Legislature(2015 - 2016)BUTROVICH 205

04/08/2016 03:30 PM RESOURCES

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as

Audio Topic
03:30:13 PM Start
03:30:38 PM SB130
06:02:26 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
<Pending Referral> --Invited Testimony Only--
Heard & Held
-- Testimony <Invitation Only> --
+ Industry Stakeholder Testimony: TELECONFERENCED
Alaska Oil and Gas Association; ExxonMobil;
British Petroleum; ConocoPhillips; HillCorp;
The Alaska Support Industry Alliance
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           SB 130-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
        [Contains discussion of companion bill HB 247.]                                                                       
3:30:38 PM                                                                                                                    
CHAIR  GIESSEL announced  consideration of  SB 130.  She welcomed                                                               
invited  testimony  from  the  Alaska  Oil  and  Gas  Association                                                               
3:30:50 PM                                                                                                                    
KARA MORIARTY, President and CEO,  Alaska Oil and Gas Association                                                               
(AOGA), Anchorage,  Alaska, said  her testimony  today on  SB 130                                                               
represents the  thoughts and  sentiments of  each of  the diverse                                                               
AOGA members. She  related that on matters of  tax, AOGA requires                                                               
unanimous consent for testimony.                                                                                                
She said  there is no  denying it; legislators have  a tremendous                                                               
challenge facing them - cutting  budgets, loss of revenue, laying                                                               
people  off, and  the  oil  and gas  industry  is facing  similar                                                               
challenges. Currently, the policy for  the oil industry places an                                                               
emphasis on  production, investment and jobs.  While the Industry                                                               
is responding  and doing its best  to weather the storm,  it also                                                               
recognizes the  value of  investment and jobs  to Alaska,  and is                                                               
doing its  part to sustain  what it can  in the interest  of long                                                               
term  sustainability for  everyone. Changing  policies will  have                                                               
further negative  impacts on the  industry, which will  be costly                                                               
for the state in the long term.                                                                                                 
She said the legislature has been  asked for the sixth time in 11                                                               
years to  examine and  change oil tax  policy. No  other industry                                                               
has had  so many changes to  its fiscal structure in  Alaska, and                                                               
she  can  find  no  other  jurisdiction in  the  world  that  has                                                               
considered changing  oil tax policy  more than Alaska has  in the                                                               
last decade.                                                                                                                    
Nevertheless,  Ms. Moriarty  said, here  they  all are  in a  low                                                               
price environment  considering changes  to the oil  industry, and                                                               
the only reason  the administration is asking  the legislature to                                                               
change the policy again is because  of low oil prices. More money                                                               
is needed  for government. Commissioner Hoffbeck  said two months                                                               
ago  that the  motivation  to look  at oil  tax  credits was  the                                                               
budget and  that the motivation was  not to redefine oil  and gas                                                               
But  regardless of  the  motivation,  the administration's  final                                                               
proposal in SB 130 does both:  it increases taxes on the industry                                                               
to generate more government revenue  and it redefines oil and gas                                                               
taxes. As  they consider SB 130  she encouraged them to  ask AOGA                                                               
and  all   the  individual  companies   who  will   testify,  the                                                               
administration and consultants four important questions:                                                                        
1. Will the governor's proposal increase production?                                                                            
2. Will it make Alaska more or less competitive?                                                                                
3. Will SB 130 provide predictability?                                                                                          
4. Will SB 130 provide stability?                                                                                               
3:34:34 PM                                                                                                                    
MS.  MORIARTY stated  that the  last major  change in  tax policy                                                               
occurred three  years ago  in SB  21 and it  was followed  by the                                                               
referendum to repeal the new  law in August, 2014. Voters decided                                                               
the  state's  current  fiscal  policy was  good  for  Alaska  and                                                               
industry  agreed. Since  April, 2013,  when the  bill passed  the                                                               
legislature,  industry  has announced  more  than  $5 billion  in                                                               
additional  spending across  the state.  That increased  spending                                                               
could not have happened at a  better time as the investments made                                                               
in the last 18-24 months  are helping the industry, Alaskans, and                                                               
the state as a whole get through this low-priced environment.                                                                   
3:35:15 PM                                                                                                                    
Objectives  like stability  and predictability  are important  in                                                               
any  business setting;  but Ms.  Moriarty emphasized,  don't lose                                                               
sight of the real prize: more oil and gas production.                                                                           
