Legislature(2015 - 2016)BARNES 124

02/29/2016 06:00 PM RESOURCES

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06:00:00 PM Start
06:00:09 PM HB247
08:38:02 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
Heard & Held
-- Testimony <Invitation Only> --
- Exxon/Mobil
- BP Exploration
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
6:00:09 PM                                                                                                                    
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
6:00:45 PM                                                                                                                    
BILL ARMSTRONG,  President/CEO, stated he is  available to answer                                                               
questions, having provided testimony at an earlier hearing.                                                                     
REPRESENTATIVE SEATON  noted that for  his decision making  he is                                                               
looking at the net present  value (NPV) of the state's investment                                                               
through the  credits.  He  inquired whether Mr.  Armstrong thinks                                                               
that is the correct perspective to be using.                                                                                    
MR.  ARMSTRONG replied  that  is a  way  to look  at  it and  not                                                               
necessarily a bad way to look at  it, but there are other ways to                                                               
look at it besides just NPV.   He said it is really important for                                                               
the State of Alaska  to put out the image and  reality that it is                                                               
open for business.   Getting other folks to come  to Alaska to do                                                               
what Armstrong Oil  and Gas ("Armstrong") has done  over the last                                                               
15 years is  really important.  He advised  that many assumptions                                                               
go into  a straight NPV  analysis, such as  what price of  oil to                                                               
use and  what kind of  cost structure went into  the development.                                                               
It is a  complicated formula and not something to  just grind out                                                               
should this or that credit not  pencil, because there are lots of                                                               
other ways to  look at it.   But, he allowed, NPV  is a technique                                                               
that the committee needs to look at and seriously analyze.                                                                      
MR.  ARMSTRONG stressed  that the  key  to success  for both  the                                                               
state and industry  is to get wells drilled.   If a straight NPV-                                                               
only analysis  doesn't fly, then  some other way must  be figured                                                               
out to  get people to  drill wells  in Alaska because  good stuff                                                               
will happen.  Every single field  on the North Slope was found by                                                               
accident, he  said.  The  key is putting  the bit in  the ground.                                                               
It is a  forgiving petroleum system.  The state  will not get oil                                                               
down its pipeline unless wells are drilled.                                                                                     
6:05:40 PM                                                                                                                    
MR.  ARMSTRONG emphasized  that Alaska  is tough,  expensive, and                                                               
difficult to  drill in.  He  posed a scenario in  which a wildcat                                                               
well is drilled in winter that  is 20 miles away from an existing                                                               
road.   A 20-mile-long ice road  would need be built  starting in                                                               
December, he explained,  at a cost of about $1  million per mile.                                                               
An ice pad would  then be drilled and there would  be a window of                                                               
three months  to drill  and test  the well.   The rig  would then                                                               
need to be  moved off the pad  and then the ice  road would melt.                                                               
Nowhere else in  the U.S. is there this $20  million expense.  It                                                               
is an uphill slog, cost-wise, in  Alaska.  So, whatever the state                                                               
can do to  help encourage the drilling of  wells, whether credits                                                               
or  something  else,  is  good.    When  contemplating  any  law,                                                               
legislators should always  ask whether this will  hurt or benefit                                                               
getting wells drilled - it is a very simple equation.                                                                           
REPRESENTATIVE SEATON  commented that [legislators]  don't expect                                                               
any  company to  undertake a  project where  the company  doesn't                                                               
expect to  make money or expect  its investment to pay  off.  So,                                                               
if there are other methods of  looking at that beside net present                                                               
value, he  would appreciate  Mr. Armstrong  sending those  to the                                                               
committee.   He said net present  value is the only  thing he has                                                               
come up  with as an  investor sitting  on the board  of directors                                                               
for the state to say whether it makes sense to do an investment.                                                                
MR. ARMSTRONG agreed to do so.                                                                                                  
6:08:13 PM                                                                                                                    
REPRESENTATIVE TARR recalled that  when earlier asked about which                                                               
of the credits were most helpful,  Mr. Armstrong had said the Net                                                               
Operating  Loss Credit.   She  noted that  under HB  247 the  Net                                                               
Operating Loss  Credit for a  company like Mr.  Armstrong's would                                                               
be limited to $25 million per  company per year and anything more                                                               
than that  would have to be  carried forward.  She  requested Mr.                                                               
Armstrong  to comment  further on  how  that would  fit into  his                                                               
company's overall profile on an annual basis.                                                                                   
MR. ARMSTRONG responded  that his company has come  to Alaska and                                                               
made a  lot of investments,  and the investments were  made based                                                               
on the rules and  the laws set up by the  legislature.  To change                                                               
those  rules that  dramatically and  to limit  the Net  Operating                                                               
Loss  Credit at  just $25  million would  be a  crushing blow  to                                                               
anybody in  a position  like Armstrong  or Caelus  Energy Alaska,                                                               
LLC ("Caelus").   It doesn't apply  so much to the  "big three" -                                                               
ConocoPhillips, BP,  and ExxonMobil.   If the  legislature's goal                                                               
is  to continue  the oligopoly  on the  North Slope  of the  "big                                                               
three,"  that would  be a  terrific way  to do  it because  those                                                               
companies have  infrastructure that  was built  30 years  ago and                                                               
has been  paid for  multiple times  over.   New players  like his                                                               
company are  starting in  a hole.   The new  players do  not have                                                               
that infrastructure to lean on  and the Net Operating Loss Credit                                                               
is  a  huge incentive  for  Armstrong  to  get going.    Assuming                                                               
success, this credit  is a small price.  He  anticipated that his                                                               
company's discovery  this last year  will provide a cash  flow to                                                               
the  state just  shy  of  $1 billion  a  year through  royalties,                                                               
taxes, and ancillary  things.  So, the Net  Operating Loss Credit                                                               
is a  massive return on  investment to  the state in  addition to                                                               
the  NPV  for  that  expense; additionally,  not  many  companies                                                               
utilize it.   He  qualified that  he is not  saying it  is Senate                                                               
Bill 21 [passed in 2013,  Twenty-Eighth Alaska State Legislature]                                                               
or nothing, but  that there is a lot of  wiggle room between what                                                               
is proposed by HB 247.                                                                                                          
MR. ARMSTRONG  added that he  understands the state is  running a                                                               
fiscal deficit,  but said the  fact of life  is that Alaska  is a                                                               
petro  state.   Every petro  country -  Saudi Arabia,  Venezuela,                                                               
Qatar, Iran, and Iraq - is  losing hugely because of the price of                                                               
commodity.   That means there is  no way that price  of commodity                                                               
is  going to  stay that  low.   Like Alaska,  pretty much  all of                                                               
those  countries have  established some  version of  a rainy  day                                                               
fund.  Alaska has $65 billion  in its rainy day fund, $45 billion                                                               
in its  permanent fund and  $20 billion  in its reserve  fund, to                                                               
weather through  a few years of  deficits.  Every oil  company is                                                               
running  deficits today,  is  laying off  people,  and trying  to                                                               
weather through  this bad  time.   As a  petro state  Alaska will                                                               
have  times of  deficit.   Alaska has  no income  tax, no  state-                                                               
imposed sales  tax, no state-imposed property  tax, and everybody                                                               
gets paid to  live in the state, all of  which is unbelievable to                                                               
people in the Lower 48.  There should be some shared pain.                                                                      
6:14:24 PM                                                                                                                    
REPRESENTATIVE TARR requested Mr.  Armstrong's view regarding the                                                               
provision  in HB  247  that would  change  confidentiality.   She                                                               
explained  that [under  current  statute] members  are unable  to                                                               
know where [the credits] are being used most effectively.                                                                       
MR. ARMSTRONG answered he does  not understand the bill enough to                                                               
know exactly what that is.  He said  he will look into it and get                                                               
back to the committee.                                                                                                          
6:15:04 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  remarked  that the  aforementioned  $1                                                               
billion per  year in cash flow  to the state really  perks up his                                                               
ears.  He asked how that number was derived.                                                                                    
MR. ARMSTRONG replied it was based  on the assumed flow rate that                                                               
Armstrong expects  off its developed  field, a  one-sixth royalty                                                               
to the state, and, he thinks, an oil price of about $70.                                                                        
6:16:22 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
6:17:15 PM                                                                                                                    
J.  PATRICK  FOLEY,  Senior  Vice  President  Alaska  Operations,                                                               
Caelus  Energy Alaska,  LLC,  began  his PowerPoint  presentation                                                               
with slide  2, "Caelus Energy  Alaska: Key Facts  & Information."                                                               
He said Caelus Energy Alaska,  LLC ("Caelus") is a private equity                                                               
company  with  all  of  its   money  coming  from  Apollo  Global                                                               
Management, LLC,  a private  equity firm  out of  New York.   "We                                                               
also  have a  lending  side, we  have  a debt  side,  and it's  a                                                               
consortium of  six different  banks," he added.   To  date Caelus                                                               
has invested  over $2  billion in Alaska.   Caelus  purchased the                                                               
assets of  Pioneer Natural Resources Alaska,  Inc. ("Pioneer"), a                                                               
company he  was with since day  one, so he actually  reaches back                                                               
to 2002 when  Pioneer and Bill Armstrong made the  first deal and                                                               
drilled Oooguruk.  He  said he is here today as  a result of that                                                               
successful operation.   Caelus will  have a total budget  in 2016                                                               
of  about  $300  million  that  is  split  about  75  percent  in                                                               
developing  Oooguruk and  25 percent  in the  ongoing exploration                                                               
project in  Smith Bay.  Caelus  has a full-time work  force of 70                                                               
employees and today has 400 people  in the North Slope working as                                                               
contractors.   That  equates to  about  600 full-time  equivalent                                                               
jobs annually on  the North Slope.  Some of  Caelus's North Slope                                                               
jobs are  year-round and some  are seasonal.   Most of  the North                                                               
Slope jobs actually  take two people to perform  because there is                                                               
a 24-hour shift.  Operationally  at Oooguruk, Caelus has produced                                                               
23 million  barrels of oil [since  2008].  In 2015  Caelus made 4                                                               
million barrels and will make slightly more than that [in 2016].                                                                
6:20:12 PM                                                                                                                    
MR. FOLEY related that smaller  companies are often asked whether                                                               
they are responsible  stewards of the state's assets  and able to                                                               
perform  operationally with  the  same degree  of  care that  the                                                               
legacy  majors do.   He  said this  question offends  him because                                                               
Caelus is  extraordinarily proud of its  history environmentally.                                                               
Caelus  is not  flawless,  he  allowed, as  the  company has  had                                                               
unreportable spills,  meaning they did  not get to  the threshold                                                               
of having to  be reported because they were measured  in cups and                                                               
quarts,  not in  gallons  and barrels.   In  2015  Caelus had  an                                                               
extraordinary  Occupational  Safety   and  Health  Administration                                                               
(OSHA) recordable  [injury] rate of  0.65, the rate  the industry                                                               
uses to portray its safety records.                                                                                             
MR. FOLEY pointed out that Caelus  has paid to the state over $65                                                               
million in royalties  and $60 million in property  taxes.  Caelus                                                               
currently  sits  on  proven  reserves at  Oooguruk  of  about  85                                                               
million barrels yet to be produced,  as well as about 100 million                                                               
barrels at Nuna, a project that Caelus is commencing.                                                                           
6:21:41 PM                                                                                                                    
MR. FOLEY showed slide 3,  "North Slope Exploration & Development                                                               
Program,"  and discussed  Caelus's ongoing  projects.   Under its                                                               
Tulimaniq Exploration Program located in  Smith Bay, Caelus is in                                                               
the  process of  drilling two  very bold  exploration wells  this                                                               
winter; one has  already been drilled and the  other is currently                                                               
being drilled.  The project is  about 120 miles away from Prudhoe                                                               
Bay and  60 miles away from  Barrow.  He said  Caelus enjoys both                                                               
Exploration Incentive Credits and  Net Operating Loss Credits for                                                               
this project.   Absent those  credits, he stressed,  Caelus would                                                               
not be drilling those wells.   At the Oooguruk Field Caelus makes                                                               
about  10,000 barrels  a  day, drills  four  or five  development                                                               
wells a  year, and places heavy  fracturing on them.   So far, 40                                                               
of 48 wells have been drilled from  the island and the hope is to                                                               
have a  drilling program that  goes on  for another two  or three                                                               
years and then that asset will be fully developed.                                                                              
CO-CHAIR NAGEAK asked whether the  eastern exploration acreage is                                                               
MR. FOLEY responded that the  exploration acreage is state leases                                                               
in offshore  state waters in Smith  Bay, and there is  a drilling                                                               
rig standing up on those leases today.                                                                                          
MR. FOLEY  continued reviewing slide  3, noting the  Nuna Project                                                               
has commenced with  the laying of gravel.   However, he reported,                                                               
the project is  currently stalled as Caelus waits  for some price                                                               
recovery and  some stability in  the state's  fiscal environment.                                                               
He further  pointed out that  Caelus has purchased  about 350,000                                                               
acres of leases [east of the  Prudhoe Bay Unit].  High resolution                                                               
three-dimensional  [seismic  surveys]   were  shot  last  winter.                                                               
Caelus hopes to have a  multi-well exploration program as soon as                                                               
this coming winter but it may be delayed one more year.                                                                         
6:24:02 PM                                                                                                                    
MR. FOLEY  explained slide 4,  "Alaska: An  Attractive Investment                                                               
Opportunity?" is  essentially a  scorecard on Alaska.   Companies                                                               
goes  through a  checklist like  this when  making an  investment                                                               
decision  about whether  to enter  a new  area where  they aren't                                                               
currently doing business.  Alaska  scores quite high in the first                                                               
six elements on  the list:  it has a  wonderful petroleum system;                                                               
there is access  to leases; there is a reasonable  amount of data                                                               
although  the drilling  density is  shockingly low;  there is  an                                                               
expert   contractor  community;   the  regulatory   community  is                                                               
hospitable and  expert, although  there is room  for improvement,                                                               
and  permits  are  received  timely   so  projects  can  proceed.                                                               
However,  Alaska scores  less favorably  as far  as the  logistic                                                               
difficulty of  doing business on  the North  Slope.  It  is dark,                                                               
cold, a long way away, and  there are seasonal limitations.  That                                                               
