  for                                                               
example, one  rig in the Gulf  of Mexico can drill  four wells in                                                               
one season.   Thus,  while the credits  are helpful,  Anadarko is                                                               
still challenged in  Alaska on a net present  value basis because                                                               
of the short operating season.                                                                                                  
2:37:09 PM                                                                                                                    
MR. HANLEY handed out a  graph entitled, "Comparison of Estimated                                                               
Production Tax  Revenue From ACES, PPT  and ELF for FY  2007 - FY                                                               
2010" [page 15 from a  2/4/2010 presentation by the Department of                                                               
Revenue].   He noted  that under  the ACES  system the  state has                                                               
collected about $2  billion more for each of those  years than it                                                               
would  have  collected  under the  Economic  Limit  Factor  (ELF)                                                               
system.   He acknowledged  that there  was not  enough investment                                                               
under ELF and argued that taking  $2 billion more out of industry                                                               
does  not   improve  industry's   economics  or   encourage  more                                                               
investment.   Even with  the ACES credits,  the state  is netting                                                               
out more money than it did under ELF.                                                                                           
2:38:50 PM                                                                                                                    
MR. HANLEY  said that while ACES  has numerous good parts,  it is                                                               
too  much overall.    He reminded  members  that when  originally                                                               
testifying  about the  petroleum production  tax (PPT),  Anadarko                                                               
said PPT  would improve its  exploration economics  slightly over                                                               
ELF, but  would hammer the existing  fields, including Anadarko's                                                               
Alpine field;  thus, on  balance, PPT  was not  great but  it was                                                               
okay.  Anadarko  testified that ACES was even worse  than ELF and                                                               
that is what is shown by the department's graph.                                                                                
MR.  HANLEY offered  Anadarko's support  for HB  308, saying  the                                                               
credits help, particularly in-field.   The progressivity slope is                                                               
too  high and  needs  changes.   He provided  an  example of  how                                                               
progressivity  works:   Under  the federal  income  tax system  a                                                               
company making  $50,000 might be  in the 20 percent  tax bracket.                                                               
An income of  $50,001 might jump the company into  the 25 percent                                                               
tax bracket,  but that 25  percent would  apply only to  that one                                                               
dollar.  However, under ACES, that  25 percent tax would apply to                                                               
all $50,001.   Instead of  just applying the  extra progressivity                                                               
to  the  dollar amount  over  the  $30  per barrel  trigger,  the                                                               
progressivity also applies  to the $30, which  is a disincentive.                                                               
He  said  it  could  be  argued that  there  is  somewhat  of  an                                                               
incentive  to keep  a company's  per  barrel profits  at $30  per                                                               
barrel or under, as was indicated by [Mr. Vigil].                                                                               
2:40:59 PM                                                                                                                    
MR. HANLEY  stated that even if  the tax rate is  reduced and the                                                               
progressivity maintained, or if the  base rate is taken down, the                                                               
tax would still  be too high overall.  Alaska  is not getting the                                                               
investment and it is hard for  Anadarko to compete.  For example,                                                               
Anadarko  just announced  a 500-million-barrel  discovery in  the                                                               
Gulf of Mexico where there is  a 12.5 percent royalty rate and no                                                               
severance tax  and no  corporate income  tax.  For  a lot  of the                                                               
places Anadarko does  business, Alaska does not  compete and what                                                               
that means is  that Alaska must have bigger prospects  to be able                                                               
to  sustain  this higher  tax  regime,  but in  its  explorations                                                               
Anadarko  is  seeing a  lot  of  smaller, 50-100  million  barrel                                                               
2:42:15 PM                                                                                                                    
MR. HANLEY  pointed out that Anadarko  is almost a victim  of its                                                               
own success  with announcements of discoveries  in Ghana, Brazil,                                                               
and the  Gulf of  Mexico.   Additionally, Anadarko  is conducting                                                               
substantial drilling  in the  Marcellus Shales.   The  company is                                                               
putting a  lot of cash  into things that  come out right  away or                                                               
within a  year and  a half;  whereas, in  Alaska, Anadarko  has a                                                               
well that will take three to four  years to test drill.  He noted                                                               
that unlike  Renaissance, Anadarko and  its partners are  able to                                                               
apply credits against  their Alpine income right  away.  However,                                                               
a  partner  with no  production  in  Alaska  would be  unable  to                                                               
monetize the credit should Anadarko  and its partners sit out one                                                               
year while analyzing  well data.  Changing this  would not affect                                                               
the state,  but would  provide a benefit  to the  people spending                                                               
the money.  He urged members to  look at how much the state needs                                                               
just  to offset  the  decline.   He  said  Anadarko supports  the                                                               
provisions  of HB  308  given that  production  is declining  and                                                               
investment is inadequate.                                                                                                       
2:44:32 PM                                                                                                                    
CO-CHAIR NEUMAN  agreed that  the production  decline could  be a                                                               
difficult situation in the future.                                                                                              
REPRESENTATIVE SEATON noted  that there is nothing  the state can                                                               
do about the competitive advantages  of places where there are no                                                               
corporate or  state taxes and  drilling can be done  year around.                                                               
He  noted, however,  that there  is very  little exploration  and                                                               
investment in Cook  Inlet despite a very low tax  rate.  He asked                                                               
how this  is explained and what  is to say this  would not happen                                                               
elsewhere in Alaska if taxes are lowered there.                                                                                 
MR. HANLEY answered that Anadarko  did operate in Cook Inlet, and                                                               
he  thinks  there  are  multiple  factors of  which  one  is  the                                                               
resource  potential; Anadarko  did not  see significant  resource                                                               
potential left  in Cook  Inlet.  If  legislators think  there are                                                               
resources to  be found in  Alaska, then  the state must  still be                                                               
able to  compete, he advised.   A 50-million-barrel field  in the                                                               
Gulf of  Mexico is  a big find,  but the same  size field  on the                                                               
North Slope  is not  economic if  it is more  than 10  miles from                                                               
existing infrastructure.   It  is just  a recognition  that there                                                               
are these challenges and if  the taxes are reduced, starting with                                                               
HB 308,  there would  be more investment  in Alaska,  although it                                                               
may still  need to  go a  bit lower.   While  he thinks  there is                                                               
resource potential on  the North Slope, he said  it is challenged                                                               
for numerous  reasons, and  one thing that  can be  controlled is                                                               
the severance tax.                                                                                                              
2:48:22 PM                                                                                                                    
REPRESENTATIVE OLSON  inquired whether Anadarko is  acquiring its                                                               
tax credits from its partners.                                                                                                  
MR. HANLEY responded Anadarko has  purchased some credits but not                                                               
all.   As a small producer  on the North Slope,  the statute only                                                               
allows  Anadarko to  reduce its  tax  by 20  percent using  these                                                               
credits.    Thus, Anadarko  has  only  a  limited amount  of  tax                                                               
credits that it can actually  purchase, although it has purchased                                                               
some.   It is easier  to have the  state purchase the  credits at                                                               
face value  so there is  no paperwork.   In further  response, he                                                               
said the  state sees the  same impact  and changing this  part of                                                               
the statute  would allow  other explorers  to receive  full value                                                               
for the money they are spending.   For those explorers looking at                                                               
only one  prospect that does not  pan out, there is  nothing left                                                               
to spend and the explorer may be unable to sell its credits.                                                                    
2:50:31 PM                                                                                                                    
REPRESENTATIVE GUTTENBERG  asked what  happened during  the years                                                               
of  ELF  when  the  tax  rate  was  so  low,  yet  there  was  no                                                               
exploration.   He noted that  this was  the time period  when Mr.                                                               
Hanley was  a member  of the  legislature and  asked why  the tax                                                               
rate was not changed then.                                                                                                      
MR. HANLEY  replied that when  he left the legislature  the price                                                               
of oil  was $10 per barrel.   At some  point the price is  so low                                                               
that  things are  uneconomic,  he  said.   Revenue  for both  the                                                               
industry and the  state has gone up because the  price of oil has                                                               
gone  up, which  has made  prospects more  economic.   However, a                                                               
company must  still compete  and show a  certain rate  of return;                                                               
so, if  a project elsewhere  is better  a company will  go there.                                                               
Technically,  he continued,  a company  can be  losing money  and                                                               
still have  to pay severance taxes,  which is why the  net profit                                                               
system makes  sense.   For example,  a system  with just  a fixed                                                               
rate on the  production times the price is a  regressive system -                                                               
if a company makes $100, but it  cost $100 to produce the oil and                                                               
the severance tax rate is 10  percent, the company still pays $10                                                               