For the  first time since  2002, production has  increased (slide                                                               
3)  from March  2015 to  March 2016,  an increase  of over  4,000                                                               
barrels/day (a 1 percent increase).                                                                                             
It is  also important to  look at  the forecast for  the outlying                                                               
years. Two and a half years  ago in December 2013, the production                                                               
forecast for  this fiscal  year was 487,600  barrels per  day. In                                                               
about three  months production will  be increased by  over 33,000                                                               
barrels/day for  a total of  520,000 barrels/day even  though oil                                                               
prices  have plummeted.  The  next few  years  are forecasted  to                                                               
bring similar  results even  though the  price forecast  today is                                                               
$50 less  per barrel  than the  price forecast  was in  2013. The                                                               
spring  production forecast,  which  was  released yesterday,  is                                                               
still about 55,000  barrels a day more when looking  out to 2022.                                                               
She concluded that  more production is always good  for the state                                                               
regardless of oil price.                                                                                                        
Speaking of prices, she said, they  are the lowest in more than a                                                               
decade, which  of course, has  had a  huge impact on  the state's                                                               
revenues.   While  it   is  significant   that   the  state   has                                                               
historically received 85-90  percent of its revenue  from the oil                                                               
industry, it's important to recognize  that her industry receives                                                               
100 percent  of its revenue  from the  price of oil.  She related                                                               
that  a friend  said,  "We are  price takers;  we  are not  price                                                               
MS. MORIARTY  said these low  prices are causing the  industry to                                                               
be  cash-flow negative.  This means  industry  is not  collecting                                                               
enough revenue each  day to cover their daily bills,  and the oil                                                               
and gas  industry is  no different than  any other  business that                                                               
does  not have  enough cash  flow to  pay its  expenses. The  cut                                                               
backs are  seen in  the dramatic increase  in project  delays and                                                               
deferrals, rigs  going idle, and most  painfully, Alaskans losing                                                               
3:38:22 PM                                                                                                                    
MS. MORIARTY  said industry recognizes  that state  employees are                                                               
also  losing   jobs  in  this  tough   environment.  The  House's                                                               
operating budget  estimates 50-75 fewer state  employees. But for                                                               
the oil and gas industry the  job loss has been even more severe.                                                               
By the end of June this  year, over 1,000 Alaskans will no longer                                                               
be working  directly for the oil  and gas industry and  that does                                                               
not include the contractor workforce.                                                                                           
MS. MORIARTY  added that  Alaska is  a high-cost  environment and                                                               
according to  the DOR  Spring Sources  Book (that  has up-to-date                                                               
numbers) the  average cost of  producing a  barrel of oil  on the                                                               
North Slope and  getting it to market before a  company pays even                                                               
one penny of tax is around  $50/barrel. And despite this they are                                                               
here testifying  about legislation to add  significant additional                                                               
cost  to  the   industry  by  raising  the   production  tax  and                                                               
eliminating incentives. She said, "Let  me be clear. If you raise                                                               
taxes and/or  reduce credits,  there will  be a  negative impact.                                                               
This is not about politics; it's about economics."                                                                              
MS.  MORIARTY  said  industry  is  cash-flow  negative  and  some                                                               
companies  may already  be  burning through  savings  to pay  for                                                               
operations. Their  reserves are not  unlimited. If a  company has                                                               
about $100  million to spend  in Alaska and the  government wants                                                               
to  take another  $10  or $20  million more,  they  will have  no                                                               
choice  but   to  further  eliminate  operating   and/or  capital                                                               
expenditures. This  means less investment, less  production, less                                                               
long-term state revenues,  and even more Alaskans  without a job.                                                               
In the interests  of time, she wouldn't belabor  each section and                                                               
concern  they  have with  the  governor's  bill,  but a  few  key                                                               
concerns will follow.                                                                                                           
3:40:11 PM                                                                                                                    
The  first  key  concern  is  the  minimum  tax.  The  governor's                                                               
proposal would increases the minimum  gross tax from 4 percent to                                                               
5 percent, and although a 1  percent point increase may not sound                                                               
significant, it  represents at  least a  25 percent  increase for                                                               
those companies  who already pay  the minimum  tax. Additionally,                                                               
the  governor's proposal  will forbid  companies  from using  any                                                               