doesn't mean  things cannot happen,  it just means the  costs are                                                               
higher than what  they would be elsewhere in the  U.S.  Regarding                                                               
the  item  of  favorable  fiscal  regime,  he  said  there  is  a                                                               
qualified yes under  Senate Bill 21 in which the  terms were fair                                                               
and balanced.   Those terms  balanced the difficulties  in Alaska                                                               
and they balanced the wonderful  petroleum system and opportunity                                                               
had in the state.  Senate Bill  21 was fair and reasonable and it                                                               
was the tax credits that made  it a balance.  Another key element                                                               
is the  stability of  the fiscal regime.   Since  Pioneer started                                                               
its business  in 2002, there  have been  five changes to  the tax                                                               
regime,  so Alaska  scores very  poorly  in that  element.   This                                                               
affects the  last element  on the list,  which is  the confidence                                                               
that lenders  and equity  providers have  with the  businesses in                                                               
Alaska.   This might  not apply to  companies that  utilize their                                                               
own  money to  develop projects,  but for  companies like  Caelus                                                               
that must go  to private equity providers and  banks, there needs                                                               
to  be the  confidence  that  the tax  regime  is  going to  stay                                                               
unchanged for a very long period of time.                                                                                       
6:26:29 PM                                                                                                                    
REPRESENTATIVE TARR observed on slide  4 that Bank of America was                                                               
committed  but spooked  by change,  and that  ING backed  out and                                                               
Wells Fargo  disengaged when changes  began.  She inquired  as to                                                               
the time period when changes began.                                                                                             
MR. FOLEY answered that these  are actual experiences Caelus had.                                                               
When  Caelus was  trying to  finance its  exploration program  at                                                               
Smith Bay  and knew it  would be  getting these credits,  it went                                                               
out  to  the  lending  community seeking  an  advance  of  money.                                                               
Caelus talked to all three lenders.   Wells Fargo was on the edge                                                               
and not  really wanting to  do business  in the state  of Alaska.                                                               
Bank of America  and ING were actively engaged, but  a shock wave                                                               
went  through the  lenders when  the  veto of  $200 million  took                                                               
place to fund the credits that could be earned.                                                                                 
6:27:26 PM                                                                                                                    
REPRESENTATIVE JOSEPHSON  related his  understanding that  if the                                                               
earnings from  the permanent fund  corpus are ignored,  the state                                                               
is predicted  to raise $1.8  billion in  new revenue.   In total,                                                               
these credits are at about $700  million.  He asked whether those                                                               
two  facts would  not also  shock the  investors, given  the math                                                               
itself has a stability problem.                                                                                                 
MR. FOLEY replied he cannot  speak specifically to those numbers,                                                               
but when looking  at the credit program he looks  at the state as                                                               
being a co-investor in his company's  projects.  This is not free                                                               
money,  he  added, these  are  credits  that are  earned  because                                                               
Caelus makes investments and Caelus  makes those investments with                                                               
an  expectation of  a return.    Those investments  will lead  to                                                               
future royalty,  future property  tax, as  well as  payments from                                                               
the  net profit  share leases  at Oooguruk.   The  entire balance                                                               
must  therefore be  looked at.    He said  his forthcoming  slide                                                               
about the Nuna Project might better answer the question.                                                                        
REPRESENTATIVE JOSEPHSON commented he  will be interested to hear                                                               
about Nuna  since it was  earlier said  that work on  the project                                                               
was suspended  due to price  sensitivities.  Given  [the state's]                                                               
fiscal  situation, he  continued, [the  state] needs  to look  at                                                               
suspending some things as well, which is why members are here.                                                                  
6:29:15 PM                                                                                                                    
REPRESENTATIVE HERRON  asked whether  industry would  have gotten                                                               
to the  last $200 million  vetoed by  the governor or  whether it                                                               
would have self-corrected before it got to the $200 million.                                                                    
MR. FOLEY  answered he does  not know  whether the work  was done                                                               
such that the $200 million would have ever actually accrued.                                                                    
REPRESENTATIVE  HERRON  said  the  governor  has  proposed  these                                                               
changes and committee members are  hearing that these changes are                                                               
significant or  spooky.  He  asked whether Mr.  Foley understands                                                               
the  explanation for  why the  changes  or whether  Mr. Foley  is                                                               
still puzzled by the decisions to go forward with this proposal.                                                                
MR. FOLEY  replied he  understands the  why.  The  state is  in a                                                               
fiscal crisis  and he  is not  insensitive to  that.   Caelus met                                                               
with the  administration and was  pleased to discuss  the changes                                                               
being contemplated  and the  impacts they  would have  on Caelus.                                                               
The net result was HB 247 which is now before the committee.                                                                    
REPRESENTATIVE HERRON  inquired whether Mr. Foley  understood the                                                               
intent  and whether  these  changes made  sense  after Mr.  Foley                                                               
heard the explanation.                                                                                                          
MR. FOLEY responded  no, they do not make sense.   The goals seem                                                               
to be a need  to generate more revenue and for  the state to have                                                               
fewer obligations to  pay out credits.  He said  he believes that                                                               
is short-sighted because  if the state does not  continue to fund                                                               
these investments they  won't happen and everyone will  see a sad                                                               
day down the road when  there are fewer companies doing business,                                                               
fewer investments, and less oil going through the pipeline.                                                                     
6:32:25 PM                                                                                                                    
REPRESENTATIVE TARR  stated she  was struck  by the  comment that                                                               
Mr.  Foley  wasn't  sure  whether the  $200  million  would  have                                                               
actually been used.   She related that it was  a delay in payment                                                               
or delay until the next quarter,  not that the state wasn't going                                                               
to follow  through on its commitment  to pay the credits  if they                                                               
were due.   She said she sees a delayed  payment versus not going                                                               
to be paid  as slightly two different things.   She asked whether                                                               
that is perceived differently by the industry.                                                                                  
MR. FOLEY  answered that Caelus was  paid for all of  the credits                                                               
it earned.   A delay in  those credits wouldn't have  been fatal,                                                               
just less valuable  than getting the value of  the credits sooner                                                               
rather than  later.  He said  his forthcoming review of  the Nuna                                                               
Project will  show the exact  impact of  the $25 million  cap per                                                               
company and what that would do to a project like Nuna.                                                                          
6:33:51 PM                                                                                                                    
REPRESENTATIVE  SEATON noted  some projects  have profit  sharing                                                               
agreements, some  a 16 percent  royalty, and some a  12.5 percent                                                               
royalty.   However,  the  bill treats  everything  the same,  not                                                               
looking at the net present value  to the state of those different                                                               
factors.   He inquired  whether Mr.  Foley thinks  something more                                                               
discriminating is needed  in the bill of what is  the net present                                                               
value of  the system that  the state  is funding the  credits to,                                                               
instead of an across-the-board everybody  gets the same amount of                                                               
credits regardless of  whether the state will ever  get return on                                                               
its investment.                                                                                                                 
MR. FOLEY  replied that Representative  Seaton makes  a wonderful                                                               
point that not all projects are  the same.  Not all capital costs                                                               
are the  same, he continued,  not all operating expenses  are the                                                               
same.  Everybody is different.   Values for a company like Caelus                                                               
are different  from the  average of the  industry.   For example,                                                               
Caelus  is  currently in  a  phase  of  growing its  business  at                                                               
Oooguruk - some  production is made, but wells  are being drilled                                                               
and capital investment  is very significant.  When  the amount of                                                               
money Caelus  has spent  in Alaska  this year  is divided  by the                                                               
amount  of  barrels made  this  year,  Caelus will  have  capital                                                               
investment  in excess  of  $50 per  barrel.   So,  Caelus is  not                                                               
represented by  the average  work that  has been  done to  try to                                                               
evaluate the  bill.  He  said he believes the  goal is to  find a                                                               
one-size-fits-all policy as opposed to  having boutique rules for                                                               
different companies, and that is the challenge.                                                                                 
REPRESENTATIVE SEATON  clarified he is not  meaning the structure                                                               
of different  companies, but the  royalty structure  or structure                                                               
that the state will receive.   [Legislators] must look at it from                                                               
the state's perspective  in what is offered to  companies to make                                                               
things happen, but also the amount  of money given for credits up                                                               
front and  how and whether  it ever  gets repaid.   He understood                                                               
Mr. Foley to  be saying it shouldn't make  any difference whether                                                               
the royalty to the state is 16  percent or on land from which the                                                               
state  receives no  royalty,  and  that there  should  just be  a                                                               
common system across everything.                                                                                                
MR. FOLEY replied  he would encourage the state to  have a common                                                               
system on the North Slope.   He said the forthcoming slide on the                                                               
Nuna Project will maybe help answer the question.                                                                               
6:37:03 PM                                                                                                                    
MR. FOLEY  turned to slide 5,  "Tax Program Changes &  Impacts to                                                               
Caelus," to demonstrate the impacts  of the various components of                                                               
HB  247.    He  offered his  agreement  with  the  point-by-point                                                               
technical analysis  of the bill  that was provided by  the Alaska                                                               
Oil and  Gas Association (AOGA)  at an earlier hearing,  and said                                                               
he will  focus on  four of those  elements that  are specifically                                                               
detrimental to  Caelus.  He explained  that the bar graph  of net                                                               
present value on the slide looks  at the core business of Caelus:                                                               
the ongoing investments at the  Oooguruk Field ("ODS"), a 48-well                                                               
program; and  the Nuna Program,  a 30-well program,  $1.2 billion                                                               
investment for 100 million barrels.   He noted the figures on the                                                               
graph were  done with a 10  percent discount rate and  at a strip                                                               
oil  price,  which  is  the  forward curve  of  what  the  market                                                               
believes oil is worth  today and what it is going  to be worth in                                                               
the future.   He qualified  it doesn't  mean the values  used are                                                               
right,  he is  just sharing  how the  evaluation was  done.   The                                                               
strip right now  would say that a  2016 oil price is  going to be                                                               
$36, coincidentally about what Brent  is today.  It will increase                                                               
a little bit each year over  five years, reaching about $52 flat.                                                               
He  said he  absolutely shares  the sentiments  of Mr.  Armstrong                                                               
that a  low oil price environment  will not be of  long duration,                                                               
but it  might be several years.   When Caelus looks  at a project                                                               
the next three  years are absolutely critical to  the company, so                                                               
for its investments Caelus considers  a strip price.  The figures                                                               
on the  slide assume the basis  of Caelus's business, so  the net                                                               
present value is what it is today at those strip prices.                                                                        
6:39:24 PM                                                                                                                    
MR. FOLEY continued  his discussion of slide 5,  first looking at                                                               
the bar on the graph representing  the provision in HB 247 to fix                                                               
the Gross  Value Reduction (GVR),  which some  have characterized                                                               
as a loophole in the current  law.  Currently, Caelus can use the                                                               
GVR to  increase its net  operating loss.   Some people  say that                                                               
was  an  unintended  consequence,  not the  intention,  and  this                                                               
should be corrected.   However, he said, Caelus  has reviewed the                                                               
current law,  has made  business decisions  based on  the current                                                               
law, and  all modeling has  assumed that the  GVR can be  used to                                                               
take the  company's net  operating loss  lower.   Eliminating the                                                               
GVR, he  reported, would erode  the value  of his business  by 13                                                               
percent.  For example, if his  company is worth $1 today and that                                                               
provision is passed, his company would be worth $.87.                                                                           
MR. FOLEY  then looked at the  bar on the graph  representing the                                                               
provision in HB 247 that would  implement a hard 4 percent floor.                                                               
Right  now, the  tax regime  is  not a  hard minimum  floor in  a                                                               
company like Caelus,  he explained.  All of  Caelus's credits can                                                               
carry the company  below the floor, so Caelus  currently does not                                                               
pay a production tax.   If HB 247 becomes law  and the hard floor                                                               
is left  at 4 percent, Caelus  would be subject to  a minimum tax                                                               
floor that would take the value  of the business down 31 percent,                                                               
making his company only worth $.69 on the dollar.                                                                               
MR. FOLEY  next looked at the  bar on the graph  representing the                                                               
provision in HB 247 that  would limit the transferable/refundable                                                               
credits to  $25 million  per year per  company.   This provision,                                                               
coupled with the GVR fix and  a 4 percent hard floor, would erode                                                               
the net present  value of his business by 77  percent, now making                                                               
his company worth $.23 on the dollar.                                                                                           
MR. FOLEY lastly looked at the  bar on the graph representing the                                                               
provision in HB 247 that would  raise the minimum hard floor from                                                               
4  percent to  5  percent.   He said  that  provision would  take                                                               
Caelus to  83 percent  of its current  value, making  his company                                                               
only worth $.17.                                                                                                                
6:41:45 PM                                                                                                                    
REPRESENTATIVE  SEATON inquired  whether each  succeeding bar  on                                                               
the graph includes the previous bars.                                                                                           
MR. FOLEY confirmed the bars  are cumulative, they cannot be done                                                               
separately because they interrelate with one another.                                                                           
6:42:20 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  asked  whether Caelus  receives  other                                                               
royalty reduction in addition to Nuna.                                                                                          
MR. FOLEY replied  Caelus enjoys two forms  of royalty reduction.                                                               
The first is  at the Oooguruk Field for the  existing Kuparuk and                                                               
Nuiqsut  production;  the  second  is  a  separate  and  distinct                                                               
royalty  modification agreement  that addresses  the Nuna  Torok.                                                               
He  said Caelus  has been  doing business  since 2002,  its first                                                               
production began in  Oooguruk in 2008, and Caelus is  yet to make                                                               
a profit,  meaning Caelus is  spending more money  reinvesting in                                                               
the state than the sum of all of its revenues.                                                                                  