even though  it had  no income.   Although  ELF tried  to address                                                               
some of that, it was not  a particularly elegant solution to some                                                               
of the problems.                                                                                                                
CO-CHAIR NEUMAN quipped that during the  time of $10 oil the cost                                                               
of running state government was about  $9.50 and now with $75 oil                                                               
the cost of government is $74.                                                                                                  
2:53:00 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI inquired  whether Anadarko  is party  to                                                               
any of the  closed leases depicted on the map  that was presented                                                               
by Ms. Crockett.                                                                                                                
MR.  HANLEY  answered yes,  Anadarko  gave  up a  couple  hundred                                                               
thousand acres, as well as some  acreage in some other areas.  He                                                               
explained  that Anadarko  sees what  is most  likely and  decides                                                               
whether to pay  rent on it.   Some sites are so far  out that the                                                               
thought may  be never for  drilling.  He  noted that not  as many                                                               
wells are being drilled and  only two exploration wells are being                                                               
drilled this winter.                                                                                                            
2:54:38 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  referred  to  slide 16  from  the  same                                                               
2/4/10 Department  of Revenue presentation  that Mr.  Hanley took                                                               
his graph from.  He noted  that slide 16 shows higher North Slope                                                               
capital and operating  expenditures for the same  time period [of                                                               
FY 2007 - FY 2010].   Therefore, he opined, the current mantra of                                                               
higher taxes means less jobs does not seem to play out.                                                                         
MR. HANLEY  allowed that some  things have been done  because the                                                               
price of oil went up.  He  suggested, however, that a lot of work                                                               
has  been spent  on pipeline  replacement during  this same  time                                                               
frame.  Right after the  first petroleum production tax (PPT) was                                                               
passed, some things  happened that required a  lot of maintenance                                                               
work.  While  he is not discounting that there  have been ups and                                                               
downs, the question is what the  spending is on and whether it is                                                               
actually producing more oil.   The older fields have higher costs                                                               
just to  maintain existing  production, and  the same  applies to                                                               
the aging TAPS pipeline.  Anadarko  will not spend money just for                                                               
the  purpose  of  getting  credits,  he said.    Income  must  be                                                               
received from that  expenditure.  Spending will not  happen if it                                                               
does not make sense to spend as a company.                                                                                      
MR. HANLEY  said the big  picture to him  is that money  is being                                                               
spent, yet  total production is  still declining in  Prudhoe Bay,                                                               
Kuparuk, and the  North Slope.  While the number  of workers is a                                                               
consideration, he urged members to  not lose sight of whether the                                                               
decline  is being  offset and  whether  there are  things in  the                                                               
state's control that can be used to  attack it.  While there is a                                                               
risk  to whether  lowering  taxes will  actually  result in  more                                                               
production,  he said  he  thinks  the lower  the  taxes the  more                                                               
likely more  production.  He pointed  out that to the  extent the                                                               
state  has  risk,   the  risk  happens  at   higher  prices  when                                                               
progressivity  kicks   in.    Therefore,   the  state   has  some                                                               
flexibility in  changing the progressivity  rate because  that is                                                               
at the high  end of prices, not  the low end.   He suggested this                                                               
is  a  risk worth  taking  should  new investment  and  increased                                                               
production not happen.                                                                                                          
2:58:28 PM                                                                                                                    
CO-CHAIR NEUMAN commented  that throughput in TAPS,  and jobs and                                                               
production, probably run at about the same level.                                                                               
CO-CHAIR JOHNSON,  in response  to Representative  Kawasaki, said                                                               
Pioneer Natural  Resources Alaska,  Inc. ("Pioneer")  was invited                                                               
to testify, but had a conflict.                                                                                                 
REPRESENTATIVE  KAWASAKI related  that when  Pioneer Oil  Company                                                               
went on line  at the Oooguruk Unit it applied  for royalty relief                                                               
to make  the economic model  work.   [Under HB 308],  portions of                                                               
the  two-year-old ACES  legislation  would  be completely  gutted                                                               
because it is  being said there is less investment.   Given there                                                               
are  now  royalty relief  provisions  in  statute, he  asked  why                                                               
smaller companies like  Anadarko do not apply  for royalty relief                                                               
to prove to the state it is not marketable.                                                                                     
MR. HANLEY  responded he  cannot speak  for Pioneer  Oil Company,                                                               
but pointed out that they were during the ELF period.                                                                           
3:00:24 PM                                                                                                                    
REPRESENTATIVE SEATON,  in regard to exploring  for oil, inquired                                                               
how big  of a  deal it is  to not  be able to  sell the  gas that                                                               
comes with the oil.                                                                                                             
MR. HANLEY  replied it is  pretty important.   He said  he thinks                                                               
having a  gasline will help  with oil recovery,  exploration, and                                                               
gas exploration.                                                                                                                
REPRESENTATIVE SEATON  further inquired  whether this  is another                                                               
one of the qualifications where the  Gulf of Mexico has gas sale-                                                               
ability while Alaska does not.                                                                                                  
MR. HANLEY answered yes.                                                                                                        
CO-CHAIR  NEUMAN  pointed out  that  written  testimony from  Ken                                                               
Sheffield of Pioneer is in the committee packet.                                                                                
3:02:34 PM                                                                                                                    
DALE  PITTMAN, Alaska  Production Manager,  ExxonMobil Production                                                               
Company ("ExxonMobil"),  noted that he commenced  his position as                                                               
Alaska  Production  Manager  in  June  2009  and  has  been  with                                                               
ExxonMobil for  nearly 30 years.   He said he is  looking forward                                                               
to continuing the  current progress to develop  and operate Point                                                               
Thomson.   He  paraphrased from  the following  written statement                                                               
while  making  a  PowerPoint presentation  [original  punctuation                                                               
     ExxonMobil has been working in  Alaska for more than 50                                                                    
     years.   We  have been  a  key player  in Alaska's  oil                                                                    
     industry development, spending  and investing well over                                                                    
     $20 billion dollars during that  time.  As you know, we                                                                    
     are  currently active  with  our  co-owners at  Prudhoe                                                                    
     Bay, Kuparuk,  Duck Island and  Granite Point.   We are                                                                    
     also excited  about our progress  at Point  Thomson and                                                                    
     remain on  track to achieve a  2014 production startup.                                                                    
     We  look forward  to being  a part  of Alaska  for many                                                                    
     years to come.                                                                                                             
3:03:57 PM                                                                                                                    
     At the outset, let me  say that ExxonMobil supports the                                                                    
     presentation you  heard today  from the Alaska  Oil and                                                                    
     Gas  Association.    I  do not  intend  to  repeat  the                                                                    
     thorough technical comments from that testimony.                                                                           
     As for  our specific comments,  I would like  to state,                                                                    
     consistent   with  our   prior  testimony   during  the                                                                    
     hearings  on both  the PPT  and  ACES, that  ExxonMobil                                                                    
     believes  Alaska's  current  production taxes  are  too                                                                    
     high to  result in the additional  investment needed to                                                                    
     maximize the development of Alaska's  resources.  It is                                                                    
     our belief that  even the proposed 20  percent tax rate                                                                    
     that was in  the original PPT bill  would not encourage                                                                    
     the full development of Alaska's resources.                                                                                
     Alaska is rich in  undiscovered resource potential.  To                                                                    
     date, Alaska has produced more  than 15 billion barrels                                                                    
     of oil from  the North Slope, and according  to the DNR                                                                    
     there  are approximately  6  billion  barrels of  known                                                                    
     resources  remaining.    These  resources  represent  a                                                                    
     known  opportunity, but  their development  is at  risk                                                                    
     under the current tax system.   Oil production today is                                                                    
     one-third of  the peak  oil production  of more  than 2                                                                    
     million barrels per day in  1988, and annual production                                                                    
     continues to decline.                                                                                                      
3:05:24 PM                                                                                                                    
     Spending  on the  North Slope  has remained  relatively                                                                    
     flat since the enactment of  ACES, as you have heard in                                                                    
     prior testimony.   But the majority  of that investment                                                                    
     has  been  for  maintenance or  production  enhancement                                                                    
     efforts   for   existing   operations,  not   for   new                                                                    
     exploration  and development  opportunities.   In fact,                                                                    
     the  industry currently  invests more  than $1  billion                                                                    