earned or available  tax credits to reduce the  minimum tax below                                                               
the  new  5 percent  floor.  It  is  likely  that there  will  be                                                               
companies, large and small, that  have earned new oil tax credits                                                               
or loss credits  from prior year investments  for exploration and                                                               
drilling and  prior year losses  while also operating in  the red                                                               
due to  low oil prices, and  using those tax credits  is the only                                                               
way  they can  continue to  invest  in the  state. This  proposal                                                               
would delay or possibly deny  vital economic recovery at the very                                                               
time  companies need  it the  most. In  other words,  raising the                                                               
minimum  tax affects  everyone  and the  proposed  increase is  a                                                               
flagrant  money-grab that  is large  enough to  cause substantial                                                               
negative impacts on all producers at today's oil prices.                                                                        
MS.  MORIARTY said  the  smaller companies  or  newcomers to  the                                                               
state who  have yet to make  a profit in Alaska  are not required                                                               
to pay  the 4  percent minimum production  tax under  the current                                                               
law,  but  under the  governor's  proposal,  they would  go  from                                                               
paying zero  (because they  don't make  a profit)  to immediately                                                               
being hit with a 5 percent gross value tax.                                                                                     
Additionally, the proposal  would change the way  the minimum tax                                                               
is determined and would prevent  producers from taking the actual                                                               
tax credits available for a month  to the extent they are greater                                                               
than the  initially estimated amount.  Both of  these incremental                                                               
changes  amount  to  a  fundamental  change in  how  the  tax  is                                                               
calculated, which actually accounts for a tax increase.                                                                         
3:42:35 PM                                                                                                                    
Another  major   concern  even  though  the   administration  has                                                               
testified that  it is preserving  the NOL credits  (net operating                                                               
loss  credits),  industry  contends that  they  become  virtually                                                               
useless under the  proposal. It would prevent the use  of the NOL                                                               
credits to  reduce the minimum  tax. This change is  analogous to                                                               
the  federal government  not allowing  a company's  losses to  be                                                               
applied  against  its  corporate income  tax.  Additionally,  the                                                               
proposal imposes  a 10-year  limit on a  company to  apply unused                                                               
NOL  credits.  All  of  these  changes  to  the  NOL  essentially                                                               
eliminate the  value of the credit  in the first place,  and that                                                               
will impact companies' decisions.                                                                                               
3:44:00 PM                                                                                                                    
Another change  that causes concern is  arbitrarily limiting cash                                                               
credits to  $25 million per  company per year. Even  the smallest                                                               
of projects  cost in the  $500 million  to $1 billion  range, and                                                               
imposing a $25  million limit per company is  unreasonable and be                                                               
a  strong  disincentive  for future  investment.  Eliminating  or                                                               
discouraging cash  rebates for  companies that  may not  yet have                                                               
production  or  profits  strongly  disadvantages  new  companies,                                                               
especially  considering that  they  invested in  good faith  when                                                               
those investments were made. It is  bad business for the state to                                                               
basically  say after  the  fact that  it is  not  going to  allow                                                               
companies to realize the true  economics of their developments as                                                               
originally promised.                                                                                                            
Eliminating  two  important credits  for  Cook  Inlet and  Middle                                                               
Earth is  also dangerous.  As for Cook  Inlet, these  tax credits                                                               
were unequivocally the driver for  several key investments in the                                                               
region  that  have  already  lead  to  substantial  increases  in                                                               
production and jobs. AOGA does not  view these credits as a cost;                                                               
they  are  an investment  by  the  state,  which reaps  it  clear                                                               
benefits. For  example, one  of the  Department of  Revenue (DOR)                                                               
many slides show  that the state has paid out  over $8 billion in                                                               
credits from  FY07 to FY16.  However, that figure implies  a huge                                                               
capital  investment  of  $30  to   $40  billion  by  the  private                                                               
industry,  and during  that same  timeframe, the  state has  also                                                               
collected over $32.8 billion in total additional tax revenues.                                                                  
MS.  MORIARTY   said  AOGA   fundamentally  disagrees   with  the                                                               
administration that  Cook Inlet has  gas that  is in search  of a                                                               
market.  DOR,   DNR,  and  enalytica  have   all  testified  that                                                               