6:43:14 PM                                                                                                                    
REPRESENTATIVE TARR inquired whether  changing the proposed limit                                                               
from  $25 million  to $50  million, or  some other  number, would                                                               
still be problematic in Mr. Foley's opinion.                                                                                    
MR.  FOLEY  responded  he  dislikes   suggesting  a  number,  but                                                               
obviously  bigger  is  better  and   if  it  was  big  enough  to                                                               
accommodate all  of Caelus's needs  that would be wonderful.   In                                                               
reality,  he added,  the state  needs more  companies.   Policies                                                               
should be created that encourage  new players to enter the state,                                                               
any kind of a limit will not accomplish that goal.                                                                              
6:44:17 PM                                                                                                                    
MR. FOLEY  displayed slide  6, "Nuna: A  Project on  the Bubble,"                                                               
and related that the original hope  was to have Nuna come on line                                                               
in late 2017.  However, it is  going to be very difficult to keep                                                               
it on that schedule,  he allowed.  The hope now  is for first oil                                                               
in  2018,   but  two  things   must  happen.    First   is  price                                                               
stabilization, which he said he thinks  will be coming.  While he                                                               
doesn't know how  high the price needs to be,  he added, his hope                                                               
is that  prices will soon be  $50-$70, and with prices  like that                                                               
Caelus hopes to continue its  investments in Alaska.  Caelus also                                                               
needs confidence that the fiscal regime isn't going to change.                                                                  
MR. FOLEY reviewed the worth of the  Nuna Project.  He said it is                                                               
about 100 million  barrels of reserves and  production would peak                                                               
at 20,000-25,000 barrels per day in about 2021.  About 300 full-                                                                
time  equivalent contractors  would  be working  during the  two-                                                               
year-long construction phase,  followed by four to  five years of                                                               
drilling that  would provide about 300  full-time equivalent jobs                                                               
on  the  North Slope.    According  to  the McDowell  Group,  the                                                               
multiplier  effect would  be 20:1,  which is  6,000 jobs.   These                                                               
jobs would be placed in jeopardy  if a project like Nuna does not                                                               
go forward.                                                                                                                     
6:46:22 PM                                                                                                                    
REPRESENTATIVE  SEATON understood  Mr.  Foley's statements  about                                                               
price and hopes to be speculation.   He recalled that a few years                                                               
ago the  legislature's consultants at enalytica  stated the price                                                               
of  $50-$70.   He asked  whether  that is  a range  where the  80                                                               
percent probability is for Caelus longer term.                                                                                  
MR. FOLEY answered he has  several skills in life, but predicting                                                               
oil price  is not one  of them.   He said he  hopes it will  be a                                                               
world of $60-$80, but he has no ability to make that prediction.                                                                
6:47:32 PM                                                                                                                    
MR. FOLEY continued  his discussion of slide 6  and addressed the                                                               
payments that  could be made to  the state from the  Nuna Project                                                               
in the  balance between the  credits given  to a company  and the                                                               
future revenue.   He noted that these numbers are  real, are at a                                                               
flat price  forecast of $70,  and are  undiscounted.  The  sum of                                                               
all future payments  to the State of Alaska would  be about $1.75                                                               
billion, broken  down as follows:   $900 million  from royalties,                                                               
$500 million  from net profit  share payments, $250  million from                                                               
production tax payments, and $100  million from Ad Valorem taxes.                                                               
Regarding  the simple  question of  whether the  state is  paying                                                               
more in  credits than the value  it receives, he said  the answer                                                               
is overwhelmingly no on the value  for production taxes.  The sum                                                               
of all  of the  credits that Nuna  would enjoy  is coincidentally                                                               
about $250  million.   Given these  numbers are  undiscounted, he                                                               
allowed that the  money Caelus gets today from the  state is more                                                               
valuable than the same $250 million  that Caelus pays back.  But,                                                               
he continued, when  the value from the royalty,  the net profits,                                                               
the property  tax, and the impact  of the jobs is  added into the                                                               
equation, overwhelmingly  the state  is making a  wise investment                                                               
in continuing to fund tax  credits that directly support more oil                                                               
through the pipeline.                                                                                                           
6:49:57 PM                                                                                                                    
MR.  FOLEY  concluded his  presentation  with  slide 7,  "Closing                                                               
thoughts," stating  Alaska needs to  make public policy  that has                                                               
more exploration  and production companies,  not fewer.   He said                                                               
HB 247 is absolutely a very  significant increase in taxes on the                                                               
oil industry.   If the bill is passed, projects  would be delayed                                                               
or canceled and there would be  a very negative effect on current                                                               
production, jobs, and  revenue.  Most importantly,  passage of HB
247 would  discourage third party  capital investments,  he said.                                                               
He  offered his  understanding that  the committee's  task is  to                                                               
find a  way to  come up  with additional  revenue to  balance the                                                               
state's budget, but  strongly urged that the oil  industry not be                                                               
looked  to  for providing  the  answers  to the  budget  problem.                                                               
Specifically,  the  refundable   Net  Operating  Loss/Loss  Carry                                                               
Forward Credits are absolutely critical  to a company like Caelus                                                               
and its  ongoing investments.   Senate Bill 21 is  what attracted                                                               
Caelus to the  state; it was the balance of  the petroleum system                                                               
and the  difficult environment and  the difficult  logistics, and                                                               
the overwhelmingly favorable tax  credits.  Caelus probably would                                                               
not  have purchased  Pioneer  if HB  247 had  been  law when  the                                                               
purchase was being considered.   Caelus would not be drilling its                                                               
two  exploration  wells  in Smith  Bay  without  the  Exploration                                                               
Incentive Credit (EIC)  and the Net Operating Loss  Credit.  Nuna                                                               
is  on  the  bubble  and  two things  are  needed:    stable  and                                                               
favorable terms, and a smile from the oil price gods.                                                                           
6:52:13 PM                                                                                                                    
REPRESENTATIVE  OLSON  inquired  whether Caelus  is  drilling  in                                                               
other jurisdictions where  the tax laws or  structure are changed                                                               
every two years.                                                                                                                
MR. FOLEY replied he has  worked in Alaska, in every jurisdiction                                                               
in the Lower  48, in the Middle East, and  in most Latin American                                                               
countries.  And, no, he has  never seen a regime that changes its                                                               
tax policies with this kind of pace.                                                                                            
6:52:57 PM                                                                                                                    
REPRESENTATIVE HERRON related there  have been many conversations                                                               
throughout the  building about the  definition of "new" oil.   In                                                               
doing some  research he  found that  Oklahoma provides  36 months                                                               
before "new"  oil becomes  "regular" oil.   He asked  whether Mr.                                                               
Foley has any thoughts on this subject.                                                                                         
MR. FOLEY responded  all he can say is the  tax policy created by                                                               
the legislature has worked really well to stimulate activity.                                                                   
6:53:45 PM                                                                                                                    
REPRESENTATIVE TARR, regarding the  proven and potential reserves                                                               
[outlined on  slide 2], commented  that today's situation  is due                                                               
to a glut of supply.  She inquired  as to how Caelus looks at the                                                               
issue  of overall  global production  relative to  investments in                                                               
Alaska.  In some ways, she  said, it would seem better for Caelus                                                               
to not develop and  to hold off for a better  price.  She further                                                               
asked  how   having  no  control   over  what  is  done   by  the                                                               
Organization  of  Petroleum  Exporting Countries  (OPEC)  factors                                                               
into Caelus's investment decisions in Alaska.                                                                                   
MR.  FOLEY replied  that Alaska  is  the only  place Caelus  does                                                               
business, so  it doesn't  have the luxury  of choosing  to invest                                                               
elsewhere.   He said  the pace  is extraordinarily  important for                                                               
Caelus and  most small independent  companies, and maybe  for the                                                               
large companies, too.   Caelus cannot have its  business sit idle                                                               
for two or  three years and then  pick up the helm and  try to do                                                               
projects years down  the road.  Caelus must  make its investments                                                               
now, it  needs to make oil  now.  Caelus makes  those investments                                                               
with  an expectation  that prices  will recover  to a  level that                                                               
makes the company healthy.                                                                                                      
6:55:48 PM                                                                                                                    
The committee took an at-ease from 6:55 p.m. to 6:59 p.m.                                                                       
6:59:13 PM                                                                                                                    
SCOTT  JEPSEN, Vice  President  External Affairs,  ConocoPhillips                                                               
Alaska, Inc.,  began his  PowerPoint presentation  by summarizing                                                               
the  activities  that  have  been  undertaken  by  ConocoPhillips                                                               
Alaska, Inc. ("ConocoPhillips") since  the 2013 passage of Senate                                                               
Bill  21, the  More Alaska  Production  Act (MAPA).   Turning  to                                                               
slide  3,  "Activities  Since  Tax   reform  (MAPA)  Passed,"  he                                                               
reported that  ConocoPhillips has added  two rigs to  its Kuparuk                                                               
River Unit  rig fleet and  placed an order  for a new  rotary rig                                                               
and  a  new  coiled  tubing  drilling  rig.    Expenditures  were                                                               
authorized to build Drill Site 2S  ("DS 2S"), an extension of the                                                               
Kuparuk River  Unit on  the southwest  edge of  the field.   This                                                               
extended the  field itself and  increased the reserves  that will                                                               
be covered  from Kuparuk.   This project  is being  drilled right                                                               
now  and is  expected to  produce about  8,000 barrels  a day  at                                                               
peak.  The  cost was about $500 million and  building it provided                                                               
over 250  on-site construction jobs.   ConocoPhillips  also moved                                                               
ahead with  North East West  Sac (1H  NEWS), a viscous  oil field                                                               
that overlies the  Kuparuk Field.  The West Sac  is a bit heavier                                                               
crude than  the light  oils seen at  Kuparuk, Alpine,  or Prudhoe                                                               
Bay.   Because this  crude is also  a lot thicker  it is  hard to                                                               
flow this oil  and get it out  of the ground.   Modules that were                                                               
built in  Anchorage and  trucked to  the North  Slope are  set on                                                               
site and  electricity has  been hooked up  to them,  but drilling                                                               
the wells  for 1H NEWS  has been  deferred until 2017,  partly in                                                               
response to the  current low oil prices.  All  told, 1H NEWS will                                                               
cost  about $450  million and  several hundred  people will  have                                                               
been on site  during the construction.  First  oil is anticipated                                                               
in late 2017.                                                                                                                   
7:01:51 PM                                                                                                                    
MR. JEPSEN continued reviewing the  activities on slide 3, noting                                                               
ConocoPhillips has  sanctioned the Greater Mooses  Tooth 1 (GMT1)                                                               
Project in  the National Petroleum  Reserve-Alaska (NPR-A).   The                                                               
GMT1 investment  decision was made in  late 2015 and some  of the                                                               
key federal  permits have been  received, so construction  is now                                                               
moving ahead.   When done, about $1 billion will  have been spent                                                               
and the expected  peak gross rate is about 30,000  barrels of oil                                                               
per day.   There will  be about 600-700 jobs  during construction                                                               
and  first oil  is  expected in  2018.   Once  GMT1 is  finished,                                                               
things will move  ahead with GMT2, another discovery  made in the                                                               
Greater Mooses Tooth  area about 9 miles southwest of  GMT1.  Not                                                               
many  details are  yet  had  given it  is  still  early, but  the                                                               
expected cost of development is  over $1 billion and will require                                                               
600-700 people  to build  it.  It  is currently  anticipated that                                                               
GMT2 is a larger accumulation than GMT1.                                                                                        
MR. JEPSEN  said ConocoPhillips  has been active  in exploration.                                                               
Two wells were drilled in 2014  that were part of the delineation                                                               
program for  GMT2.  Seismic  was shot over  GMT1 in 2015.   Three                                                               
exploration wells  will be drilled  this year.   Two explorations                                                               
are being drilled in the Greater  Mooses Tooth Unit west of GMT2.                                                               
Thus, there  is CD5, and about  nine miles west of  that is GMT1,                                                               
and  about  nine  miles  west  of that  is  GMT2,  and  two  more                                                               
exploration wells are  being drilled in another nine  miles.  The                                                               
first well  has been finished and  the rig is now  being moved to                                                               
the  next  well.     After  those  wells   are  drilled,  another                                                               
exploration well  will be  drilled this spring  off the  CD5 pad.                                                               
Mr. Jepsen noted  he is not talking about the  CD5 Project in the                                                               
context of  tax reform because  ConocoPhillips elected  to pursue                                                               
that project  in 2012  before Senate  Bill 21  was passed.   That                                                               
decision was  made primarily because  the company spent  about 10                                                               
years getting  it permitted, so there  was a lot of  momentum and                                                               
desire to get it going.                                                                                                         
MR.  JEPSEN   recalled  sitting  before  the   committee  [during                                                               
hearings on Senate  Bill 21] and being  asked what ConocoPhillips                                                               
would do if the  bill was passed.  He said  his response then was                                                               
that he couldn't say exactly what  his company would do, but that                                                               
if a favorable  investment climate was put in place  he could say                                                               
there would  be more investment.   That is exactly what  has been                                                               
seen over the last couple of years, he added.                                                                                   
7:04:51 PM                                                                                                                    
MR.  JEPSEN  addressed  the  four graphs  depicted  on  slide  4,                                                               
"Capital Spending  Trends."   He explained  that the  graphs show                                                               
the capital trends of ConocoPhillips  as a corporation, how these                                                               
change  with regard  to  oil price,  and  what the  corporation's                                                               
capital investment  in Alaska has  been over the past  few years.                                                               
He said  he is focusing on  capital investment because it  is the                                                               
closest proxy  for adding new rate  and new reserves.   Not shown                                                               
on the slide  are expenditures for projects  like well workovers,                                                               
which also  add rate  to the company's  production.   Speaking to                                                               
the upper left graph, he  said it shows the corporation's capital                                                               
spending since 2012,  which peaked in 2014 at  about $17 billion.                                                               
Turning to the bottom left graph,  he pointed out that the Alaska                                                               
North Slope  (ANS) West  Coast (WC) oil  prices began  going down                                                               
significantly right  after 2014.   Like the  State of  Alaska, he                                                               