     per year  just to  maintain North Slope  oil production                                                                    
     at  the  current  decline  rate   of  about  6  percent                                                                    
     annually.    Without  that  continued  investment,  the                                                                    
     annual production  decline would not be  6 percent, but                                                                    
     would actually be closer to 12-15 percent annually.                                                                        
     What this  means is in  just 10 years, the  majority of                                                                    
     future  oil  production  will need  to  flow  from  new                                                                    
     investments - investments that are  at risk today under                                                                    
     Alaska's current production tax regime.                                                                                    
     Let me explain.                                                                                                            
     Time in  the oil  and gas industry  is not  measured in                                                                    
     business  cycles.   It is  measured in  decades and  in                                                                    
     generations.  Today's production  rates are the product                                                                    
     of government policies,  technical work, and investment                                                                    
     decisions  that in  many cases  were made  decades ago.                                                                    
     Increasing  production rates  in  the  decades to  come                                                                    
     will  result   from  sound  policies,   decisions,  and                                                                    
     commitments  that are  made today.   As  policy makers,                                                                    
     you will  need to decide whether  Alaska's current high                                                                    
     production tax  regime is the  right course  for Alaska                                                                    
     or  -  given  the   current  high  costs  and  steadily                                                                    
     declining  oil production  rates we  face -  if another                                                                    
     course is  necessary to harness the  remaining resource                                                                    
3:06:37 PM                                                                                                                    
     It  is important  to recognize  that any  decision made                                                                    
     today  impacts  much  more  than  tax  revenue  in  the                                                                    
     future.   Decisions made today impact  jobs for Alaskan                                                                    
     workers,  revenue  for   many  Alaska  businesses,  and                                                                    
     infrastructure  that benefits  Alaskan communities  and                                                                    
     extends the life of production in existing fields.                                                                         
     To  encourage full  development of  Alaska's resources,                                                                    
     we  believe production  taxes should  be lowered.   The                                                                    
     high  base tax  rate and  the higher  taxes due  to the                                                                    
     additional  progressivity tax  are major  disincentives                                                                    
     to the  high risk investment opportunities  required in                                                                    
3:07:17 PM                                                                                                                    
     Companies  like ExxonMobil  are willing  to accept  the                                                                    
     risks of long-term,  capital intensive investments when                                                                    
     there  is  a  stable  tax  structure  that  allows  and                                                                    
     encourages  investment  and   ensures  a  corresponding                                                                    
     opportunity for upside potential.   Upside factors such                                                                    
     as increased  production and higher prices  should be a                                                                    
     benefit   for  risks   taken,  because   companies  are                                                                    
     certainly negatively impacted  when lower than expected                                                                    
     production or  prices occur.   When  you take  away the                                                                    
     upside potential that companies  can achieve you reduce                                                                    
     the overall  attractiveness of those  capital intensive                                                                    
     Alaska faces  significant challenges.  Costs  are high,                                                                    
     exploration  is   down  and  production   continues  to                                                                    
     decline.  We  all need to work together  to achieve the                                                                    
     right balance  - a balance  that maximizes  the benefit                                                                    
     to Alaskans  while encouraging industry to  continue to                                                                    
     invest in Alaska.                                                                                                          
3:08:09 PM                                                                                                                    
     We  advocate  a  collaborative approach  to  develop  a                                                                    
     sustainable long-term resource  development policy that                                                                    
     will  encourage the  needed  investments  to build  the                                                                    
     future of Alaska for many generations to come.                                                                             
     Alaska's  resource development  policy should  identify                                                                    
     and   characterize   state-wide   resource   potential,                                                                    
     identify   key  issues   challenging  exploration   and                                                                    
     development,   and  encourage   investment  needed   to                                                                    
     mitigate  production decline.    Such  a policy  should                                                                    
     also consider  key factors that impact  resource value,                                                                    
     such  as  research   and  technology,  exploration  and                                                                    
     development   costs,   regulatory   and   environmental                                                                    
     considerations,  and land  access.   A reassessment  of                                                                    
     Alaska's high  production taxes is  a critical  part of                                                                    
     that long-term resource development policy.                                                                                
3:09:03 PM                                                                                                                    
     Committee  Substitute   to  House  Bill  308   is  best                                                                    
     characterized as  a first step  toward what  we believe                                                                    
     should  be  a  comprehensive  examination  of  Alaska's                                                                    
     production tax structure.                                                                                                  
     It will take everyone  working together to achieve that                                                                    
     long-term   policy.     Government  leaders,   industry                                                                    
     representatives, contractors and  citizens all stand to                                                                    
     benefit from developing Alaska's resources.                                                                                
     ExxonMobil   looks   forward   to  working   with   the                                                                    
     Administration,  the  legislators,   industry  and  the                                                                    
     people of Alaska in the  future pursuit and development                                                                    
     of Alaska's oil and gas resources.                                                                                         
3:09:41 PM                                                                                                                    
REPRESENTATIVE P.  WILSON agreed that it  will take comprehensive                                                               
examination and working collaboratively,  which has been tried in                                                               
the past.   She inquired  whether Mr. Pittman believes  that this                                                               
time collaborative  work can be done  so that both the  state and                                                               
industry benefit, and  that things will not be like  they were in                                                               
the past.                                                                                                                       
MR.  PITTMAN responded  that as  a newcomer  he cannot  judge the                                                               
past  and allowed  that  it is  very complex  problem.   He  said                                                               
ExxonMobil  focuses on  large, long-term  projects and  therefore                                                               
looks  at 30-  to 50-year  time  horizons, although  some in  the                                                               
industry are looking  for returns in the next two  to five years.                                                               
The state must appeal to both  types of investors, he advised, as                                                               
well as those that are middle-term  investors.  While he does not                                                               
understand  all  of  the  taxes and  their  implications,  he  is                                                               
worried  that it  is  bigger  than everyone  in  this  room.   He                                                               
suggested that  the state  needs a  long-term policy  that people                                                               
can understand as they begin to make those investment decisions.                                                                
3:12:30 PM                                                                                                                    
REPRESENTATIVE   SEATON  related   that  when   ACES  was   being                                                               
considered, the mantra from ExxonMobil  and others was that taxes                                                               
needed to remain  stable and should not be changed.   This is now                                                               
an  intermediate  change, because  once  a  gasline goes  through                                                               
there  will need  to be  negotiation on  those taxes.   He  asked                                                               
whether  Mr. Pittman  is now  saying  that stability  on the  tax                                                               
system does not mean anything and the taxes should be changed.                                                                  
MR. PITTMAN  replied he  appreciates that view  and has  heard it                                                               
before.  He  said ExxonMobil is suggesting that  someone needs to                                                               
make that investment decision knowing  what that tax structure is                                                               
going to be  for the next 30 years.   If this is it,  and it will                                                               
never  be  changed,  ExxonMobil can  make  those  decisions  now.                                                               
ExxonMobil has  stated its  opinion that the  taxes are  too high                                                               
and that it would  help the state to lower those  taxes.  He said                                                               
he thinks it  would be beneficial if the state  could tell people                                                               
what taxes  will look like for  the next 30 years  and that those                                                               
taxes will  not change,  at least  from the  investment decisions                                                               
that are made  today.  Taxes and fiscal policy  are only one part                                                               
when  making  a  decision.   The  other  parts  include  resource                                                               
potential in a  prospect, whether it is gas or  oil that is being                                                               
looked for, and political stability.                                                                                            
3:14:22 PM                                                                                                                    
CO-CHAIR NEUMAN  commented that ExxonMobil  did ask for  a stable                                                               
tax base and  the legislature increased taxes with  ACES, and now                                                               
after  a couple  of  years there  is concern  by  folks like  the                                                               
sponsor and the governor that  production may have been affected.                                                               
He inquired  whether industry is  receptive to the  provisions in                                                               