additional  investments  are  necessary to  meet  the  increasing                                                               
demand of  Alaska's residents. Without continued  investment, gas                                                               
production will  rapidly decline and any  decline will inevitably                                                               
result in  higher utility  rates for  consumers and  increase the                                                               
likelihood of gas shortages.                                                                                                    
One  provision  that  isn't  talked  about  much,  but  is  still                                                               
important,  is section  39 that  defines the  state's outstanding                                                               
liability in the broadest of terms.  It says that the state could                                                               
deny or delay tax credits  payments for virtually any outstanding                                                               
and  alleged  liability  even  if  it was  with  a  state  agency                                                               
completely unrelated to taxes.                                                                                                  
3:47:03 PM                                                                                                                    
MS. MORIARTY said although there  are plenty more aspects of this                                                               
bill that warrant  further discussion, she wanted  to conclude by                                                               
addressing  the  proposed increase  in  the  interest rate.  It's                                                               
crazy for  industry to have  to compound interest after  it takes                                                               
the DOR six years to do  an audit. AOGA supports the current rate                                                               
and  believes  it  is reasonable,  particularly  considering  the                                                               
lengthy  statute of  limitations.  Because the  DOR  has a  track                                                               
record of  taking all  six years to  complete audits,  under this                                                               
proposal,  there could  be scenarios  where the  interest payment                                                               
could be more than the actual tax bill, itself.                                                                                 
She explained  that Governor  Hammond was  first to  establish an                                                               
equitable  policy for  Alaska of  one-third for  the state,  one-                                                               
third for the  industry, and the remaining third  for the federal                                                               
government. During the ACES regime,  government take climbed to a                                                               
high  level, which  in turn  was  part of  the reason  SB 21  was                                                               
introduced  as an  effort to  normalize total  government over  a                                                               
broad range of prices.                                                                                                          
3:48:44 PM                                                                                                                    
As Mr. Mayer  from enalytica described, government  take is about                                                               
62 percent in a price range  of $60-150/barrel. That is why it is                                                               
important to look  at the production tax in  conjunction with the                                                               
rest  of the  fiscal  system.  As the  Division  of  Oil and  Gas                                                               
Director,  Corri  Feige,  stated in  House  Resources  testimony,                                                               
companies lump taxes and royalties  all together in one bucket of                                                               
cost, and  any increase in  production taxes will  impact overall                                                               
government take. At today's prices,  due to the regressive nature                                                               
of  royalty, government  take  exceeds 100  percent,  and SB  130                                                               
would  increase government  take for  all fields  and for  gas as                                                               
Finally, Ms. Moriarty said, the  governor's proposal will not add                                                               
more oil  to the pipeline.  There is no plausible  scenario under                                                               
which increasing taxes  by $782 million will  result in increased                                                               
production.  Assuming  the state  sees  a  10 percent  production                                                               
decline  because  of  less  investment,   it  would  also  see  a                                                               
reduction in royalties of $793  million over the next five years,                                                               
based on DOR  Resource Sources Book data.  This demonstrates that                                                               
it  doesn't matter  if prices  go back  to $60  or $80/barrel  if                                                               
production declines.                                                                                                            
While the administration  has testified that SB  130 will provide                                                               
certainty and predictability, she could  assure them that none of                                                               
her member  companies sees any  certainty or  predictability from                                                               
it. In  fact, the  message it  would send is  that Alaska  may be                                                               
having  a  bit  of  an  "identity crisis."  She  asked  how  many                                                               
companies regardless  of industry  will beat down  Alaska's doors                                                               
to  invest when  they count  on  their taxes  being increased  at                                                               
times of  high commodity  prices and then  again when  prices are                                                               
MS.  MORIARTY said  she  is  not before  them  asking  for a  tax                                                               
decrease  or  for relief  while  members  struggle through  these                                                               
extremely low oil  prices and difficult economic  times. She only                                                               
asks that the  legislature not "kick us while  we're down because                                                               
of low prices."  She asked that their  policy encourage explorers                                                               
and  new  entrants  and ensures  that  current  producers  remain                                                               
committed to Alaska.                                                                                                            