said, a  corporation cannot have significant  negative cash flows                                                               
for long periods of time,  so ConocoPhillips acted rationally and                                                               
started ratcheting down  its capital program and  cutting back on                                                               
expenses  in many  places.   Drawing attention  to the  top right                                                               
graph,  Mr.  Jepsen  explained  it shows  what  has  happened  in                                                               
Alaska.   Despite high oil  prices during the years  of 2007-2012                                                               
under  the  tax regime  of  Alaska's  Clear and  Equitable  Share                                                               
(ACES)  [passed in  2007, House  Bill  2001, Twenty-Fifth  Alaska                                                               
State  Legislature],  ConocoPhillips  only  averaged  about  $800                                                               
million  annually of  investment  in Alaska.    After passage  of                                                               
Senate  Bill 21,  ConocoPhillips ramped  up its  investments, and                                                               
even for  2016 the corporation  estimates it will spend  about $1                                                               
billion.  Referring to the  bottom right graph, he explained that                                                               
it depicts the  percentage of Alaska capital spend  as a function                                                               
of total corporate spend [6  percent in 2012, increasing over the                                                               
years to an estimated 16 percent in 2016].                                                                                      
7:06:41 PM                                                                                                                    
MR. JEPSEN  said his point with  slide 4 is that  Alaska has been                                                               
differential  to the  corporation's  other  business units,  with                                                               
ConocoPhillips spending  more in Alaska relative  to its spending                                                               
in other places.  The corporation  announced in late 2015 that it                                                               
thought it  would spend  about $1.3 billion  in Alaska  for 2016.                                                               
But  in  the  intervening  months   prices  went  lower  and  the                                                               
corporation anticipates the lower prices  are going to stay lower                                                               
longer.   So, capital spending  has been ratcheted down  about 20                                                               
percent [in Alaska], but as  a corporation spending has come down                                                               
about 40 percent.  Referencing  Representative Tarr's question of                                                               
whether it  would be better  to stand back  and leave the  oil in                                                               
the  ground,  Mr. Jepsen  said  ConocoPhillips  is continuing  to                                                               
spend in Alaska because, as was  explained by Mr. Foley, there is                                                               
a  lot  of momentum  and  investment  that  must occur  before  a                                                               
company can  see production.   Oftentimes it  takes years  to get                                                               
permits,  it  takes  years  to   build  infrastructure,  and  rig                                                               
contracts are signed  that have duration of years.   So, once all                                                               
this is in place it can  be very expensive and relatively hard to                                                               
unwind  and would  be very  difficult  to restart  once that  was                                                               
wanted.  Also,  ConocoPhillips got on to this  growth in spending                                                               
in  part because  Senate  Bill  21 passed.    It  was a  positive                                                               
investment climate.   Senate  Bill 21  has been  a factor  in the                                                               
investment  decisions made  by ConocoPhillips  over the  last few                                                               
years.   Obviously, it is  not the sole investment  criteria, but                                                               
it has been  part of the corporation's discussion and  has been a                                                               
very positive factor.                                                                                                           
7:08:25 PM                                                                                                                    
MR.  JEPSEN  specified  that  the   graph  on  slide  5,  "Alaska                                                               
Producers Negative at Current Pricing,"  captures what this whole                                                               
conversation is  really all  about.   He noted  the data  for the                                                               
graph is  from the fall  2015 Revenue Sources Book  [published by                                                             
the Department of Revenue].   The Y axis is the  net cash flow in                                                               
millions  of dollars  and  the X  axis  is the  ANS  WC price  in                                                               
dollars  per  barrel.   The  orange  bar represents  the  state's                                                               
share, the  state's cash  flow as  a function  of oil  price; the                                                               
green bar is federal share; and the  blue bar is what goes to the                                                               
producers.    Included  in  the   state's  share  are  royalties,                                                               
severance  tax, income  tax,  and property  tax;  the tax  credit                                                               
program  is not  included,  but it  does  include the  per-barrel                                                               
production  tax  credits.   Mr.  Jepsen  stated that  at  current                                                               
prices on  up to about  $50 a  barrel, industry is  losing money.                                                               
The federal  government is  losing money  because industry  is in                                                               
negative  cash flow  and  producers basically  get  a loss  carry                                                               
forward on their  federal taxes.  The state is  still making over                                                               
$1  billion  a year  from  the  aforementioned components.    The                                                               
discussion right now, he continued,  is about whether to increase                                                               
the tax  burden on an  industry that is  in a negative  cash flow                                                               
situation.   The state is in  a positive situation at  this point                                                               
in time, although maybe not as positive  as it would like.   From                                                               
an industry  point of view,  increasing taxes drives  industry to                                                               
make equally  rational decisions  as it did  when Senate  Bill 21                                                               
was  passed.    If  industry  has  a  greater  tax  bite  on  its                                                               
operations  it will  have to  find ways  to make  up those  costs                                                               
somewhere else,  such as reducing  costs or  reducing investments                                                               
this year and looking at whether  that is going to be encouraging                                                               
for industry to make investments down the road.                                                                                 
7:10:30 PM                                                                                                                    
REPRESENTATIVE TARR requested Mr.  Jepsen to again describe where                                                               
the number of $1.2 billion to the State of Alaska comes from.                                                                   
MR. JEPSEN replied  it was his corporation's  modeling based upon                                                               
the state's forecast of cost  and capital expenses and looking at                                                               
what would be the derived royalty, severance tax, and so forth.                                                                 
MR. JEPSEN added that ConocoPhillips  was negative cash flow last                                                               
year.   The average price for  Alaska was about $52  a barrel and                                                               
prices are  lower this year, so  ConocoPhillips anticipates being                                                               
negative cash flow this year as well.                                                                                           
7:11:23 PM                                                                                                                    
PAUL RUSCH, Vice President  Finance, ConocoPhillips Alaska, Inc.,                                                               
brought attention  to slide 6,  "Key Concerns  with HB 247."   He                                                               
said the  proposal in HB 247  to increase the minimum  tax from 4                                                               
percent  to 5  percent is  especially troubling  given industry's                                                               
negative cash  flow position.   ConocoPhillips is unique  in that                                                               
it discloses the results of  its Alaska region externally, unlike                                                               
most companies.   On a net flow basis, ConocoPhillips  had a loss                                                               
in  2015 in  excess  of  $100 million.    He  surmised the  other                                                               
companies also had  a similar sort of loss, and  said an increase                                                               
in  the minimum  tax in  this environment  clearly would  further                                                               
negatively impact industry's results in Alaska.                                                                                 
MR. RUSCH specified  that the hardening of the  minimum tax floor                                                               
proposed in HB  247 also represents a tax  increase for industry.                                                               
Current tax law allows the use  of some limited credits to reduce                                                               
the tax below the minimum,  he noted, in particular Net Operating                                                               
Loss Credits  and credits associated  with new oil.   Eliminating                                                               
this  potential will  effectively  serve as  a  tax increase  for                                                               
those companies that  are experiencing a loss and  those that are                                                               
investing in new oil.   He said that HB 247  proposes a number of                                                               
other  changes which  also represent  increases in  tax, such  as                                                               
higher  interest  rates,  a  loss   of  per-barrel  credits,  and                                                               
excluding certain items from the net operating loss calculation.                                                                
7:13:45 PM                                                                                                                    
REPRESENTATIVE  SEATON  related  that  [ConocoPhillips's]  fourth                                                               
quarter  [2015]  detailed   supplemental  information  shows  $67                                                               
million as loss from continuing  operations for income taxes.  He                                                               
asked whether this  is cash flow or is different  than the [loss]                                                               
in excess of $100 million.                                                                                                      
MR.  RUSCH offered  his belief  that the  adjusted net  income on                                                               
that same report was $482 million.                                                                                              
REPRESENTATIVE SEATON understood, then,  it is going off adjusted                                                               
instead of cash flow.                                                                                                           
MR. RUSCH responded yes and explained  that there is a higher net                                                               
income  figure,  a  financial  accounting  figure  that  is  then                                                               
adjusted by  non-cash items.   Depreciation was in the  amount of                                                               
$680 million, he  believed, and then there is  subtraction.  That                                                               
doesn't capture  the real cash  outflow of  capital expenditures,                                                               
he continued,  which were  in the  neighborhood of  $1.4 billion.                                                               
So, that's the full equation.   The earnings figure does not have                                                               
that  capital  number   in  it,  so  capital   investment  is  an                                                               
adjustment that is made.                                                                                                        
REPRESENTATIVE SEATON explained  he is just trying  to figure out                                                               
how all the numbers correspond.                                                                                                 
MR.  JEPSEN interjected  that the  financial accounting  does not                                                               
reflect the cash position.                                                                                                      
7:15:20 PM                                                                                                                    
REPRESENTATIVE  HERRON, regarding  the  proposed  25 percent  tax                                                               
increase [through  raising the minimum  tax floor from  4 percent                                                               
to 5 percent],  inquired what ConocoPhillips would  think about a                                                               
tax increase that was 5 or 10 percent as opposed to 25 percent.                                                                 
MR. JEPSEN answered  any time there is a  tax increase, investors                                                               
should be  expected to  react rationally.   A tax  increase would                                                               
decrease the attractiveness  of investing in Alaska  and would be                                                               
compared to  other existing investment  opportunities to  see how                                                               
Alaska looks  on an overall  basis.   An increase to  4.1 percent                                                               
would  be better  than an  increase to  5 percent,  but it  would                                                               
still be moving in the wrong direction at this point in time.                                                                   
7:16:36 PM                                                                                                                    
REPRESENTATIVE  TARR,  regarding  the   proposal  in  HB  247  to                                                               
increase  the interest  rate for  under/over  paid taxes,  stated                                                               
that  the interest  rate under  ACES  seemed too  high and  under                                                               
current law  [Senate Bill 21] seems  too low.  The  sweet spot is                                                               
trying to be found, she said,  so as not to incentivize behaviors                                                               
that  happen on  either end  of too  high or  too high.   If  the                                                               
interest rate is  too low it might be  advantageous for companies                                                               
to underpay.  She requested Mr. Rusch to comment in this regard.                                                                
MR. RUSCH replied that the next slide will cover this point.                                                                    
7:17:52 PM                                                                                                                    
MR. RUSCH  turned to  slide 7,  "Key Concerns  with HB  247," and                                                               
addressed  the  proposed provision  in  HB  247 to  increase  the                                                               
interest rate  on taxes due.   He said payments are  made in good                                                               
faith on  time, and  it seems inappropriate  to apply  a punitive                                                               
interest rate.  As far as what  is a punitive rate, he noted that                                                               
under the  current rate and current  system there is a  period of                                                               
6-plus years  in which the  state completes  its audits.   So, if                                                               
there is  any follow-up discussion  to resolve the  tax, anything                                                               
higher really  does lead to  excessive amounts of interest.   For                                                               
example,  he pointed  out, ConocoPhillips's  2006 audit  was just                                                               
now finally closed out - 10 years  later.  That is where the real                                                               
objection comes  from.  The  system currently in place  drags out                                                               
for a  very long period of  time; the corporation has  no control                                                               
over that.   The  corporation makes  its best  effort to  pay its                                                               
taxes in good faith and as  accurately as it can.  However, there                                                               
is  a  lot  of  subjectivity  in  the  system.    Sometimes  when                                                               
ConocoPhillips appeals  these rulings  they go  in its  favor and                                                               
sometimes they don't.  No matter  how hard a company tries to pay                                                               
its  taxes as  accurately as  it can,  the company  cannot do  it                                                               
because there is that much subjectivity.                                                                                        
7:19:12 PM                                                                                                                    
REPRESENTATIVE TARR related that  tightening of the timeframe has                                                               
been discussed  and the  Department of Revenue  (DOR) has  a plan                                                               
for getting  to where it  is two to  three years for  the audits.                                                               
She asked  whether this  changes Mr.  Rusch's opinion  about this                                                               
particular proposal.                                                                                                            
MR.  RUSCH responded,  yes,  the corporation  would  be open  for                                                               
considering that,  but he would  be hesitant to go  there because                                                               
it  will  take a  number  of  years for  DOR  to  get caught  up.                                                               
Second,  there  are some  other  things  that ConocoPhillips  has                                                               
considered,  such  as  whether the  interest  could  begin  being                                                               
applied  at some  later point  in a  process, such  as after  the                                                               
audit  is  completed  and the  company  receives  an  assessment.                                                               
Right now  it goes  back to  the period in  question, not  to the                                                               
time the  assessment is issued.   The big issue is  the amount of                                                               
time and that  it is compounding interest over that  time.  There                                                               
have been  assessments where the  interest component is  close to                                                               
or greater  than the actual  audit finding,  which is not  a goal                                                               
that anyone has  through the process.  He  said ConocoPhillips is                                                               
open to anything that could be done to shorten the audit period.                                                                
7:20:55 PM                                                                                                                    
MR. RUSCH continued discussing slide  7, drawing attention to the                                                               
proposed provision in  HB 247 that would  restrict the per-barrel                                                               
credits earned and  applying them on a monthly  basis rather than                                                               
the  full-year   basis  that  ConocoPhillips  believes   was  the                                                               
intention of the law.   He said this appears to  be an attempt by                                                               
the state to game the system  such that the state will always win                                                               
in  the event  of  a  price movement  or  price  volatility.   In                                                               
ConocoPhillips's view,  that is in  conflict with the  concept of                                                               
an annual  tax.   Monthly estimates are  made, payments  are made                                                               
off those estimates, but the tax is intended to be a yearly tax.                                                                
7:21:59 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON  observed  the statement  on  slide  7,                                                               
"intent was  full year basis."   However, he said,  testimony has                                                               
been received  that that  was not  the intent.   Because  that is                                                               
definitely what  the statutory language  in Senate Bill  21 says,                                                               
the presumption is strong that  ConocoPhillips is in the driver's                                                               
seat.  But,  he continued, the legislative history  appears to be                                                               