HB 308, such as more and different credits.                                                                                     
MR. PITTMAN answered  absolutely.  He added,  however, that there                                                               
is still  a benefit to stability  and he does not  want people to                                                               
think that ExxonMobil is looking  to change taxes every two years                                                               
only if it benefits the company.                                                                                                
3:15:25 PM                                                                                                                    
REPRESENTATIVE  SEATON  pointed  out  that there  is  the  stable                                                               
system under statute to apply for  royalty relief if a project is                                                               
uneconomic.    He  asked  whether   the  royalty  relief  is  not                                                               
functional for ExxonMobil such that  it prefers to have the taxes                                                               
MR.  PITTMAN  responded  that the  hypothetical  answer  to  this                                                               
hypothetical  question is  that  ExxonMobil has  to  look at  the                                                               
economics  of that  particular  project.   If  royalty relief  is                                                               
needed to  move the project  forward, ExxonMobil  would obviously                                                               
entertain that.   He said  his overall message, however,  is that                                                               
legislators  must strike  the right  balance for  Alaska and  the                                                               
right balance for  the state's investors, and then find  a way to                                                               
make that a stable policy that can be counted on for the future.                                                                
CO-CHAIR NEUMAN remarked  that in regard to  royalty relief there                                                               
is a price for everything.                                                                                                      
MR. PITTMAN agreed.                                                                                                             
3:16:53 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  inquired  whether  the  $1  billion  in                                                               
annual  investment  mentioned  by  Mr. Pittman  is  for  the  oil                                                               
industry as a whole.                                                                                                            
MR. PITTMAN replied  that the number is very  conservative and he                                                               
suspects others  would say  a much  larger number.   He  said his                                                               
focus  there was  on the  money  ExxonMobil spends  just on  well                                                               
enhancements and  workovers to try  to keep that decline  rate at                                                               
the  6 percent  level.    In further  response,  he  said the  $1                                                               
billion is ExxonMobil's best guess  for the North Slope producers                                                               
that it is involved with.                                                                                                       
3:17:58 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI   asked  whether  ExxonMobil   would  be                                                               
willing to  provide legislators with  a 10-year  capital spending                                                               
plan if the entire legislature  agrees not to change anything now                                                               
and agrees to not touch taxes for ten years.                                                                                    
MR.  PITTMAN  answered  that  that   would  be  a  challenge  for                                                               
ExxonMobil as a company, and certainly for him as an individual.                                                                
CO-CHAIR NEUMAN inquired whether there  are any guarantees on how                                                               
much oil and gas ExxonMobil will find in the next 10 years.                                                                     
MR. PITTMAN responded no.                                                                                                       
CO-CHAIR NEUMAN said he did not think so.                                                                                       
3:18:54 PM                                                                                                                    
REPRESENTATIVE KAWASAKI asked whether  Mr. Pittman's statement on                                                               
page  4 of  his  testimony  that exploration  is  down refers  to                                                               
ExxonMobil and  the folks it  does business with  dollar-wise, or                                                               
is about the number of wells drilled, or about contracts.                                                                       
MR.  PITTMAN  replied his  personal  view  is talking  about  the                                                               
decline rate  and knowing  how the State  of Alaska  is dependent                                                               
upon those  revenues.   Declines rarely go  above 6  percent, and                                                               
while it  can be  larger, he  is worried  about what  things will                                                               
look like in 10 years at even a 6 percent rate.                                                                                 
CO-CHAIR NEUMAN recessed the meeting to a call of the chair.                                                                    
6:05:39 PM                                                                                                                    
CO-CHAIR NEUMAN  called the  meeting back to  order at  6:05 p.m.                                                               
Representatives Kawasaki,  P. Wilson, Olson, Johnson,  and Neuman                                                               
were present  at the call  back to order.   Representative Seaton                                                               
arrived as the meeting was in progress.                                                                                         
6:06:34 PM                                                                                                                    
BRIAN  WENZEL,  Vice  President-Finance,  ConocoPhillips  Alaska,                                                               
Inc. ("ConocoPhillips"),  stated that ConocoPhillips  supports HB
308  as  a step  in  the  right  direction  for creating  a  more                                                               
favorable investment climate.  He  qualified that HB 308 does not                                                               
address all of  the company's concerns with the  current ACES tax                                                               
structure  and  the  proposed  amendments   are  not  an  optimal                                                               
structure.   He added  that a  more favorable  investment climate                                                               
would create  increased business  confidence which would  lead to                                                               
increased investment in Alaska, which  in turn would lead to more                                                               
jobs and purchases of goods  and services from Alaskans, and more                                                               
royalties and production taxes to the state.                                                                                    
6:08:52 PM                                                                                                                    
MR.  WENZEL  began his  PowerPoint  presentation  with a  map  of                                                               
ConocoPhillips' assets  on the  North Slope [slide  2].   He said                                                               
ConocoPhillips  is a  5  percent  owner in  Point  Thomson, a  36                                                               
percent owner  in Prudhoe Bay  where "BP"  is the operator,  a 55                                                               
percent owner  in Kuparuk where  ConocoPhillips is  the operator,                                                               
and a 78 percent  owner in Alpine.  All of  these assets, as well                                                               
as the  company's assets  in Cook Inlet,  are subject  to various                                                               
forms  of  government  take, such  as  property  tax,  royalties,                                                               
production tax,  state corporate  income tax, and  federal income                                                               
tax.   On average,  government take in  Alaska ranges  from 65-75                                                               
percent, based on  oil prices between $70 and  $115 [per barrel].                                                               
This means  that for a given  $100 of net cash  flow the producer                                                               
keeps only  $25-$35 and the rest  is government take of  one form                                                               
or another.   He  explained that  progressivity is  dramatic when                                                               
looking at an incremental dollar.   For example, if the price per                                                               
barrel  goes up  by $1,  the  marginal take  on that  incremental                                                               
dollar can  be as high as  93 percent, leaving the  producer with                                                               
only 7 cents from that $1.                                                                                                      
6:09:46 PM                                                                                                                    
CO-CHAIR NEUMAN requested Mr. Wenzel  to address the concept that                                                               
while all  the forms of  government take might total  80 percent,                                                               
the  producer is  left  with a  20 percent  net  margin and  most                                                               
companies would consider a 3-4 percent margin as doing well.                                                                    
MR.  WENZEL  responded  that  the   total  take  by  the  various                                                               
government forms  is 65-75 percent of  the net cash flow.   While                                                               
some  people   might  view  the   producer's  net  margin   as  a                                                               
significant margin,  it is  ConocoPhillips' view  that it  is the                                                               
one taking the  risk.  At times, larger returns  are received and                                                               
at other times the returns are zero or negative.                                                                                
6:11:33 PM                                                                                                                    
MR.  WENZEL returned  to his  presentation, stating  that HB  308                                                               
attempts  to   partially  rectify  the  extreme   nature  of  the                                                               
progressivity that creates a marginal tax rate of 93 percent.                                                                   
MR. WENZEL explained that as  a result of investment, the decline                                                               
profile shown  on slide  3 is shallower  than it  would otherwise                                                               
be.   Everyone is looking to  the day when technology  allows the                                                               
development of heavy  oil, Alaska North Slope (ANS)  gas, and the                                                               
Outer Continental Shelf; however, this  technology is at least 10                                                               
years away.  ConocoPhillips is  concerned about how to bridge the                                                               
gap between  now and  then so  that production  does not  fall so                                                               
precipitously that it creates  problems.  ConocoPhillips believes                                                               
it is going to take another  $40 billion in expenditures over the                                                               
next decade just  to deliver the profile shown on  slide 3.  Less                                                               
investment will mean a faster decline rate.                                                                                     
6:13:36 PM                                                                                                                    
CO-CHAIR  NEUMAN  related  that  at  a  presentation  on  3/9/10,                                                               
Alyeska  Pipeline Service  Company ("Alyeska")  said the  decline                                                               
would  reach 300,000  barrels [per  day] within  8-10 years.   He                                                               
asked for an explanation as to  why the decline depicted on slide                                                               
3 is an additional 20 years out.                                                                                                
MR.  WENZEL replied  he  has  not listened  to  all of  Alyeska's                                                               
comments,  but   he  understands  that  Alyeska   has  said  that                                                               
significant operating issues [for  TAPS] begin at 500,000 barrels                                                               
per day and 300,000 barrels per day is worse.                                                                                   
6:14:34 PM                                                                                                                    
CO-CHAIR  NEUMAN  offered  his   understanding  that  at  300,000                                                               
barrels a day the pipeline cannot be operated.                                                                                  
MR. WENZEL  answered he  must have missed  that because  he would                                                               
have thought Alyeska  would say that [TAPS] can  be operated, but                                                               