3:53:21 PM                                                                                                                    
CHAIR GIESSEL  asked if carrying  the NOLs  forward is a  loss of                                                               
value to producers and how important the NOL is to them.                                                                        
MS. MORIARTY answered that the  NOLs are extremely important. The                                                               
NOL, itself, implies that it's a  loss. Being able to apply those                                                               
ensures that companies  can continue investing when  they are not                                                               
making money.                                                                                                                   
CHAIR  GIESSEL  asked  if  the  state's  reimbursement  fund  for                                                               
credits were depleted  and companies had to carry  forward any of                                                               
the credits including the NOLs, what  that would mean in terms of                                                               
their value.                                                                                                                    
MS.  MORIARTY  answered  that  individual  companies  could  talk                                                               
specifically to  their own  economics, but  if they  thought they                                                               
were  going to  be able  to carry  that loss  forward and  can no                                                               
longer do that, it very  much changes their economics and whether                                                               
they decide to invest in this low price environment.                                                                            
CHAIR GIESSEL  said Mr.  Alper showed them  a chart  yesterday of                                                               
his projection of the .028 fund  out of which credits are paid. A                                                               
formula based in  statute (depending on the price of  a barrel of                                                               
oil) determines  how much money  is in  that fund, and  this year                                                               
$73 million was  appropriated to it. Last year the  fund had $700                                                               
million, because  additional money was appropriated.  If the fund                                                               
were  limited and  companies  had to  carry  credits forward,  he                                                               
didn't know what that would mean in fiscal terms.                                                                               
MS. MORIARTY  answered that each company  has different economics                                                               
and the DOR  commissioner was commissioner when  that statute was                                                               
created. When he testified to  House Finance, he talked about the                                                               
intent of  the fund. But  talking about economics,  obviously not                                                               
being able to  have that credit and then not  being able to apply                                                               
it  is like  it goes  away. For  those companies  it will  have a                                                               
severe impact on whether they are able to invest in Alaska.                                                                     
3:56:56 PM                                                                                                                    
SENATOR COGHILL said they have to  figure out how to work with an                                                               
industry that already is losing  money, because there wouldn't be                                                               
any great use for a net  operating loss without losses. They have                                                               
gone into  this negative valley both  as a state and  an industry                                                               
and he didn't think  it was wrong for them both  to look for ways                                                               
of dealing with it.                                                                                                             
One  of  the   ways  he  tries  to  balance   the  discussion  is                                                               
illustrated by  the state's partnership with  industry in raising                                                               
taxes but also  incentivizing things that were  beneficial to the                                                               
state. Because  he wanted  to be  able to  make "value  calls" on                                                               
what the state wants and what  the industry needs, as well as the                                                               
cash  call, he  asked what  the timeframe  was for  industry's $5                                                               
billion investment.                                                                                                             
MS. MORIARTY  answered since SB  21 passed on April,  2013, there                                                               
has been  an additional $5  billion of investment  announced from                                                               
the industry both in the Cook Inlet and on the North Slope.                                                                     
SENATOR COGHILL said that significant  investment is what brought                                                               
the  oil curve  from a  stand-even  to a  low-positive 1  percent                                                               
raise in  the decline  rate, which  is not  a decline  rate right                                                               
now. That  was a win  for both in  a high price  environment. But                                                               
neither the  industry nor the  state anticipated the  current low                                                               
price environment. However, the  state also made some significant                                                               
investments and stated that he  would be watching where that cash                                                               
flow balance  is. A lot  of the  $5 billion investment  went into                                                               
infrastructure,   operations  and   maintenance,  and   what  are                                                               
considered  "sunk costs."  The NOL  carry  forward, because  it's                                                               
really  not a  credit, just  stacks up  and becomes  numbers that                                                               
will have  to be paid  back some day,  and because of  that their                                                               
value is minimal.                                                                                                               
He doesn't  mind stacking  the credits up  and going  through the                                                               
valley as long  as the infrastructure remains  whole and healthy,                                                               
and is  able to produce  when they get to  the other side  of the                                                               
valley. He didn't  want the infrastructure -  the cash investment                                                               