that that was not the  intent; he inquired whether ConocoPhillips                                                               
knows of any legislative history that counters that.                                                                            
MR. JEPSEN answered  he doesn't have any citations  with him that                                                               
he can  provide today, but past  practice tells this is  what the                                                               
intent was.   Until this  year it was  never heard that  this was                                                               
supposed to  be a monthly tax.   That is how  the corporation has                                                               
been paying its taxes and that  is how they have been audited, it                                                               
has been the basis on which the system works.                                                                                   
MR. RUSCH  cited the  language in  AS 43.55.020(a)(5)  [slide 10]                                                               
that states,  "less 1/12 of the  tax credits that are  allowed by                                                               
law" and "for the calendar  year," and said this language implies                                                               
that it is a full calendar year tax assessment.                                                                                 
7:23:45 PM                                                                                                                    
MR. RUSCH  continued discussing slide 7,  addressing the proposed                                                               
provision in HB  247 that would limit  deductions for calculating                                                               
net    operating   losses    (NOLs),   in    particular   capping                                                               
transportation losses that  result in a gross value  at the point                                                               
of production  (GVPP) that falls  below zero, and  also excluding                                                               
the  Gross Value  Reduction  (GVR) from  the  net operating  loss                                                               
calculation.  He  said excluding the GVR is simply  a question of                                                               
whether  the removal  of this  incentive  will negatively  impact                                                               
future investment  related to new  oil, which was  presumably put                                                               
in  place  to incentivize  new  oil.   ConocoPhillips  views  the                                                               
elimination of transportation cost as  a bit more problematic and                                                               
arbitrary as the  transportation cost is an actual  cost that has                                                               
been calculated and is a valid  expense that has been accepted as                                                               
a reasonable cost.                                                                                                              
MR.  RUSCH  spoke  to the  proposed  changes  in  confidentiality                                                               
included  in  HB 247.    He  said  these changes  are  concerning                                                               
because it is unclear as to  what the limitations would be on the                                                               
data that  would need to be  provided.  It was  initially thought                                                               
that  this  would only  cover  reimbursable  credits, but  it  is                                                               
ConocoPhillips's understanding  that under the bill  as currently                                                               
drafted,  it  could  potentially   require  the  release  of  all                                                               
taxpayer  information.   While  it  makes  reference to  the  tax                                                               
credits,  the tax  credits  are  based on  a  calculation of  the                                                               
taxpayer's full  tax position.   He said ConocoPhillips  does not                                                               
want  to make  it  more difficult  for the  state  to manage  its                                                               
budget,  and he  knows  that obtaining  some  of this  additional                                                               
information would  help, but his  corporation is  concerned about                                                               
releasing   potentially   competitively  sensitive   information.                                                               
Giving the information  could result in a request  for even more.                                                               
The bottom line is that it opens up some very dangerous ground.                                                                 
7:26:17 PM                                                                                                                    
REPRESENTATIVE SEATON  pointed out it  wouldn't be known  what an                                                               
individual company's tax liability is.   Only the credits applied                                                               
or refunded  would be  known, he said,  and therefore  he doesn't                                                               
see  what the  difference is.   If  the credits  are secret,  the                                                               
state's  investment by  region is  unknown except  broadly across                                                               
everything.  He asked how  that divulges something that shouldn't                                                               
be known about the state's investment.                                                                                          
MR.  RUSCH  replied  that as  just  explained  by  Representative                                                               
Seaton he  does not  believe it  would be an  issue if  this were                                                               
restricted to releasing information  on reimbursable tax credits.                                                               
However, his  understanding is  that because  the wording  in the                                                               
current law  is referring  to tax credits  it has  been suggested                                                               
that  net  operating  losses  are  also a  tax  credit,  so  that                                                               
information would be available.   Given the wording, if a company                                                               
is required to  release information on its  net operating losses,                                                               
is the company also required  to release information on how those                                                               
net operating  losses were calculated?   So,  it is a  concern if                                                               
there  is   a  requirement  to  provide   some  additional  data.                                                               
ConocoPhillips would ask that consideration  be given to ensuring                                                               
the language is very narrowly defined.                                                                                          
REPRESENTATIVE  SEATON understood  Mr.  Rusch to  be saying  that                                                               
ConocoPhillips Alaska,  Inc. really doesn't have  a large problem                                                               
except for  the net operating loss.   He allowed he  can see that                                                               
if a Net Operating Loss Credit  were to be applied then something                                                               
would be known about the whole  scheme.  But, he surmised, as far                                                               
as the  other credits  applied against  tax liability  that's not                                                               
really  so much  a  problem for  ConocoPhillips  because that  is                                                               
really like the reimbursable tax credit.                                                                                        
MR.  RUSCH responded  he  would need  to  better understand  what                                                               
specifically other  tax credits  mean since the  devil is  in the                                                               
detail.   If  it  were to  be very  narrowly  defined, he  thinks                                                               
ConocoPhillips would be okay with that.   When it is more broadly                                                               
defined in the legislation is when it gets more problematic.                                                                    
REPRESENTATIVE  SEATON requested  that ConocoPhillips  supply the                                                               
committee with the definitions that  would work without revealing                                                               
the corporation's tax information.                                                                                              
7:29:44 PM                                                                                                                    
MR. JEPSEN  moved to slide  8, "Observations," and  expressed the                                                               
concern that  if HB 247  is passed the  state will once  again be                                                               
entering  a new  significant tax  framework.   Tax stability  and                                                               
durability is important to investors, he  said.  It is a critical                                                               
component in  terms of how  projects are evaluated  in investment                                                               
decisions.  It  has only been 18 months since  Senate Bill 21 was                                                               
ratified by the voters and  once again significant changes to the                                                               
state's tax framework are being considered.                                                                                     
MR. JEPSEN further  noted that ConocoPhillips Alaska,  Inc. is in                                                               
a  negative cash  flow position,  which he  believes much  of the                                                               
industry  is.   An  increased tax  burden  will, with  certainty,                                                               
impact the  corporation's long-term investment decisions  as well                                                               
as this  year's operations, he said.   Like the State  of Alaska,                                                               
ConocoPhillips  is trying  to  find  a way  to  get through  this                                                               
trough that looks  like it is going to be  deeper and potentially                                                               
longer than was  anticipated.  If his  corporation sees increased                                                               
costs it  will have to  offset those  somewhere.  The  only place                                                               
where that can  be done is by reducing  investments and expenses.                                                               
He offered his  belief that it would have a  very material impact                                                               
on his  corporation's long-term investments because,  once again,                                                               
it is  being seen that when  the state needs more  money it comes                                                               
back to  the people  who pay  taxes.   Last year  his corporation                                                               
incurred  obligation  to  the  State  of  Alaska  of  about  $665                                                               
million.  So,  ConocoPhillips is one of the  players that provide                                                               
revenue to the state.  The  corporation would like to stay in the                                                               
position  of continuing  to invest  for the  future, but  changes                                                               
like this will impact the corporation's investment plans.                                                                       
7:31:34 PM                                                                                                                    
REPRESENTATIVE TARR inquired whether  an assessment has been done                                                               
as to  what the overall  financial impact of  HB 247 would  be to                                                               
ConocoPhillips Alaska, Inc.                                                                                                     
MR. JEPSEN  responded that when a  company is in a  negative cash                                                               
flow position,  and somebody wants  more money from  the company,                                                               
that is a significant change.   He explained that his corporation                                                               
keeps its  internal finances confidential;  that is why  he talks                                                               
about the impacts using the  Revenue Sources Book, which contains                                                             
publically available  data.  Therefore,  he is not in  a position                                                               
where he can  tell the committee how much each  change would mean                                                               
to his  corporation.   But HB 247  potentially has  a significant                                                               
increase on his corporation's tax burden.   Because of being in a                                                               
negative  cash  flow  position  it  is  not  something  that  the                                                               
corporation can just absorb.                                                                                                    
7:33:09 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  understood ConocoPhillips  Alaska,  Inc.                                                               
has five rigs working on the North Slope.                                                                                       
MR. JEPSEN  answered that right  now ConocoPhillips  Alaska, Inc.                                                               
has about  five rigs running,  which will  increase to six  for a                                                               
short  period of  time between  Alpine and  Kuparuk when  the new                                                               
rigs are  brought up.   Some of the  rigs are scheduled  to leave                                                               
the corporation's  rig fleet because  the scope of work  for them                                                               
has been completed.   A couple of new rigs  were brought in right                                                               
after  Senate Bill  21 was  passed and  those were  designated as                                                               
workover rigs  and the corporation  has basically  worked through                                                               
the backlog,  there are no more  broken wells to be  fixed.  Some                                                               
of the other rigs will be phased  out as the new rigs are brought                                                               
in.   The  expectation  for 2016  is four  to  five rigs  working                                                               
between Kuparuk and Alpine.                                                                                                     
REPRESENTATIVE JOHNSON asked how  many rigs ConocoPhillips has in                                                               
the Lower 48.                                                                                                                   
MR. JEPSEN  replied he thinks  there were  three rigs as  of late                                                               
last year, but he is unsure what the count is right now.                                                                        
7:34:21 PM                                                                                                                    
REPRESENTATIVE OLSON  inquired whether ConocoPhillips  is working                                                               
in any other  jurisdictions in the world that  have changed their                                                               
tax structure as often as has the State of Alaska.                                                                              
MR. JEPSEN  responded not  to his knowledge  and deferred  to Mr.                                                               
Rusch to answer further.                                                                                                        
MR. RUSCH answered no, he has not  seen that.  As was stated by a                                                               
previous speaker, he  recounted, a number of  other countries are                                                               
offering incentives; for example,  deepwater incentives are being                                                               
offered  by Malaysia.   If  changes are  being made,  he surmised                                                               
they are probably going in the other direction.                                                                                 
7:35:16 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
7:36:18 PM                                                                                                                    
PATRICK  GALVIN,  Chief  Commercial Officer  &  General  Counsel,                                                               
Great  Bear  Petroleum,  began  his  PowerPoint  presentation  by                                                               
pointing  out that  Great  Bear Petroleum  ("Great  Bear") is  an                                                               
exploration  company.    He displayed  the  slide,  "PRESENTATION                                                               
TOPICS RELATING  TO PRODUCTION  TAX CREDITS &  HB 247,"  and said                                                               
that  as  an  exploration  company  Great  Bear  urges  that  the                                                               
Exploration Incentive Credits  be extended.  This  program is set                                                               
to  expire  June  30,  2016,  he noted,  and  from  Great  Bear's                                                               
perspective  this  program is  an  important  investment for  the                                                               
state and is  a program that should be extended  as it relates to                                                               
North Slope exploration activities.                                                                                             
MR. GALVIN addressed  the slide, "GREAT BEAR PETROLEUM  - A QUICK                                                               
HISTORY,  A  NORTH  SLOPE EXPLORATION  COMPANY,"  and  noted  the                                                               
company was founded  in 2010, is focused  exclusively on Alaska's                                                               
North Slope,  and has an  office and all employees  in Anchorage.                                                               
Great Bear  holds just  under 500,000 acres,  which is  the limit                                                               
for North Slope  exploration acreage position, and  Great Bear is                                                               
the operator on about 590,000 acres  of state oil and gas leases.                                                               
Great  Bear has  acquired 500  square miles  of three-dimensional                                                               
(3-D) seismic over the past four  seasons and is currently in the                                                               
process  of  acquiring an  additional  450  square miles  of  3-D                                                               
seismic.  Great Bear has drilled three exploration wells.                                                                       
MR.  GALVIN moved  the slide,  "GREAT  BEAR PETROLEUM  - A  QUICK                                                               
HISTORY, FROM  UNCONVENTIONAL TO  CONVENTIONAL," and  stated that                                                               
Great  Bear's original  target was  an unconventional,  or shale,                                                               
play on  the North Slope.   The company recognizes that  with the                                                               
cost  environment   in  Alaska,  shale  plays   face  an  "Alaska                                                               
Unconventional Catch-22."   This means that in order  for a shale                                                               
play to  be economic  it needs  to have  a cost  environment that                                                               
will provide  for the return even  at a higher oil  price than is                                                               
seen  today.   To  achieve  that cost  reduction  in Alaska  will                                                               
probably require a critical mass  of additional drilling activity                                                               
such as  would be  associated with an  unconventional play.   So,                                                               
there is a  bit of a chicken-and-egg aspect to  the economics for                                                               
unconventional plays in  Alaska where the amount  of cost savings                                                               
associated with volume of drilling  activity cannot be seen until                                                               
actually doing it, but a  company cannot anticipate that until it                                                               
can  get  going  on  it.   Great  Bear  is  fortunate  in  having                                                               
identified significant conventional oil  and gas potential on its                                                               
acreage.  So, the company has  been able to refocus its attention                                                               
on  the conventional  plays within  its  leasehold and  recognize                                                               
that there  is still an  opportunity for an  unconventional play,                                                               
but it would  likely come on the back of  the buildout that would                                                               
be borne by a conventional oil and gas discovery.                                                                               
7:40:20 PM                                                                                                                    
MR.   GALVIN   showed   the  slide,   "STRATEGIC   EXPANSION   OF                                                               
CAPABILITIES, PARTICULAR  FOCUS ON GEOSCIENCE &  OPERATIONS," and                                                               
said  Great Bear  is swimming  against the  tide by  being in  an                                                               
expanding mode right  now.  As an exploration  company Great Bear                                                               
is not currently impacted by low  oil prices other than costs are                                                               
going down,  which creates  opportunity for  the company.   Great                                                               
Bear  has  had reorganization,  has  changed  out its  management                                                               
team, and has significantly expanded  in the areas of geosciences                                                               
and operations.                                                                                                                 
MR. GALVIN  presented Great Bear's  new management  team pictured                                                               
on  the   slide,  "STRATEGIC   EXPANSION  OF   CAPABILITIES,  NEW                                                               