it  just comes  with  additional cost  and  difficulty, which  is                                                               
something  everyone  is  concerned  about.   The  point  is  that                                                               
Alyeska is  questioning whether  it will  be economic  to operate                                                               
the pipeline at  that point, and ConocoPhillips would  agree.  He                                                               
noted  that  the data  on  slide  3  is  from the  Department  of                                                               
Revenue, not ConocoPhillips.  He  said ConocoPhillips would agree                                                               
that it  is one more reason  for not letting production  fall too                                                               
far before bringing on heavy oil or the Outer Continental Shelf.                                                                
CO-CHAIR  NEUMAN added  it is  not  just the  economic, but  also                                                               
actual physical  properties such as viscosity,  water, waxes, and                                                               
MR. WENZEL agreed.                                                                                                              
6:15:42 PM                                                                                                                    
CO-CHAIR JOHNSON  observed that slide  3 is data forecast  by the                                                               
Department  of  Revenue, and  Alyeska's  forecast  at its  3/9/10                                                               
presentation  was less  than  projected by  the  department.   He                                                               
inquired whether  ConocoPhillips has  conducted a forecast  or is                                                               
depending upon the Department of Revenue.                                                                                       
MR.  WENZEL responded  ConocoPhillips is  probably not  depending                                                               
upon the  Department of  Revenue exclusively,  but it  did choose                                                               
the numbers depicted on slide  3 because they are public numbers.                                                               
ConocoPhillips has not  put out its own numbers; it  is a way for                                                               
the company  to get a  total industry  view as opposed  to simply                                                               
taking ConocoPhillips' view and factoring it up.                                                                                
6:16:32 PM                                                                                                                    
MR. WENZEL  resumed his  presentation, noting  that slide  4 uses                                                               
production at  the Kuparuk  and Alpine  oil fields  to illustrate                                                               
the importance of  additional investment.  He  explained that the                                                               
orange-colored  portions  of  the  two  graphs  depict  the  base                                                               
production  off  the  initial asset  investment  and  the  green-                                                               
colored  portions   depict  the  incremental  investment.     The                                                               
incremental  investment is  additional  project development  that                                                               
increases production  beyond what was originally  expected and is                                                               
the  type  of  investment  that   helps  to  mitigate  production                                                               
MR. WENZEL  pointed out  that the  new projects  being discussed,                                                               
such  as Point  Thomson, Nikaitchuq,  Liberty, and  Oooguruk, are                                                               
relatively small in  terms of remaining barrels over  the next 40                                                               
years from 2010-2050  [slide 5].  According to  a 2008 Department                                                               
of Revenue forecast, the vast  majority of remaining barrels will                                                               
come from  the core fields  of Kuparuk, Prudhoe Bay,  and Alpine.                                                               
Therefore,   when  structuring   fiscal  policy   to  incentivize                                                               
additional barrels, it  is the view of  ConocoPhillips that those                                                               
core fields are what should be looked at.                                                                                       
6:18:40 PM                                                                                                                    
MR. WENZEL  noted that  the 2009  Department of  Revenue forecast                                                               
predicts  a 20  percent  reduction in  production  from the  core                                                               
fields [slide  6].   The department  steepened its  decline rates                                                               
because it is  now expecting less recovery.   He reminded members                                                               
that in a February [2010]  presentation the Department of Revenue                                                               
showed a  slide depicting investment falling  off dramatically in                                                               
the core fields.   He said it is  ConocoPhillips perspective that                                                               
the two are inextricably tied  - loosing investment increases the                                                               
steepness of decline.                                                                                                           
MR.  WENZEL  reviewed   ConocoPhillips'  concerns  regarding  the                                                               
leading indicators of  problems in Alaska [slide 7].   He pointed                                                               
out  that ConocoPhillips  has been  the state's  leading explorer                                                               
for many years.  However, it  will not be drilling an exploration                                                               
well in 2010, the first time in  45 years that it has not drilled                                                               
an  exploration  well.    Of   industry's  four  wells  that  are                                                               
permitted  for  2010, he  is  unsure  whether  all of  them  will                                                               
happen.   The  dramatic  decrease in  industry exploration  wells                                                               
[depicted by  the graph on  the left side  of slide 7]  cannot be                                                               
ignored.   He  said the  [14  percent] decline  in industry  well                                                               
completions   [from  2007-2009]   is  a   leading  indicator   to                                                               
ConocoPhillips of  problems within the  state.  If wells  are not                                                               
being drilled  and are  not being completed,  new barrels  of oil                                                               
are not being found and brought on.                                                                                             
6:20:55 PM                                                                                                                    
MR. WENZEL,  in response to Co-Chair  Neuman, said ConocoPhillips                                                               
is  not drilling  an exploration  well in  2010 for  a number  of                                                               
reasons that  are combined together  when making decisions.   One                                                               
reason is  ConocoPhillips' view of  prospectivity in some  of its                                                               
acreage.   Another reason  is that  ConocoPhillips is  spending a                                                               
fair  amount of  money in  getting ready  for exploration  in the                                                               
coming years  in the Chukchi  Sea.   An additional reason  is the                                                               
fiscal system.   As ConocoPhillips  looks into  the uncertainties                                                               
of the future, and the average  and marginal take by the State of                                                               
Alaska, it  gets to  a point where  it does not  make sense.   He                                                               
noted that  ConocoPhillips is doing things  in-field because that                                                               
is  seen as  a much  more efficient  way to  bring on  additional                                                               
6:22:12 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  inquired as to  ConocoPhillips' activity                                                               
levels in the other countries in which it operates.                                                                             
MR. WENZEL responded he does not  have a full laundry list, but a                                                               
few months  ago Larry Archibald,  Vice President  of Exploration,                                                               
stated in a presentation that  ConocoPhillips sees its operations                                                               
in  the Gulf  Coast  off Texas  and in  Australia  as being  more                                                               
attractive regimes for its exploration dollars than Alaska.                                                                     
MR.  WENZEL continued  his discussion  of  leading indicators  in                                                               
regard to drilling activity [slide 8].   He drew attention to the                                                               
black line at the top of  the graph depicting historic oil prices                                                               
and the  green line  below that  which depicts  the U.S.  oil rig                                                               
count [from  2005 through 2009],  and pointed out that  they move                                                               
up and  down in tandem,  although the  oil rig count  is somewhat                                                               
delayed  in  its reaction  given  it  takes  awhile to  get  rigs                                                               
engaged or disengaged.   He said the troubling thing  is that the                                                               
rig trend for core fields in  Alaska, depicted by the red bars on                                                               
the  graph, is  flat or  down  from second  quarter 2006  through                                                               
fourth  quarter 2008,  while  the U.S.  oil  rig count  increased                                                               
steadily over  this same  time frame.   Additionally,  oil prices                                                               
went  up  in   late  2009  and  the  U.S.   rig  count  responded                                                               
accordingly,   but   Alaska's   rig    count   declined.      For                                                               
ConocoPhillips, this  is a leading  indicator of problems  yet to                                                               
come in Alaska, he said.                                                                                                        
6:24:39 PM                                                                                                                    
MR.  WENZEL, in  response to  Representative Kawasaki,  explained                                                               
that  the core  fields being  depicted  on slide  8 are  Kuparuk,                                                               
Alpine, and  Prudhoe Bay, as was  also depicted on slide  5.  The                                                               
core fields  represent 90  percent of  North Slope  production in                                                               
2009 and also  represent the vast majority  of expected remaining                                                               
barrels over  the next  40 years  relative to  some of  the other                                                               
projects that are going on  today.  He said ConocoPhillips thinks                                                               
the  core  fields  are  the  areas of  opportunity  in  terms  of                                                               
incentivizing new investment and new production.                                                                                
REPRESENTATIVE KAWASAKI asked whether the  rig count has a direct                                                               
correlation to the volume of oil.                                                                                               
MR.  WENZEL   replied  yes,  there   is  probably   some  natural                                                               
correlation  but it  is  not  a direct  linear  formula.   As  an                                                               
industry, the  goal is  to have more  rigs drilling  because more                                                               
rigs either  finds more  barrels or brings  on more  barrels when                                                               
conducting in-field drilling.                                                                                                   
6:26:32 PM                                                                                                                    
MR. WENZEL,  in response to another  question from Representative                                                               
Kawasaki, explained  that the green  line for the U.S.  rig count                                                               
does not depict the actual number  of rigs.  He explained that he                                                               
normalized the line and forced it to  meet the top of the red bar                                                               
for Alaska  for the first quarter  of 2005.  The  total number of                                                               
U.S. rigs is  much larger than the red bars;  he just brought the                                                               
green line down  so the correlation could be seen.   For example,                                                               
the peak number of U.S. rigs for fourth quarter 2008 is 145.                                                                    
6:28:10 PM                                                                                                                    