and the "sunk costs" - to be  of no value. The NOLs and increased                                                               
base tax  eat into available cash  right now, but the  sunk costs                                                               
are  still  there he  reasoned.  He  was  faced with  making  the                                                               
judgement call of  how to "kind of hunker down"  with industry to                                                               
go through  this valley  of low oil  prices without  messing that                                                               
field up.                                                                                                                       
4:02:03 PM                                                                                                                    
CHAIR  GIESSEL  said  she  understands   the  importance  of  Ms.                                                               
Moriarty's policy  questions (referring  to slide 2),  and stated                                                               
that legislators  have three questions  of their own  that relate                                                               
to all taxes:                                                                                                                   
1. How does it affect Alaska families?                                                                                          
2. How will this affect Alaska businesses?                                                                                      
3. Will it affect Alaska jobs?                                                                                                  
Last week  Chair Giessel said she  talked to a registrar  of over                                                               
10 years  in one of  her district's  schools who said  in January                                                               
she had  five families withdraw and  she had never had  that many                                                               
withdraw before.  Four of them  were families that had  lost jobs                                                               
in  the oil  industry  and they  were moving  out  of state.  So,                                                               
legislators see the  impact of the low price  environment and the                                                               
decisions   industry  has   to   make,  but   it  affects   their                                                               
constituents, as well. That is  the balance they are looking for,                                                               
4:03:19 PM                                                                                                                    
SENATOR  COSTELLO asked  if Ms.  Moriarty's member  companies had                                                               
related communications from the  investment community in relation                                                               
to the  price environment or  just having this bill  before them.                                                               
Specifically, she was  interested in the companies  that might be                                                               
eligible for the cashable credits.                                                                                              
MS.  MORIARTY  answered  that  the  investor  community  is  very                                                               
nervous. They  first started getting extremely  nervous after the                                                               
governor's veto of  the $200 million in the  credit fund, because                                                               
it  was  completely  unexpected.  That  caused  a  ripple  effect                                                               
through  the investment  community, whether  it's private  equity                                                               
firms, banks, and so on, and that has not gone away.                                                                            
She  said that  one  of  her member  companies  was  ready to  go                                                               
forward with  a gas project  in Cook  Inlet, but decided  to wait                                                               
until they  see what is happening  in Juneau. That could  be seen                                                               
in the letter from Caelus.                                                                                                      
4:05:27 PM                                                                                                                    
SENATOR COSTELLO  asked if the  oil price rebounds  slowly, which                                                               
is anticipated, would those companies  put their plans on hold or                                                               
exit Alaska.                                                                                                                    
MS. MORIARTY  answered that  it depends  on what  the legislature                                                               
does with  tax policy. Prices can  go up, but if  companies don't                                                               
feel  Alaska is  a  stable environment,  and if  it  is going  to                                                               
continue to raise taxes, the oil price may not matter.                                                                          
CHAIR GIESSEL thanked Ms. Moriarty  for her testimony and invited                                                               
Mr. Seckers to testify.                                                                                                         
4:06:15 PM                                                                                                                    
DAN  SECKERS,  Tax  Counsel, ExxonMobil  Corporation,  Anchorage,                                                               
Alaska, said SB 130 is  a "very concerning piece of legislation."                                                               
Addressing  Senator Costello's  question, he  said ExxonMobil  is                                                               
committed to Alaska.  They had been here for many  years and will                                                               
continue  to  pursue  attractive investment  opportunities;  they                                                               
look  forward  to being  here  for  many  years to  come.  Alaska                                                               
remains  a very  important component  of ExxonMobil's  investment                                                               
He   underscored  that   ExxonMobil  recognizes   the  difficulty                                                               
legislators face as policymakers  in tackling the state's current                                                               
budget  problems while  still trying  to protect  current revenue                                                               
streams and trying to keep Alaska  as a very competitive place to                                                               
do  business.  Tax  policy  decisions  fundamentally  impact  the                                                               
economic health of  the state and those companies  that are doing                                                               
business  in the  state.  Those tax  policy  decisions will  move                                                               
Alaska either towards  or away from its vision of  the future for                                                               