MANAGEMENT TEAM."  He said  the new president and chief executive                                                               
officer (CEO)  is Mike Mason,  who has significant  experience in                                                               
the oil field as a petroleum  engineer, spent many years with BP,                                                               
and rose to the top petroleum  engineer within BP.  Clark Clement                                                               
is the chief operating officer and  is one of the leading experts                                                               
in directional drilling  as well as hydraulic  fracturing.  Larry                                                               
Casarta is the  new vice president for exploration and  has a lot                                                               
of  experience both  in Alaska  and worldwide  in finding  oil in                                                               
exploration plays.                                                                                                              
7:42:38 PM                                                                                                                    
MR. GALVIN moved  to the slide, "GREAT BEAR -  PROJECT AREA," and                                                               
pointed out  that Great Bear's  lease position is shown  in blue.                                                               
This  position is  located  on the  North  Slope almost  directly                                                               
south  of Prudhoe  Bay  and Kuparuk,  he noted,  but  not in  the                                                               
foothills.  Great Bear's acreage  position is roughly the size of                                                               
Prudhoe, Kuparuk, and Point Thomson combined.                                                                                   
MR. GALVIN showed  the slide, "GREAT BEAR  - LEASEHOLD POSITION,"                                                               
and said Great Bear's lease  position has been acquired over five                                                               
lease  sales as  those leases  became available  as they  expired                                                               
from previous  holders.   He displayed  a second  slide entitled,                                                               
"GREAT BEAR  - LEASEHOLD POSITION,"  and said Great Bear  is very                                                               
cognizant that  the clock is  ticking with regard to  its leases.                                                               
The  expiration dates  for Great  Bear's leasehold  are shown  on                                                               
this slide,  he noted, and  a large portion expires  in mid-2018.                                                               
This  ticking is  heard very  loudly,  particularly when  dealing                                                               
with seasonal  opportunities for  exploration activities.   Great                                                               
Bear  has  a number  of  partners,  Mr.  Galvin said,  one  being                                                               
Halliburton.   By  farming  in and  doing  work, Halliburton  has                                                               
earned  a 25  percent  working  interest in  a  portion of  Great                                                               
Bear's acreage.   In order to come under  the acreage limitation,                                                               
Great Bear last  year sold a portion of its  acreage to Borealis,                                                               
which is owned  by the Australian company Otto  Energy.  Borealis                                                               
acquired an 8-10 percent interest  in most of Great Bear's leases                                                               
through that transaction.                                                                                                       
7:44:48 PM                                                                                                                    
MR. GALVIN  brought attention to  the slide,  "GEOLOGIC TARGETS,"                                                               
and  reviewed the  evolution of  Great  Bear's focus.   When  the                                                               
company first  came in it  was focused almost exclusively  on the                                                               
shale source  rock, he  said.   Great Bear  was attracted  to the                                                               
North Slope by the three world  class shale plays that are there.                                                               
All three of  these shale plays are stacked on  top of each other                                                               
within  Great  Bear's  acreage,   providing  the  opportunity  to                                                               
develop any  of those three  depending upon the location.   Also,                                                               
within  that strata  are a  number of  conventional or  reservoir                                                               
potential  plays.   These are  mixed in  to the  shale plays,  so                                                               
within any particular  lease location there may be  any number of                                                               
potential  targets within  these conventional  and unconventional                                                               
plays.   Use  of  the terms  conventional  and unconventional  is                                                               
pretty loose  within the industry,  he noted.  Due  to technology                                                               
advancements,  things  that  were  previously  considered  fairly                                                               
unconventional  are now  becoming rather  conventional.   A model                                                               
anticipated by Great Bear is  to bring unconventional technology,                                                               
horizontal drilling  and hydraulic fracturing, to  a conventional                                                               
play in order to enhance the recovery from those fields.                                                                        
7:46:56 PM                                                                                                                    
MR. GALVIN  displayed the  slide, "MODEL  - MIGRATION  OF SHUBLIK                                                               
OIL," and  noted Great Bear's  location and proximity  to Prudhoe                                                               
Bay and Kuparuk.   He explained that the  current reservoirs have                                                               
accumulated  the  oil through  the  migration  from the  original                                                               
source rocks up into those reservoirs.   This slide is a computer                                                               
model that  was generated from the  input of all the  North Slope                                                               
wells and  well data.   A project  of the U.S.  Geological Survey                                                               
(USGS) and PetroMod petroleum systems  modeling software, it is a                                                               
snapshot  showing  the  migration  route from  the  Shublik,  the                                                               
deepest and potentially most prolific of the source rock.                                                                       
MR. GALVIN  moved to the  slide, "GREAT BEAR'S CONCEPT,  FIND AND                                                               
PRODUCE OIL  FROM THE  SOURCE OR FROM  TRAPS ALONG  THE MIGRATION                                                               
ROUTE."   He  said Great  Bear picked  up the  leases that  cover                                                               
those source rock  areas because the company  recognized that the                                                               
tremendous  amount of  oil  sitting in  Prudhoe  and Kuparuk  was                                                               
generated underneath this  acreage.  Great Bear is  looking at an                                                               
opportunity to produce from either  the original source itself or                                                               
from traps that  collected oil along the way as  the oil migrated                                                               
up to the north.                                                                                                                
MR. GALVIN  outlined the activities  done by Great Bear  to date.                                                               
Turning to  the slide, "GREAT BEAR  - 3D SEISMIC SURVEYS,  2012 -                                                               
PRESENT,"  he said  the most  significant thing  the company  has                                                               
done is to  shoot modern 3-D seismic over a  large portion of its                                                               
acreage.   He explained that  3-D seismic provides a  window into                                                               
the potential  conventional plays that  may be with  Great Bear's                                                               
acreage and  gives an opportunity  to finds those traps  that may                                                               
be holding the oil that is  migrating through.  This season Great                                                               
Bear is  acquiring about 450  square miles of  additional seismic                                                               
and  once  complete  Great  Bear  will  have  nearly  its  entire                                                               
contiguous position  covered with  3-D seismic.   This tremendous                                                               
asset will  provide an opportunity  to identify  drilling targets                                                               
to pursue going forward.                                                                                                        
7:49:41 PM                                                                                                                    
MR. GALVIN addressed the slide,  "GREAT BEAR - EXPLORATION WELLS,                                                               
2012 - PRESENT," noting Great  Bear has drilled three exploration                                                               
wells.  The  first two were drilled the summer  of 2012 along the                                                               
haul  road  [Dalton Highway]  on  upland  sites accessible  year-                                                               
round.  Great Bear is one  of the only exploration companies that                                                               
is able to  operate in the summer  as long as the  location is in                                                               
one  of the  six sites  shown  on the  map.   All  six sites  are                                                               
permitted  for  year-round  access.   The  two  well  sites  were                                                               
selected primarily because of convenience  and the first drilling                                                               
program was primarily  for drawing whole core samples  out of the                                                               
source rocks to  tell what state they are in  and their potential                                                               
for producing oil and gas going  forward.  Using the seismic that                                                               
was shot  Great Bear  identified three  conventional oil  and gas                                                               
prospects.   Great Bear was  drilling last winter and  was hoping                                                               
to drill  all three, but  due to  a number of  factors, including                                                               
the flooding  of the  Sagavanirktok (Sag)  River over  the Dalton                                                               
Highway, the  company was only able  to get to the  bottom of the                                                               
first  one, Alkaid  #1.   Great  Bear remains  encouraged by  the                                                               
prospectivity  of all  three of  these  areas, but  now with  the                                                               
additional  time  the company  has  added  those  to the  pot  to                                                               
compete with the  rest of the prospects that  are being generated                                                               
through Great Bear's seismic analysis.                                                                                          
7:51:28 PM                                                                                                                    
MR.  GALVIN turned  to the  slide, "GREAT  BEAR PROJECT  SPENDING                                                               
(2010  - PRESENT),  BUSTING THE  MYTH THAT  EXPLORATION COMPANIES                                                               
DON'T HAVE 'SKIN  IN THE GAME.'"  He said  Great Bear happened to                                                               
come along  at a  time that  saw the  state provide  probably the                                                               
most generous  credits that  are going  to be seen.   Due  to the                                                               
change in the law and  ability to stack the Exploration Incentive                                                               
Credits  on a  temporarily increased  Net Operating  Loss Credit,                                                               
there  have been  times  when Great  Bear's  seismic program  was                                                               
receiving about  an 85 percent  tax credit.  Overall,  Great Bear                                                               
has spent about $220 million  on its seismic, drilling, and other                                                               
activities, including  holding the  leases and  general operating                                                               
expenses.   Great Bear has  taken advantage of the  Net Operating                                                               
Loss Credits which have ranged from  25 percent to a temporary 45                                                               
percent  to the  current  35  percent.   Great  Bear  has had  40                                                               
percent  Exploration  Incentive  Credits   for  its  seismic  and                                                               
generally 30 percent  credits for its wells.  Of  that, the state                                                               
has or will  eventually reimburse Great Bear  about $140 million.                                                               
This means  Great Bear  and its partners  have spent  $80 million                                                               
that will not  be reimbursed by the state; it  is real money that                                                               
is being spent  to acquire this information.   Because Great Bear                                                               
owns  such a  significant interest  it  has spent  that money  as                                                               
wisely as  possible in discovering oil  on its acreage.   The tax                                                               
credit program requires Great Bear to  convey to the state all of                                                               
the  data generated  through the  company's drilling  and seismic                                                               
programs.   Therefore  the state  now has  very valuable  seismic                                                               
data on its acreage as a result of these shared activities.                                                                     
7:54:05 PM                                                                                                                    
MR. GALVIN  spoke to  slide, "TAX  CREDIT FINANCING,  BUSTING THE                                                               
MYTH THAT  EXPLORATION COMPANIES ARE 'FINANCED'  BY TAX CREDITS."                                                               
He said  he wants  to discuss  the idea  that companies  that are                                                               
enjoying tax credits  are "financed" or "wholly  financed" by the                                                               
credit program.   As far as  the North Slope is  concerned, Great                                                               
Bear uses is  investors' money to pay employee  salaries, oil and                                                               
gas rentals, office expenses, and  other business expenses.  Some                                                               
of those expenditures associated  with geologic work, permitting,                                                               
and the  actual contracting of  the seismic and  drilling qualify                                                               
for tax credits,  currently somewhere between 35  and 75 percent.                                                               
Because of  the ability  to collateralize  the tax  credits Great                                                               
Bear  can borrow  against  the expected  credit  from the  state.                                                               
That means Great Bear can take  the money it has available to it,                                                               
can anticipate  if X amount of  dollars is spent then  so much in                                                               
credits will be  generated, and the company goes to  the bank and                                                               
asks for  a loan  against that.   As long as  Great Bear  has the                                                               
money  to  pay its  portion  and  the  money  to pay  the  bank's                                                               
financing fee, the  bank may be willing to lend  the money.  But,                                                               
Great  Bear must  put  real  money up,  a  significant amount  of                                                               
capital, in  order to  do that.   So, at  no point  are explorers                                                               
making  money off  of  the  tax credit  program.   Explorers  are                                                               
investing that money to advance  their exploration activities and                                                               
doing it in conjunction with the state.                                                                                         
7:56:03 PM                                                                                                                    
MR. GALVIN  showed the slide,  "CHALLENGES UNIQUE TO  NORTH SLOPE                                                               
EXPLORERS, ADDING MORE RISK TO  AN ALREADY RISKY INVESTMENT," and                                                               
outlined  why the  tax credit  programs are  so important  from a                                                               
North Slope explorer's  perspective.  Oil and  gas exploration in                                                               
definition is a risky venture, he  said, there is no guarantee of                                                               
a  return on  investment.   Adding some  of the  particular items                                                               
with regard to Alaska's North Slope  and that just adds more risk                                                               
to  what is  already a  risky  investment.   There is  a lack  of                                                               
geologic data  on the North Slope,  particularly anywhere outside                                                               
of  the existing  fields.   There  is a  short and  unpredictable                                                               
winter exploration season.   Permitting is complex  and there are                                                               
often delays.  And, Alaska is a very high cost environment.                                                                     
MR.  GALVIN said  the slide,  "UNIQUE  ANS CHALLENGES  - LACK  OF                                                               
GEOLOGIC DATA,  FEW WELLS  IN GREAT BEAR  ACREAGE," shows  all of                                                               
the well penetrations  on the Alaska North Slope.   Each dot is a                                                               
well and the  lines reflect deviated wells.   A tremendous amount                                                               
of activity has occurred in  certain clusters.  However, on Great                                                               
Bear's acreage, only  about 11 wells drilled  were drilled before                                                               
the company  came along.  From  a density perspective and  an oil                                                               
and gas  density perspective, this is  basically unexplored area.                                                               
Little to nothing is known about  what is between those wells and                                                               
each  well has  its  own  story about  how  much information  was                                                               
received  from that  well.   From  a risk  perspective that  adds                                                               
tremendously in  terms of whether  an investment is going  to pay                                                               
off.  Only  two wells had penetrated the Shublik  previous to the                                                               
acreage  being purchased  by Great  Bear.   Great Bear  has since                                                               
drilled  two wells  through the  Shublik, basically  doubling the                                                               
information relating to the Shublik within Great Bear's acreage.                                                                
7:58:45 PM                                                                                                                    
REPRESENTATIVE JOHNSON  asked how much  of the $80  million spent                                                               
by Great Bear Petroleum and its partners was leveraged.                                                                         
MR. GALVIN clarified that the  $80 million was not leveraged, the                                                               
$80 million is entirely what Great Bear has spent.                                                                              
REPRESENTATIVE  JOHNSON recalled  Mr. Galvin  having stated  that                                                               
the  tax credits  allowed Great  Bear  to leverage  money and  to                                                               
borrow  money.   He  asked whether  any of  that  $80 million  is                                                               
leveraged or whether it is all straight ownership investment.                                                                   
MR. GALVIN explained that when  he says "leveraged" he that means                                                               
Great Bear  is putting its  money up and  is then able  to borrow                                                               
additional money against it.                                                                                                    
REPRESENTATIVE JOHNSON said he understood  Mr. Galvin to say that                                                               
because of  the tax credits  Great Bear  was also able  to borrow                                                               
money using that.                                                                                                               
MR. GALVIN  responded that  a way to  look at it  is that  of the                                                               
$140 million that will be  reimbursed by the state, approximately                                                               
half of it was borrowed ahead of  time.  So, $150 million was put                                                               
up and  $70 million  was borrowed.   It was  over four  years, so                                                               