MR.  WENZEL returned  to his  discussion  of leading  indicators,                                                               
saying  that   the  second  leading   indicator  of   concern  to                                                               
ConocoPhillips  is   the  overall   spending  level.     He  said                                                               
ConocoPhillips has a different view  than does the administration                                                               
regarding the  increasing levels  of expenditures which  have led                                                               
the administration  to conclude  that it is  too early  to decide                                                               
whether there  is a problem  coming.   He explained that  the red                                                               
bars  on slide  [9] represent  the industry's  total capital  and                                                               
operating expenditures,  which increase from fiscal  year 2007 to                                                               
2009  and which  are forecast  to decrease  in fiscal  year 2010.                                                               
The  yellow  bars adjust  those  expenditures  for inflation  and                                                               
these bars indicate  that in reality those  expenditures are flat                                                               
over this  time frame, which is  not indicative of a  growing and                                                               
vibrant industry.                                                                                                               
MR. WENZEL  moved to slide  [10] and pointed out  that investment                                                               
is flat  in development  projects, which  are the  new production                                                               
projects  that bring  on  new barrels.    However, investment  is                                                               
increasing  for  maintenance/replacement/repair  projects,  which                                                               
are projects that maintain current-level  production.  Thus, less                                                               
and less  of the total  expenditure is on  rate-adding production                                                               
that puts more barrels down  the pipeline and brings more revenue                                                               
to the state.                                                                                                                   
6:30:15 PM                                                                                                                    
REPRESENTATIVE SEATON  noted that  due to  deflation the  cost of                                                               
drilling wells and  installing pipe has decreased.   In regard to                                                               
slide 9, he surmised that this  would raise the red bars from the                                                               
prior year where the costs were unitized higher.                                                                                
MR. WENZEL  answered the  yellow bar,  yes.   To the  extent that                                                               
deflation was seen, it would  possibly reflect in a higher number                                                               
CO-CHAIR  NEUMAN   asked  whether   ConocoPhillips'  year-to-year                                                               
operating expenses have ever decreased.                                                                                         
MR. WENZEL  responded they have  not in  the recent past,  but he                                                               
does not know further back than that.                                                                                           
6:32:00 PM                                                                                                                    
MR.  WENZEL,  in  response to  Representative  Seaton,  said  the                                                               
expenses shown  on slide 10 are  not adjusted for inflation.   He                                                               
said  he  thinks  if  they had  been  adjusted,  the  development                                                               
projects   would  be   down  a   little   and  the   maintenance/                                                               
replacement/repair  would still  be increasing  but at  a flatter                                                               
rate.  He  pointed out that for  2008 and 2009 more  than half of                                                               
the  expense  was  going  for  maintenance/replacement/repair  as                                                               
opposed to rate-adding.                                                                                                         
CO-CHAIR  NEUMAN inquired  how the  declining throughput  in TAPS                                                               
for the years 2005-2009, would equate to the graph on slide 10.                                                                 
MR. WENZEL  replied there would  be a steady downward  decline of                                                               
production through TAPS,  so the costs per  barrel are increasing                                                               
dramatically.   In further response,  he said the goal  should be                                                               
to increase  the height of the  red bars [on slide  10] over time                                                               
because   ConocoPhillips  believes   that  will   lead  to   more                                                               
production which  then lessens the  slope of  production decline;                                                               
however, there would still be production decline.                                                                               
6:33:40 PM                                                                                                                    
REPRESENTATIVE WILSON observed that  many factors happened at the                                                               
same time,  such as  pipeline leaks that  needed to  be repaired,                                                               
coupled with  the economy falling  and the  declining production.                                                               
She  asked  whether ConocoPhillips  had  to  therefore shift  its                                                               
money from development to maintenance and repair.                                                                               
MR. WENZEL  presumed the question  is whether  ConocoPhillips has                                                               
some pre-set idea  of how much it  is going to spend  per year in                                                               
Alaska.  He  said that is not case; ConocoPhillips  will spend as                                                               
needed to  affect the  necessary repairs and  be able  to operate                                                               
safely.   At the  same time, the  development projects  in Alaska                                                               
compete independently  with other  projects around the  world and                                                               
those  funds will  be allocated  according  to where  it is  most                                                               
economic with the  least amount of risk and  uncertainties.  Part                                                               
of ConocoPhillips' concern  in Alaska is that  as that proportion                                                               
of maintenance and  repair is masked by the  overall increase, it                                                               
sees a  greater decline in  the future.  ConocoPhillips  will get                                                               
through this  repair of  its 30-year-old  assets and  this bubble                                                               
will come  off in  3-4 years, but  addressing how  to incentivize                                                               
development projects needs  to be started now or it  will be even                                                               
more difficult in the future.                                                                                                   
6:36:12 PM                                                                                                                    
REPRESENTATIVE SEATON  understood that most of  the production is                                                               
in  the core  fields, but  that does  not mean  that most  of the                                                               
investment  is  necessarily in  the  core  fields.   He  inquired                                                               
whether there  is a  graph looking at  the total  investment that                                                               
includes Point Thomson and the other development projects.                                                                      
MR. WENZEL  answered he  does not have  anything that  splits out                                                               
the  investment by  core  field versus  other  fields.   However,                                                               
pointing back  to slide 5,  he noted  that the opportunity  is in                                                               
the core fields;  thus, he recommends setting up  a fiscal system                                                               
that  incentivizes more  investment in  those core  fields.   The                                                               
opportunity in  Point Thomson, Nikaitchuq, Liberty,  and Oooguruk                                                               
is relatively  small in terms of  remaining barrels.  He  said HB
308  makes sense  because it  expands  the tax  credit system  to                                                               
apply to investments in those core fields.                                                                                      
REPRESENTATIVE  SEATON  requested  Mr.   Wenzel  to  provide  the                                                               
committee with  material that looks  at the total  investment for                                                               
both core and new projects.                                                                                                     
6:38:08 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  asked  how   much  of  the  maintenance                                                               
investment  [on slide  10]  is  due to  new  requirements by  the                                                               
Department of  Transportation & Public Facilities  or other state                                                               
MR. WENZEL responded he does not  have those numbers and will get                                                               
back to members with that information.                                                                                          
MR. WENZEL commenced his presentation  with discussion of a third                                                               
leading  indicator -  oil  and  gas employment  [slide  11].   He                                                               
related  that  the  administration   sees  increasing  levels  of                                                               
employment.   Employment peaked  in mid-2009,  but has  fallen in                                                               
the last few months.  He  said ConocoPhillips is of the view that                                                               
part of that  employment increase is also driven  by the increase                                                               
in  spending on  repair and  refurbishment activities.   He  also                                                               
noted that usage of the Kuparuk camp is down 20 percent.                                                                        
REPRESENTATIVE  KAWASAKI  related  that  according  to  the  last                                                               
[Department of  Labor & Workforce  Development] report  the total                                                               
number of  nonresident hires in  the oil industry  is increasing.                                                               
He further related that another  report regarding economic trends                                                               
shows that the  largest percentage of increase in  the oil sector                                                               
of new  hires is from nonresidents.   He requested Mr.  Wenzel to                                                               
address this from the perspective of the industry as a whole.                                                                   
MR. WENZEL offered to speak to this when he gets to slide [16].                                                                 
6:40:44 PM                                                                                                                    
MR.   WENZEL  resumed   his   presentation   and  addressed   the                                                               
administration's talk  about additional  projects that  are being                                                               
approved and  moved forward.   He reminded members  that Oooguruk                                                               
was sanctioned prior to ACES  becoming effective, so there was no                                                               
chance  to change  the investment  decision.   Both Oooguruk  and                                                               
Nikaitchuq had royalty  relief to help their  economics.  Liberty                                                               
is not  subject to the ACES  tax system.  He  said ConocoPhillips                                                               
is aware of $2 billion in  projects that have been deferred since                                                               
the passage  of ACES.   These projects include the  [Prudhoe Bay]                                                               
I-Pad and gas  partial processing project, [West Sak]  1N and 1P,                                                               
and the ultra low sulfur diesel (ULSD) topping plant.                                                                           
REPRESENTATIVE  KAWASAKI inquired  with  Mr.  Wenzel is  alleging                                                               
that ACES is the cause of the deferral of these projects.                                                                       
MR. WENZEL replied  he is indicating that $2  billion of projects                                                               
has been  deferred since ACES  was passed.   While he  cannot say                                                               
why  ConocoPhillips'  working  interest partners  came  to  their                                                               
conclusions,  he  can  say that  ConocoPhillips  supported  these                                                               