oil  and gas  development.  The  need for  Alaska  to maintain  a                                                               
competitive   and  stable   fiscal  regime   that  attracts   and                                                               
encourages   long-time,    critical   investments    and   future                                                               
investments to  develop its resources  especially in  today's low                                                               
price environment is  one of the most important  issues the state                                                               
faces, ExxonMobil believes.                                                                                                     
MR. SECKERS  said they appreciate  the need to close  the state's                                                               
fiscal gap,  but ExxonMobil believes  that any tax  policy change                                                               
should be weighed  against the potential negative  impacts on the                                                               
state's long-term  investment climate.  The real  question before                                                               
legislators seems to  be whether or not raising taxes  on the oil                                                               
and gas  industry at a time  when the DOR has  testified that the                                                               
companies are  losing money  is consistent  with their  vision of                                                               
Alaska's future, and  if they believe that such  action will lead                                                               
to more jobs,  lead to more investment, lead  to more production,                                                               
and lead  to more long-term  sustainable state revenues,  or will                                                               
it in fact, just make matters worse?                                                                                            
MR.  SECKERS said  ExxonMobil supports  AOGA's testimony  that SB
130  represents a  significant tax  increase on  the oil  and gas                                                               
industry.  They  also  agree  with   the  comments  made  by  the                                                               
legislative  consultants,  enalytica,   that  SB  130  represents                                                               
further  instability  in  Alaska's  tax and  fiscal  policy,  and                                                               
undermines the  economics and investments  that were made  in the                                                               
past and  those that  are being contemplated  for today  and into                                                               
the future. SB  130 will not improve  Alaska's overall investment                                                               
climate; it  will not  lead to  more industry  jobs; it  will not                                                               
help maintain  or increase  production, and it  will not  lead to                                                               
sustainable,  long-term   revenues  for   the  state.   In  fact,                                                               
ExxonMobil believes it will do the exact opposite.                                                                              
4:10:25 PM                                                                                                                    
He said SB 130 will create  a major disincentive for companies to                                                               
invest in  the high cost,  high risk, environment that  is Alaska                                                               
and  reduce Alaska's  global  competitiveness.  For those  reason                                                               
ExxonMobil opposes SB 130.                                                                                                      
MR. SECKERS  said the impacts  of SB  130 can be  summarized into                                                               
three  categories: one  is substantive  law changes,  another are                                                               
procedural changes,  and the  other is  the overall  state policy                                                               
concerns. SB 130  affects each and every one  of those categories                                                               
in a  profoundly negative way.  While ExxonMobil believes  SB 130                                                               
as a whole  is a bad bill,  its key impacts are  first: it raises                                                               
the  minimum  tax  from  4  to  5  percent,  which  represents  a                                                               
substantial regressive  tax increase. It represents  a minimum of                                                               
25 percent  increase. As  the legislature's  consultant testified                                                               
that under today's  low prices, the state is already  at or above                                                               
100 percent of total government  take. Raising taxes on companies                                                               
in that  scenario on the very  activity of producing oil  and gas                                                               
is not  a wise nor  a long term feasible  solution and it  is not                                                               
sound tax policy.                                                                                                               
Secondly,  Mr.  Seckers  said, hardening  the  minimum  floor  in                                                               
section  17  will  prevent  companies  from  realizing  the  true                                                               
economics  of  their  investments   by  preventing  critical  tax                                                               
credits  from being  used to  reduce or  offset the  minimum tax.                                                               
Disallowing  companies from  using  any earned  or available  tax                                                               
credits to reduce their minimum  tax would represent an immediate                                                               
and  significant  tax  increase,  and  it  would  penalize  those                                                               
companies who  made prior year  investments even while  they were                                                               
losing money. It  would also penalize companies  that continue to                                                               
make  current   investments  or  are  planning   to  make  future                                                               
investments   from  realizing   the  true   economics  of   their                                                               
investment despite the  low price environment. He  said that AOGA                                                               
summed it up correctly in  saying that this provision will affect                                                               
large or  small companies; those  that have new oil  tax credits,                                                               
exploration  credits, loss  credits, and  who  may be  in a  loss                                                               
position today  because of  low prices and  who are  depending on                                                               
those credits to help continue to make investments in the state.                                                                