there are different cycles.                                                                                                     
8:00:40 PM                                                                                                                    
REPRESENTATIVE  JOHNSON  recalled  that  in  2011  a  Great  Bear                                                               
representative testified  that there  would be 200,000  barrels a                                                               
day by  2020.   The representative  further testified  that Great                                                               
Bear planned to begin production in  2013.  He inquired why there                                                               
has yet to be production to date in 2016.                                                                                       
MR.  GALVIN replied  that the  testimony was  provided by  former                                                               
president and CEO,  Ed Duncan, who is no longer  with Great Bear.                                                               
Pointing out he  was not with Great Bear at  the time, he offered                                                               
his   understanding  that   the  slide   being  referred   to  by                                                               
Representative Johnson was intended to  provide a picture of what                                                               
could  be  possible  with  an  unconventional  play  if  it  were                                                               
supported through  both the  state and Great  Bear being  able to                                                               
advance it  in an expeditious manner.   The purpose of  the slide                                                               
was to  basically give the  state a  reason to recognize  that if                                                               
this comes about, we  are going to have to be  ready to deal with                                                               
a  couple  hundred wells  a  year  on  the permitting  and  other                                                               
infrastructure aspects  of it.  He  said he does not  believe Mr.                                                               
Duncan intended to say Great  Bear was at this point guaranteeing                                                               
it  was going  to  be  drilling this  amount  and producing  that                                                               
amount of oil because it hadn't yet done any exploration.                                                                       
REPRESENTATIVE  JOHNSON  referred   back  to  testimony  provided                                                               
before the Senate  Finance Committee where a  senator stated that                                                               
Great Bear would be drilling 150  wells per year.  However, there                                                               
has been nothing close to that,  only six have been drilled since                                                               
2011 when it  had been said that  there would be 100 a  year.  He                                                               
asked whether this presentation is as speculative as that one.                                                                  
MR.  GALVIN responded  he cannot  speak to  what the  senator was                                                               
referring  to.   He  offered  his  belief  that the  senator  was                                                               
referring to the  same slide that was intended  to represent what                                                               
was  possible  with an  unconventional  play  and what  would  be                                                               
necessary for  an unconventional play.   How  it was used  at the                                                               
time is  not anything  to do  with Great Bear.   But,  Mr. Galvin                                                               
said,  what  he is  presenting  to  the  committee today  is  not                                                               
speculative whatsoever,  he is showing  the committee  what Great                                                               
Bear has done.                                                                                                                  
REPRESENTATIVE JOHNSON  commented that  he was  not the  only one                                                               
confused  by the  statement, a  senator also  interpreted it  the                                                               
same way.                                                                                                                       
8:03:33 PM                                                                                                                    
REPRESENTATIVE TARR,  regarding the  state picking up  65 percent                                                               
of  the  cost  and  Great  Bear  35  percent,  recalled  previous                                                               
speakers advising  to think of tax  credits as the state  being a                                                               
co-investor.  Given [the state] is  at much more than 50 percent,                                                               
she asked  when it is  a subsidy versus a  co-investment scenario                                                               
from Great Bear's perspective.  She  said that when she thinks of                                                               
co-investor  she thinks  more of  equal  investment or  something                                                               
that is more favorable for the state than is this scenario.                                                                     
MR.  GALVIN  answered  he  would go  back  to  something  earlier                                                               
described  by Representative  Seaton  with regard  to looking  at                                                               
this as an investment and whether  it is worthwhile to the state.                                                               
Mr. Galvin  said he would argue  that having the state  provide a                                                               
greater  subsidy  for exploration  activity  actually  is a  good                                                               
investment from  the state because  of the return that  the state                                                               
could receive  and the ability  to basically multiply  the amount                                                               
of  wells that  the  state is  going  to get  for  the amount  of                                                               
private dollars  that are going  to be available for  taking that                                                               
risk in Alaska.   Because the state is the  resource owner it has                                                               
a significant interest in trying to  get as many explorers to the                                                               
state as possible, not just betting on one.                                                                                     
8:05:14 PM                                                                                                                    
REPRESENTATIVE TARR noted  industry has said it  wants some level                                                               
of  certainty, stability,  and durability;  therefore it  doesn't                                                               
seem unreasonable for  the state to also want  some similar level                                                               
of  certainty.   She recalled  that according  to Mr.  Ken Alper,                                                               
director of DOR's  Tax Division, there is a  certain amount spent                                                               
that can  be directly linked  to projects that are  in production                                                               
right now.  She said she  thinks about $650 million was spent for                                                               
things  that are  not in  production.   A  significant amount  of                                                               
investment is  being made on  the part  of the state  without any                                                               
level  of certainty  that production  will come.   Based  on what                                                               
Representative  Johnson is  saying,  she  thinks that  previously                                                               
[legislators] were given that expectation  and factored that into                                                               
their decision  making.  She  asked how [legislators] are  to get                                                               
the sense of certainty that industry likes.                                                                                     
MR.  GALVIN  replied that  speaking  as  an exploration  company,                                                               
there  is no  certainty.   There is  nothing that  an exploration                                                               
company can give legislators with  regard to certainty that there                                                               
is going  to be a  particular outcome.   If [the  legislature] is                                                               
going to  encourage someone to  drill two  wells there will  be a                                                               
certain  likelihood of  success  and someone  drilling six  wells                                                               
will have  a significantly greater  likelihood of success.   From                                                               
the basis of  an investment portfolio, the  greater the diversity                                                               
of investments the higher the  level of confidence for the return                                                               
being looking for.   With regard to exploration,  he suggested it                                                               
is a  similar dynamic -  if additional exploration  is encouraged                                                               
there will be a higher  likelihood of success because [the state]                                                               
has diversified its  risk more.  On an  individual company basis,                                                               
he advised, if anybody tells  the committee that it can guarantee                                                               
exploration success, don't believe them.                                                                                        
8:07:35 PM                                                                                                                    
REPRESENTATIVE SEATON said the problem as  he sees it is that net                                                               
present value for the state's investment  has to at least pay off                                                               
some time.   The scenarios being seen by the  state are fields of                                                               
15,000 barrels a  day with a 30-year life and  the facilities and                                                               
tax credits up front.  The state  has a net present value loss at                                                               
$80 when  talking about production  tax, and at $60  when talking                                                               
about  corporate income  tax, production  tax, and  royalty.   At                                                               
price ranges  of $60-$80 the  state never recovers its  money and                                                               
in fact  has to  generate other taxes  to supplement  that, which                                                               
gives [members]  pause for  going forward  in the  current credit                                                               
situation.    He  requested  Mr.  Galvin to  tell  him  how  that                                                               
analysis is wrong or how the  state should look at its investment                                                               
as to whether it will ever be repaid in those situations.                                                                       
MR.  GALVIN  responded that  a  fundamental  question is  whether                                                               
members believe  in the likelihood  of finding additional  oil on                                                               
the North Slope.  He related  that pretty much every geologist he                                                               
has talked to  has said there is great certainty  that there is a                                                               
tremendous amount  of yet  undiscovered oil  on the  North Slope.                                                               
If the likelihood  of a 30 million barrel field  is evaluated and                                                               
what the  economics of that  would be  compared to a  200 million                                                               
barrel  field  it  will  be  seen  that  they  are  significantly                                                               
different.  Doing  that type of analysis  accepts the probability                                                               
that a range of fields is going  to be found still sitting on the                                                               
undrilled acreage on  the North Slope.  Because the  state is the                                                               
owner  of  the  entire  pool,  the  state  investing  along  with                                                               
industry  in exploring  that area  gives the  state the  greatest                                                               
likelihood of getting a return on  its investment than any of the                                                               
individual investors because the  state shares in the probability                                                               
for all  of those.  Within  the state land, and  given the amount                                                               
of oil  that should be  found up  there and the  expectation that                                                               
prices are  going to recover  at least  to a moderate  level, Mr.                                                               
Galvin said he would suggest that  members will find that the net                                                               
present value  (NPV) analysis would  show that it is  positive to                                                               
the state given  the range of potential fields  that would likely                                                               
be found.   He clarified he is talking  about exploration acreage                                                               
on the North Slope on state land.                                                                                               
8:11:22 PM                                                                                                                    
REPRESENTATIVE SEATON  reiterated that what the  state has gotten                                                               
so far is fields of 15,000  barrels a day with 30-year lifespans.                                                               
He surmised  members need to  look at  larger fields to  see what                                                               
the net present value of those  would be.  However, he continued,                                                               
with new oil having a 20  percent Gross Value Reduction (GVR) the                                                               
net present  values turn out to  be negative at some  pretty high                                                               
levels "compared  to ... if that  P80 50-70 is right,  then we're                                                               
in negative territory much of the time."                                                                                        
MR.  GALVIN   answered  that  for   any  modeling   exercise  the                                                               
assumptions  must be  set appropriately  and with  a wide  enough                                                               
window.   Everyone  has experienced  the problems  with having  a                                                               
narrow assumption field.   A wide enough assumption  area must be                                                               
given and the  probable outcomes set accordingly.   [Models would                                                               
need to  be run]  against a  number of  different field  sizes, a                                                               
number  of different  cost  regimes, and  a  number of  different                                                               
price scenarios.                                                                                                                
8:12:47 PM                                                                                                                    
MR.  GALVIN resumed  his  presentation.   He  explained that  the                                                               
graph  on  the  slide,  "ANS CHALLENGES-  SHORT  &  UNPREDICTABLE                                                               
DRILLING SEASON,"  shows the number  of days the tundra  was open                                                               
within Great  Bear's acreage  over the  past 12  seasons.   It is                                                               
highly  unpredictable and  fairly limited,  he pointed  out.   An                                                               
explorer must  identify the  prospects a  year in  advance, begin                                                               
getting permits in place six months  in advance, commit to a rig,                                                               
and  put  millions  and  millions  of dollars  at  stake  for  an                                                               
exploration season that might be less  than a month or as long as                                                               
four months.   Such  uncertainty adds  significantly to  the risk                                                               
profile  and  how  much  of  that  investment  will  end  up  not                                                               
generating  the wanted  results.   For example,  last year  Great                                                               
Bear was  hoping to drill and  complete two wells in  the season,                                                               
but in  the end spent virtually  the same amount of  money to get                                                               
only one  well drilled.  That  adds tremendously to the  risk and                                                               
is the reason why it  is difficult to attract exploration dollars                                                               
to Alaska.                                                                                                                      
MR.  GALVIN referred  to  the slides,  "UNIQUE  ANS CHALLENGES  -                                                               
COMPLEX PERMITTING,"  and "UNIQUE  ANS CHALLENGES -  HIGH COSTS,"                                                               
and noted that  permitting is difficult in Alaska.   Great Bear's                                                               
exploration program,  which is fairly standard,  had 19 different                                                               
permits from 16 different agency contacts.   The North Slope is a                                                               
high cost  environment.   As price comes  down, costs  are coming                                                               
down  due to  increased competition,  increased equipment  on the                                                               
Slope, and more providers of the  same type of service.  But, one                                                               
driver for Great Bear's costs is  the number of wells it can plan                                                               
to drill  at any one time.   When Great Bear  drills one-off well                                                               
programs  the  service provider  is  basically  getting its  rack                                                               
price, but when Great Bear has a  four to six well program it can                                                               
negotiate and bring those costs down.                                                                                           
8:15:32 PM                                                                                                                    
MR. GALVIN showed  the slide, "GREAT BEAR -  IMMEDIATE WORK PLAN,                                                               
HOW WE WILL  REALIZE THE POTENTIAL," and reported  that under its                                                               
immediate work plan going forward  Great Bear will:  complete its                                                               
seismic program for this winter;  complete its prospect inventory                                                               
to identify the wells to  drill; execute a multi-year, multi-well                                                               
exploration  program  over  the  next few  years;  and  hopefully                                                               
secure cost-effective services.                                                                                                 
MR.  GALVIN moved  to the  slide,  "GREAT BEAR  - IMMEDIATE  WORK                                                               
PLAN,  HOW  PRODUCTION TAX  CREDITS  WILL  DICTATE LIKELIHOOD  OF                                                               
SUCCESS," and  said the  number of wells  that Great  Bear drills                                                               
will be  directly related to  the tax  credit program that  is in                                                               
place.  Thus  far the state has  supported exploration activities                                                               
through  the Exploration  Incentive Credit  and through  allowing                                                               
that credit  to be  stacked with the  Net Operating  Loss Credit.                                                               
Collateralization of those tax credits  has allowed Great Bear to                                                               
borrow against them  in advance.  The secured  repayment on those                                                               
tax  credits also  allows Great  Bear to  secure the  lowest cost                                                               
financing.  Unpredictability  in the repayment of  the credits is                                                               
expensive because it adds to the cost of borrowing against them.                                                                
MR.  GALVIN  addressed  the  slide,   "HOW  TAX  CREDITS  DICTATE                                                               
EXPLORATION DRILLING  VOLUME, A CONCEPTUAL EXAMPLE."   He pointed                                                               
out  that the  tax credit  programs work  as a  multiplier on  an                                                               
exploration company's capital.   Great Bear has  a certain amount                                                               
of capital it has raised to  execute an exploration program.  The                                                               
amount  of credit  the  state offers  will  leverage or  multiply                                                               
Great Bear's  available capital and establish  what the company's                                                               
drilling program  is going to be.   He posed a  scenario in which                                                               
Great Bear has $100 million available  to spend, money it has and                                                               
is putting  in that is  not going to  be reimbursed.   That money                                                               
can  then be  leveraged up  because  of the  tax credit  program.                                                               
Under  a 35  percent credit  program  Great Bear  can spend  $140                                                               
million and drill  between 5 and 7 wells, and  under a 65 percent                                                               
credit  program Great  Bear can  drill  between 10  and 13  wells                                                               