deferrals and the ACES tax law was part of that decision.                                                                       
6:42:36 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  asked whether  changing ACES  would mean                                                               
these projects would come off the shelf.                                                                                        
MR. WENZEL  answered he  cannot promise  the projects  would come                                                               
off the shelf  because ConocoPhillips is only  a working interest                                                               
owner.    However,  ConocoPhillips  supports HB  308  because  it                                                               
provides   additional   incentives   for   these   projects   and                                                               
ConocoPhillips would  definitely re-evaluate these projects.   If                                                               
they met ConocoPhillips'  hurdle rates, the company  would try to                                                               
convince its working interest partners the same.                                                                                
6:43:35 PM                                                                                                                    
MR.  WENZEL   commenced  his  presentation  with   a  $1  billion                                                               
investment  example.   He said  the first  example applied  to an                                                               
offshore  project like  the Gulf  of  Mexico or  the Chukchi  Sea                                                               
where there is no production tax  [slide 13].  The yellow bars on                                                               
the graph are  the industry keep of the incremental  cash flow of                                                               
profits  off the  project and  the  red bars  are the  government                                                               
take.   It can be seen  that as oil prices  increase the investor                                                               
keep and government take are about  the same, making it a win-win                                                               
situation.   However, for  this same  scenario of  investment and                                                               
oil  prices  in Alaska  [slide  14],  the investor  keep  remains                                                               
relatively flat even when high  oil prices are reached, resulting                                                               
in  a very  unbalanced sharing  of the  upside.   This unbalanced                                                               
sharing is caused by progressivity  in which the state government                                                               
takes a  greater share of the  net profits as oil  price goes up.                                                               
He  said  investors  in  ConocoPhillips are  not  looking  for  a                                                               
profile  like the  one on  slide  14; investors  are looking  for                                                               
exposure to  upside prices  and a profile  that is  more balanced                                                               
like the one on slide 13.                                                                                                       
6:45:23 PM                                                                                                                    
REPRESENTATIVE SEATON  offered his  hope that  Mr. Wenzel  is not                                                               
suggesting Alaska should have the  profile of zero production tax                                                               
and no  royalty.   He pointed  out that slide  14 shows  there is                                                               
protection on  the downside at  low oil  prices when there  is no                                                               
production tax, something that industry supported.                                                                              
MR.  WENZEL responded  ConocoPhillips would  suggest that  Alaska                                                               
find a way to provide a more  balanced sharing of the upside.  He                                                               
said HB 308  by no means creates  this profile, but is  a step in                                                               
the right  direction.  As  long as there is  progressivity, there                                                               
is always a greater share going  to the government on the upside.                                                               
In regard to industry support  for protection on the downside, he                                                               
said ConocoPhillips at  that time was not  arguing for protection                                                               
on  the downside.    ConocoPhillips saw  the  natural balance  of                                                               
having  the downside  be exposed  also, but  ConocoPhillips would                                                               
much  rather  be  fully  exposed  or at  least  have  a  balanced                                                               
approach  to the  upside.   He said  investors believe  in upside                                                               
price appreciation and understand the risk if prices go down.                                                                   
6:47:56 PM                                                                                                                    
REPRESENTATIVE  SEATON presumed  ConocoPhillips would  be willing                                                               
to have a  per barrel flat tax  when the price is below  $50 as a                                                               
balancing mechanism.                                                                                                            
MR. WENZEL  replied he cannot  speak for the whole  industry, but                                                               
should  a  more balanced  approach  be  created for  the  upside,                                                               
ConocoPhillips would definitely be  willing to talk about shaping                                                               
an appropriate tax system that applies  to the downside.  He said                                                               
that  can  already  be  seen   today  in  ACES  where  there  are                                                               
protections, and  in royalty  fees which  are flat  regardless of                                                               
oil prices.   Additionally, ACES  has a graduated floor  tax that                                                               
currently provides protection for the state on the downside.                                                                    
REPRESENTATIVE SEATON  said it  is production  tax that  is being                                                               
talked about here, not the  state's ownership share in royalties.                                                               
He said  he appreciates  Mr. Wenzel's comments  and as  things go                                                               
forward he will look at the taxes below $50.                                                                                    
CO-CHAIR NEUMAN  stated that other companies  that have testified                                                               
have said  it is  not so  much production tax  but the  myriad of                                                               
other things that also happened in ACES.                                                                                        
The committee took an at-ease from 6:49 pm. to 6:56 p.m.                                                                        
6:56:39 PM                                                                                                                    
MR.  WENZEL pointed  out that  the charts  he is  displaying show                                                               
total government take,  not just production tax.   Production tax                                                               
drives the  progressivity.  Total government  take includes state                                                               
income tax, property tax, production tax, and royalty.                                                                          
MR.  WENZEL  discussed  another leading  indicator  -  production                                                               
[slide 15].  He said the  historical production decline rate is 6                                                               
percent, and  Conoco Phillips believes  it will take  another $40                                                               
billion  over the  next decade  just  to deliver  that 6  percent                                                               
decline   rate.      Without   that   $40   billion   investment,                                                               
ConocoPhillips believes  the natural decline rate  would be 10-16                                                               
percent, which would make it very difficult to run TAPS.                                                                        
6:58:05 PM                                                                                                                    
MR.  WENZEL  noted  that  his whole  presentation  is  about  the                                                               
importance  of  investment  for  delivering  production  and  for                                                               
delivering jobs.   He pointed out that the  Department of Revenue                                                               
forecast is  for only a 2.5  percent decline rate.   Delivering a                                                               
2.5 percent  decline rate requires  finding a way  to incentivize                                                               
new, additional  investment above the  $40 billion, he said.   It                                                               
is not  just about  whether enough is  being invested  today, but                                                               
also about what is being done to increase investment.                                                                           
MR.  WENZEL addressed  Representative  Kawasaki's question  about                                                               
employment  [slide 16].   He  said 88  percent of  ConocoPhillips                                                               
direct  employees  are  Alaska  residents.    However,  the  vast                                                               
majority  of people  working on  ConocoPhillips operative  assets                                                               
are  employees  of  subcontractors  and  the  majority  of  those                                                               
employees are also Alaska residents  [ASRC Energy Services - 81.5                                                               
percent, Doyon Universal Services  - 92.9 percent, Kuukpik Arctic                                                               
Catering  -   92.8  percent,  Doyon  Drilling   -  89.8  percent,                                                               
Halliburton  Energy Services  - 74.3  percent, and  Nabors Alaska                                                               
Drilling - 78.1 percent].                                                                                                       
7:00:02 PM                                                                                                                    
REPRESENTATIVE  SEATON, in  regard to  slide 15,  asked what  the                                                               
liability  risk  is  for  dismantling,  removal  and  restoration                                                               
(DR&R) should  the companies  decide not to  invest and  the TAPS                                                               
throughput subsequently goes below the necessary minimum.                                                                       
MR.   WENZEL  answered   the   dismantlement  and   refurbishment                                                               
activities  are not  a risk,  but a  reality; the  companies have                                                               
that obligation  at some point in  time.  It is  to the advantage                                                               
of both the  industry and the state to delay  that period as long                                                               
as possible because  that would mean oil is  still being produced                                                               
and shipped.                                                                                                                    
REPRESENTATIVE  SEATON inquired  whether ConocoPhillips  looks at                                                               
investing  in well-related  activities  so as  not  to incur  the                                                               
significant costs of DR&R sooner rather than later.                                                                             
MR.  WENZEL responded  no, that  is not  part of  ConocoPhillips'                                                               
consideration in terms of how quickly  it might be faced with its                                                               
DR&R liabilities.   ConocoPhillips knows those are  out there and                                                               
is accruing for  them.  ConocoPhillips is very  much motivated by                                                               
production,  just  as  the  state   is,  and  wants  to  increase                                                               
production wherever, whenever,  and as quickly as  possible.  For                                                               
ConocoPhillips  it  is all  about  how  to continue  or  increase                                                               
production in an economic fashion.                                                                                              
[Co-Chair Neuman passed the gavel to Co-Chair Johnson.]                                                                         
7:02:53 PM                                                                                                                    
MR.  WENZEL  reiterated  that  ConocoPhillips  supports  HB  308,                                                               
saying that while the  bill does not go far enough,  it is a step                                                               
toward creating  a more favorable investment  climate that builds                                                               
business  confidence   [slide  17].     The  bill   would  reduce                                                               
progressivity  which would  create  a  more balanced  risk/reward                                                               
environment, incentivize  new investment in core  and new fields,                                                               
and support  increased long-term  jobs and investment  in riskier                                                               
projects.   The bill would  provide expanded credits  for expense                                                               
activities which  would incentivize well-related  activity inside                                                               
the core fields.   The bill would provide for  restoration of the                                                               
3-year audit period, something that  is important to the state as                                                               
well as  the taxpayer to  ensure that  both are aligned  in their                                                               
interpretation  of the  tax law  and the  regulations.   The bill                                                               
would  provide waiver  of interest  due  to delayed  regulations,                                                               
which is  the only  fair way to  do this.   Lastly, HB  308 would                                                               
provide a more  reasonable interest rate that is  more in keeping                                                               
with other states and other commercial contracts.                                                                               
7:05:17 PM                                                                                                                    
MR. WENZEL  summarized, stating that ConocoPhillips  sees several                                                               
leading indicators  that cause it  concern.   It is past  time to                                                               
make a change to the production  tax system in Alaska because the                                                               
government take is  too high.  The most leveraging  way to adjust                                                               
that, while still  creating a semblance of a  balanced sharing of                                                               
the upside  with the state,  is to adjust the  progressivity, and                                                               
HB 308  attempts to do  that.  The number  of wells and  rigs are                                                               
down, expenditures on  the North Slope are flat  after taking out                                                               
inflation,  development  expenditures  are  down,  employment  is                                                               
trending down,  camp usage is down  20 percent, and there  are $2                                                               
billion  in  deferred  projects  that are  partly  due  to  ACES.                                                               
Production  decline is  key to  everyone, he  stressed.   It will                                                               
require $40 billion  over the next decade just to  maintain the 6                                                               
percent  decline rate,  yet the  state is  projecting only  a 2.5                                                               
percent decline;  therefore, a way  must be found  to incentivize                                                               
dramatically more investment on the North  Slope.  He said HB 308                                                               
is  an opportunity  to create  a climate  that is  more favorable                                                               
toward future  investment, future  jobs, and future  revenues for                                                               
both the industry and the state.                                                                                                
7:07:04 PM                                                                                                                    
REPRESENTATIVE   SEATON   asked    whether   ConocoPhillips   has                                                               
estimation that  it will be  able to declare actual  expenses now                                                               
that  there is  no longer  the  standard deduction  for the  core                                                               
fields.    He  understood  that   actual  expenses  exceeded  the                                                               
standard deduction that  was put in place during  the time period                                                               
that ACES regulations were not yet adopted.                                                                                     
MR.  WENZEL  replied  he  believes  the number  put  out  by  the                                                               
Department of Revenue was $300-$400  million in expenditures that                                                               
were  not allowable  because of  the standard  deduction.   Thus,                                                               
those  expenditures  will come  into  play  and will  reduce  the                                                               
profitability per  barrel, which reduces the  progressivity going                                                               
into 2010.  He  said it is not a standard  deduction like a state                                                               
income tax  and is not  a simple way  to take just  one deduction                                                               
and not  have to prove it.   In reality, all  expenses must still                                                               
be  proved up  to  that  number, which  means  it  does not  save                                                               
effort.  Rather,  it is a cap on  expenditures and ConocoPhillips                                                               
believes it is an inappropriate  cap because all expenditures are                                                               
legitimate and should be deductible against a net profits tax.                                                                  
[Co-Chair Johnson returned the gavel to Co-Chair Neuman.]                                                                       
7:09:35 PM                                                                                                                    
REPRESENTATIVE SEATON said he does  not disagree with Mr. Wenzel.                                                               
He inquired whether  Mr. Wenzel knows how  much the profitability                                                               
numbers will be moved downward.                                                                                                 
MR. WENZEL answered he has not  done that calculation to see what                                                               
it does in  terms of changing the production tax  value (PTV) per                                                               
barrel  of oil  equivalent  (BOE).   He  offered  to provide  the                                                               
calculation for members.                                                                                                        
7:10:37 PM                                                                                                                    
REPRESENTATIVE KAWASAKI asked how  much ConocoPhillips intends to                                                               
spend for capital infrastructure in  the state of Alaska over the                                                               
next 10 years under the current ACES provisions.                                                                                
MR. WENZEL responded that number has not yet been set.                                                                          
REPRESENTATIVE  KAWASAKI inquired  how much  ConocoPhillips would                                                               
intend to spend on capital  infrastructure in the state of Alaska                                                               
if HB 308 was passed.                                                                                                           
MR. WENZEL  replied he cannot say,  but that he can  say it would                                                               
create a  more favorable business  climate and will, in  the view                                                               
of ConocoPhillips, incentivize new investment.                                                                                  
7:11:34 PM                                                                                                                    
REPRESENTATIVE KAWASAKI  asked why  Mr. Wenzel has  not mentioned                                                               
the local  hire provision  of HB  308 as one  of the  reasons for                                                               
ConocoPhillips' support of the bill.                                                                                            
MR. WENZEL  answered there was  a fair  amount of debate  on that                                                               
provision at earlier hearings and he  does not want to start that                                                               
debate.   If  the  provision stays  in  the bill,  ConocoPhillips                                                               
would be  happy to see it  there because it has  a defensible and                                                               
impressive  record on  Alaska hire.   That  aside, ConocoPhillips                                                               
would support the bill for the reasons he has suggested.                                                                        
7:12:30 PM                                                                                                                    
REPRESENTATIVE  KAWASAKI  inquired   whether  ConocoPhillips  has                                                               
calculated how  much more money  it would  have made if  ACES and                                                               
progressivity not been in place.                                                                                                
MR. WENZEL responded  no.  He said the question  is multi-fold as                                                               
to whether to go  back to ELF or PPT, and it  is not considered a                                                               
loss because ConocoPhillips  pays its taxes under the  law of the                                                               
day.   However,  ConocoPhillips talks  to members  and recommends                                                               
changes  it  thinks are  necessary  for  creating a  healthy  and                                                               
vibrant oil industry and economy for Alaska.                                                                                    
7:13:19 PM                                                                                                                    
CO-CHAIR NEUMAN  asked whether ConocoPhillips knows  how much oil                                                               
and gas it is going to produce in the next 10 years.                                                                            
MR. WENZEL replied no.                                                                                                          
CO-CHAIR JOHNSON said he thinks  members are asking Mr. Wenzel to                                                               
give certainty  in an area that  no one could give  certainty to,                                                               
and the  crux of the  argument is  if the legislature  does this,                                                               
then  what will  ConocoPhillips guarantee.   However,  guarantees                                                               
are few and far between, whether for the state or industry.                                                                     
7:14:03 PM                                                                                                                    
REPRESENTATIVE  SEATON  inquired  at  what  point  ConocoPhillips                                                               
would decide  that this is an  unstable tax regime because  it is                                                               
being changed every two years or so.                                                                                            
MR. WENZEL  allowed that  Representative Seaton  is correct.   At                                                               
the  time   of  the  most   recent  change,   ConocoPhillips  was                                                               
definitely concerned, and is still  concerned, about the business                                                               
climate in  Alaska.   He said ConocoPhillips  is not  looking for                                                               
stability  at   the  tax  system   that  exists  today.     While                                                               
stabilization  of the  tax system  today would  provide certainty                                                               
for  decision  making,  he  is  afraid it  would  be  a  negative                                                               
decision  for ConocoPhillips.    He strongly  suggested that  the                                                               
state and  legislature find a way  to change this tax  system and                                                               
create one  that provides a  more balanced sharing of  the upside                                                               
and a more incentivizing environment.                                                                                           
7:15:51 PM                                                                                                                    
CO-CHAIR  NEUMAN  understood  that   Mr.  Wenzel  is  before  the                                                               
committee because  ConocoPhillips is concerned about  the effects                                                               
ACES has had over the past  two years and would accept changes to                                                               
ACES to make a more appropriate business environment.                                                                           
MR. WENZEL  answered correct, ConocoPhillips  thinks there  is an                                                               
opportunity to bring more investment  and production to the state                                                               
than there would be without the change.                                                                                         
7:16:35 PM                                                                                                                    
CO-CHAIR NEUMAN held over HB 308.                                                                                               

Document Name Date/Time Subjects
PXD Comments CSHB308 031010.pdf HRES 3/10/2010 1:00:00 PM
HB 308
HB 308 Savant AK 3.10.10.pdf HRES 3/10/2010 1:00:00 PM
HB 308
AOGA Presentation 3.10.10.pdf HRES 3/10/2010 1:00:00 PM
HB 308
AOGA Testimony on CSHB308 FINAL.pdf HRES 3/10/2010 1:00:00 PM
HB 308
HB 337.pdf HRES 3/10/2010 1:00:00 PM
HB 337
HB 337 Gov Letter.pdf HRES 3/10/2010 1:00:00 PM
HB 337
HB 337 Fiscal Notes 1.2.3..pdf HRES 3/10/2010 1:00:00 PM
HB 337
CS HB 369 v.S.pdf HRES 3/10/2010 1:00:00 PM
HB 369
HB 308 ConocoPhillips Testimony 3.10.10.pdf HRES 3/10/2010 1:00:00 PM
HB 308
HB 308 ExxonMobil Testimony 3.10.10.pdf HRES 3/10/2010 1:00:00 PM
HB 308