because it can spend about $260  million.  That is the difference                                                               
between  the state  providing  less than  half  versus more  than                                                               
half; it  will provide  that more  wells can  be drilled  for the                                                               
same amount of equity money put in by Great Bear.                                                                               
8:18:19 PM                                                                                                                    
MR.  GALVIN spoke  to the  slide, "EXPLORATION'S  ROLE IN  FUTURE                                                               
STATE  PRODUCTION,"  saying  it  is important  from  the  state's                                                               
perspective to get  more wells drilled.  The  more wells drilled,                                                               
the more discoveries  there will be, the more  projects that will                                                               
come  into  production to  replace  the  decline in  the  current                                                               
fields.  To feed  the system so it is not  on a perpetual decline                                                               
requires more  exploration at the  front end in order  to replace                                                               
the fields that are decline.                                                                                                    
MR.  GALVIN turned  to the  slide, "WHY  THE STATE  SHOULD EXTEND                                                               
EXPLORATION  INCENTIVE  CREDITS,"  to  advocate  that  successful                                                               
exploration will  result in cash  flow to  the state.   He argued                                                               
that it will  be significantly net present value  positive to the                                                               
state  if  the  exploration  companies on  the  North  Slope  are                                                               
successful.  The chance of  success is increased by drilling more                                                               
wells.  There are multiple play  types on the North Slope and one                                                               
entity's success  is going to  inform the opportunities  in other                                                               
parts  of  the  Slope.    It has  a  virtuous  circle  aspect  to                                                               
increasing activity  levels on the  Slope.  Costs will  come down                                                               
because of increased activity levels.   As the resource owner the                                                               
state  has  a  greater  chance of  success  than  any  individual                                                               
company.   The  state is  able to  increase its  confidence in  a                                                               
return by  having more activity.   At  a minimum, the  state will                                                               
gain valuable information about its  resources that will begin to                                                               
chip away  at that lack  of data that is  a barrier to  entry for                                                               
new companies that are looking at Alaska.                                                                                       
8:20:40 PM                                                                                                                    
MR. GALVIN elaborated  on the slide, "TAX CREDITS -  KEEP WHAT IS                                                               
WORKING,"  asserting that  the state's  reason for  putting these                                                               
policies  in place  is  still  valid -  trying  to encourage  and                                                               
accelerate  the  transition  of  the  state's  field  from  being                                                               
dominated by a  couple multi-nationals to one  that is attractive                                                               
and  creates  a vibrant  and  diversified  group of  independents                                                               
exploring in the area.  The state  has taken a number of steps to                                                               
try  to  do  that  and  has generated  a  significant  amount  of                                                               
momentum.  There are more operators  on the North Slope than ever                                                               
before.   A lot of recent  successes have been announced.   There                                                               
is tremendous potential for oil  discovery on the North Slope and                                                               
the  state needs  to  recognize  that and  join  the industry  in                                                               
trying  to  make it  a  success.   The  one  thing  that must  be                                                               
understood is that the momentum  that is currently going can also                                                               
end  up working  in reverse  if the  state ends  up stopping  it.                                                               
Inertia is  a significant force  in the  industry.  If  the state                                                               
stops the activity level, if  the state discourages the companies                                                               
that have invested thus far, trying  to get new companies back to                                                               
follow behind  the ones that came  to Alaska and failed  is going                                                               
to be  extremely difficult and the  state will lose the  years of                                                               
time it has invested in trying to get this momentum going.                                                                      
MR.  GALVIN concluded  by turning  to the  slide, "SUMMARY."   He                                                               
said Great Bear is a highly  active North Slope explorer that has                                                               
invested  significant amounts  to  date;  those investments  have                                                               
been well  spent.  He  said the pace  and volume of  Great Bear's                                                               
future  activity will  be  dependent upon  the  tax credits,  the                                                               
Exploration Incentive  Credits, that  are available  to it.   The                                                               
state's  interest   is  in  reducing  risk   of  exploration  and                                                               
increasing  the  likelihood of  success  for  the state  and  the                                                               
Exploration   Incentive  Credits   under   Alaska  Statute   (AS)                                                               
43.55.025  are  very  valuable  in  that  record  and  should  be                                                               
extended for North Slope exploration activities.                                                                                
8:23:18 PM                                                                                                                    
REPRESENTATIVE  JOSEPHSON asked  what  Great Bear  spent for  its                                                               
MR. GALVIN offered his belief that  all told on all of its leases                                                               
Great Bear is  approaching $30 million.  He said  he will provide                                                               
the committee with a more accurate figure.                                                                                      
8:24:04 PM                                                                                                                    
The committee took a brief at-ease.                                                                                             
8:25:26 PM                                                                                                                    
JOE REESE,  Senior Managing Tax Counsel,  BP Exploration (Alaska)                                                               
Inc. ("BP"),  stated that BP  is a member  of the Alaska  Oil and                                                               
Gas  Association  (AOGA)  and supports  the  testimony  that  was                                                               
provided  by  AOGA earlier  in  the  day.   He  said  BP is  very                                                               
interested in Alaska's oil and gas  tax policy and the success of                                                               
it,  as well  as  ensuring  that BP,  the  State  of Alaska,  and                                                               
Alaskans  benefit from  that policy.   The  policy is  crucial to                                                               
BP's business  and to its  successes.   BP is looking  forward to                                                               
continuing to  maintain a safe  and compliant business  in Alaska                                                               
that is  sustainable.  Oil  prices have dropped about  70 percent                                                               
over the  past two years  and this  has created a  very difficult                                                               
situation  for  BP.    The corporation  is  currently  cash  flow                                                               
negative, which is  not a sustainable way to  operate a business.                                                               
As  a  result,  BP  is  instituting  an  approximate  13  percent                                                               
reduction in  force and  is also  collaborating with  its working                                                               
interest owners  at Prudhoe  Bay to right  size the  business for                                                               
the current economic environment.                                                                                               
8:27:26 PM                                                                                                                    
MR. REESE  said BP is committed  to complying with tax  laws in a                                                               
responsible  way and  is  committed  to developing  relationships                                                               
that are  constructed and open with  the tax policy makers.   One                                                               
of the major  costs for BP is production tax  and it is important                                                               
to note that production taxes are  not a tax on profits.  Rather,                                                               
they are  more closely aligned  with a tax  on cash flow,  but is                                                               
not precisely that either.   It is its own defined  term and is a                                                               
tax  on production.   Given  the conflating  of verbiage  as this                                                               
discussion  has   progressed,  BP   wants  to  ensure   that  the                                                               
differences  are understood.    Those  differences are  basically                                                               
based off  of how capital  expenditures are  treated.  In  a cash                                                               
flow  analysis,  all  of a  company's  capital  expenditures  are                                                               
deducted just  the same  as is  done with  operating expenditure.                                                               
It is  simply what cash  is brought in  and what cash  is flowing                                                               
out.    From a  profit  standpoint,  the capital  expenditure  is                                                               
amortized  and deducted  over some  period of  time.   So, it  is                                                               
really in  the way that  the capital expenditures  are reflected.                                                               
While  BP  is  currently  cash   flow  negative,  it  still  pays                                                               
production  taxes because  of the  way those  costs are  treated.                                                               
There  are  several  investments  that  BP  makes  that  are  not                                                               
deductible for production tax purposes  - for example, the Alaska                                                               
Liquefied  Natural  Gas  (AK  LNG)   Project  and  certain  other                                                               
specifically excluded costs under the production tax law.                                                                       
MR.  REESE  pointed out  that  at  current  prices, BP  does  not                                                               
receive  any production  tax credits  from the  State of  Alaska.                                                               
Nor  does  Prudhoe  Bay production  attract  oil  production  tax                                                               
credits  under the  minimum tax.    While BP  does not  currently                                                               
receive any  oil production tax  credits, BP believes that  it is                                                               
important to both the industry  and Alaska that many participants                                                               
are able to  have a viable business here.   Therefore BP does not                                                               
support any change to the production taxes under Senate Bill 21.                                                                
MR. REESE said  BP acknowledges that the State of  Alaska is in a                                                               
fiscal crisis and  is struggling along with the  industry to make                                                               
ends meet.   While  reasonable people may  disagree about  how to                                                               
improve the current  oil and gas tax policy, BP  does not believe                                                               
that  now is  the  right  time to  make  any  changes that  would                                                               
increase taxes and  further inhibit BP's ability  to maintain the                                                               
activity level  at Prudhoe  Bay along  with its  working interest                                                               
owners.    Near-term changes  to  the  state's  oil and  gas  tax                                                               
policies will have long-term consequences for everyone.                                                                         
8:30:37 PM                                                                                                                    
MR. REESE  provided specific comments  about HB 247,  saying that                                                               
in particular the bill would  increase the minimum production tax                                                               
from 4 percent to 5 percent.  He  said this would be a 25 percent                                                               
tax  increase on  the industry  and for  some folks  it would  be                                                               
more.  It  would be a 25  percent increase to BP  because BP does                                                               
not have any credits that would lower the minimum tax.                                                                          
MR.  REESE stated  HB  247 proposes  to  implement an  artificial                                                               
limitation  on the  use  of credits  within the  tax  year.   The                                                               
production  tax is  calculated on  an annual  basis with  monthly                                                               
installment payments,  he explained.   Those  monthly installment                                                               
payments are based off of  forecasted prices and estimated costs,                                                               
so BP  makes a payment using  those tentative numbers.   The bill                                                               
would  suggest  that any  credits  that  are calculated  on  that                                                               
monthly basis create a limitation  to the total amount of credits                                                               
that a  company can take  so that a  company could not  take more                                                               
than that.   If, upon true-up  on March 31, a  company determines                                                               
that its forecasted prices and  estimated costs were not actuals,                                                               
the company  would be  capped out  on the  amount of  tax credits                                                               
that it  could take.  However,  if it came lower,  that advantage                                                               
would swing the other way and go to the state.                                                                                  
MR. REESE specified that BP  views the interest increase proposed                                                               
by HB  247 as being a  material change.  Current  law provides an                                                               
interest rate that is 3  percent above the federal funds interest                                                               
rate and  is calculated  on a  simple basis.   Under HB  247, the                                                               
interest  rate would  be 7  percentage points  above the  federal                                                               
fund rate  and the  interest would be  compounded on  a quarterly                                                               
basis.  This is significant for  multiple reasons.  First, at the                                                               
current federal funds  rate, that would represent  an increase to                                                               
the principle  amount of  the tax  due of  about $.55  per dollar                                                               
during the  period which the  audit is outstanding.   The current                                                               
statute of  limitations is six  years, so  in year one  a company                                                               
pays its  tax, in year  two there is a  true-up on March  31, and                                                               
then six years from that true-up  event is the end of the statute                                                               
of limitations and that is when  the state is required to provide                                                               
the  company with  its production  tax assessment.   During  that                                                               
intervening period, to  the extent that the  state has determined                                                               
that  an  assessment  is  due,   that  assessment  would  attract                                                               
interest.   Because of  the significant period  of time  that has                                                               
elapsed, it  becomes a material sum  of money and BP  views it as                                                               
an incentive for the state to  delay those audits and not provide                                                               
them to a company until the end of that statute of limitations.                                                                 
8:34:21 PM                                                                                                                    
MR. REESE said the Net Operating  Loss Credit is important to the                                                               
industry.   While BP does not  currently use this credit  for oil                                                               
taxes, BP  believes that  it is  a matter of  good tax  policy to                                                               
allow the  recovery of those  losses.  Even  if a company  is not                                                               
able to  take that credit  in the  current year, it  should still                                                               
have the benefit of that credit.                                                                                                
MR. REESE  lastly pointed out  that BP views  the confidentiality                                                               
provision in HB 247 as a  slippery slope.  The bill proposes that                                                               
confidentiality is expanded beyond  simply an aggregate number of                                                               
tax credits to disclosing an  individual taxpayer's amount of tax                                                               
credits.  He  expressed BP's concern about  where that disclosure                                                               
would  begin and  end.   He further  stated that  there may  be a                                                               
constitutional  issue with  respect to  both the  Alaska and  the                                                               
U.S.  constitutions  regarding   the  privileges  and  immunities                                                               
clause.  It is BP's  view that taxpayer confidentiality cannot be                                                               
partially  waived, BP's  view  is that  it  is an  all-or-nothing                                                               
proposition.   Therefore, BP  does not  support the  expansion in                                                               
any way of the confidentiality provisions.                                                                                      
MR.  REESE  concluded by  reiterating  that  BP is  committed  to                                                               
maintaining  a safe  and  compliant business  in  Alaska that  is                                                               
sustainable; BP is  committed to complying with the ax  laws in a                                                               
responsible   manner  and   to  having   open  and   constructive                                                               
relationships with  tax policy makers;  and BP  supports durable,                                                               
predictable, and  administrable oil and  gas tax policy  and that                                                               
is why BP does not support HB 247.                                                                                              
8:36:44 PM                                                                                                                    
REPRESENTATIVE  SEATON surmised  that  when Mr.  Reese stated  BP                                                               
does not get any tax credits he  was meaning that BP does not get                                                               
any reimbursable tax credits, and that  BP applies all of its tax                                                               
credits against its production tax.                                                                                             
MR. REESE replied that he said BP does not yet currently receive                                                                
any oil production tax credits and under the minimum tax Prudhoe                                                                
Bay does not attract any oil production tax credits.                                                                            
8:37:19 PM                                                                                                                    
CO-CHAIR NAGEAK thanked the witnesses for their testimony.                                                                      
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HSE RES 2.29.16 Conoco-Phillips.pdf HRES 2/29/2016 6:00:00 PM
HB 247
HSE RES 2.29.16 Great Bear.pdf HRES 2/29/2016 6:00:00 PM
HB 247
HSE RES 2.29.16 HB 247 BP written testimony.pdf HRES 2/29/2016 6:00:00 PM
HB 247