Further, this  provision would deny  that economic  recovery when                                                               
they  need it  the most.  This  provision, by  announcing to  the                                                               
world that  Alaska is willing  to adversely affect  the economics                                                               
of prior  and future  investments simply  for short  term revenue                                                               
needs,  would   significantly  and  negatively   impact  Alaska's                                                               
investment  climate and  the  perception  of Alaska's  investment                                                               
climate to any future investor.                                                                                                 
4:13:09 PM                                                                                                                    
MR. SECKERS stated that section 17  of SB 130 doesn't stop there.                                                               
"This 'bad boy'  has a double-edged sword."  Preventing a company                                                               
from fully utilizing  its tax credits from any  month against its                                                               
total  production  liability  for  the  year  is  nothing  but  a                                                               
"disguised tax increase."                                                                                                       
He explained  that the  production tax  is an  annual tax,  not a                                                               
monthly  tax. It  is paid  in monthly  installments from  monthly                                                               
estimates. This proposal  would, in effect, migrate  the tax into                                                               
more of  a monthly  tax which  is a  significant change,  and the                                                               
repeated suggestion  that this bill  only affects  the per-barrel                                                               
credits  or the  legacy field  credits is  simply not  true. This                                                               
section of the bill has the  potential to impact every single tax                                                               
credit.  This  means  that  companies  with  small  producer  tax                                                               
credits, exploration credits,  and loss credits could  each be at                                                               
the risk  of losing tax  credits, or worse, having  them deferred                                                               
or actually losing them, and "that is a tax increase."                                                                          
MR.  SECKERS  explained that  the  production  tax is  an  annual                                                               
estimated tax that  a company files 12  monthly installments for,                                                               
and  a lot  of  variables go  into  that. One  is  the fact  that                                                               
companies can  only claim one-twelfth of  its estimated expenses,                                                               
not actual expenses, every month.  They can only take one-twelfth                                                               
of fixed  credits or carry overs  from a prior year  in any given                                                               
month. That is why the  payments are called estimates. "True ups"                                                               
are filed  at the end  of the year  and on  March 31 of  the next                                                               
year and those reflect the total  economics of the entire year of                                                               
operations. This  bill would require almost  perfect estimates to                                                               
be filed for numbers they can't  possibly know. If they don't hit                                                               
it exactly, any credit they could  have claimed the next month or                                                               
at the  end of  the year will  either be deferred  or it  will be                                                               
lost forever, and some of these credits do not carry forward.                                                                   
4:16:28 PM                                                                                                                    
Another hidden  tax increase  is in section  31 that  keeps gross                                                               
value  at the  point  of  production from  going  below zero.  He                                                               
explained that  the production  tax is  not filed  on a  field by                                                               
field basis like  the Economic Limit Factor (ELF) used  to be; it                                                               
is a segment by segment tax. When  PPT was put in place, which is                                                               
the  foundation of  the current  law, it  created four  segments:                                                               
Cook Inlet,  Cook Inlet  gas, Middle Earth  and the  North Slope.                                                               
Separate  returns  are not  filed  for  Prudhoe Bay,  Kuparuk  or                                                               
Endicott;  they file  one for  the entire  segment, which  is the                                                               
North Slope. Thus if a company  is producing from a remote field,                                                               
the gross  value of  that unit goes  negative (because  of marine                                                               
transportation  costs  or  pipeline  costs, the  value  of  those                                                               
investments (in  a pipeline or  in marine tankers) are  not lost,                                                               
because it  is all  consolidated at  the end of  the year  as one                                                               
economic segment of  activity. This provision says  no, the gross                                                               
value can't go below zero, and  therefore the costs that drove it                                                               
there are  now lost forever. "That  is a tax increase.  That they                                                               
never tell you; that is a disguised tax increase."                                                                              
4:18:19 PM                                                                                                                    
MR.  SECKERS said  section 8  addresses confidentiality  and this                                                               
provision  would  allow  the DOR  to  make  significant  taxpayer                                                               
confidential and  sensitive information available to  the public.                                                               
This  information  is  currently  confidential  and  rightly  so.                                                               
ExxonMobil, even they are partners  with BP and ConocoPhillips in                                                               
various fields,  remain competitors  with them and  are prevented                                                               
by   federal  law   from   discussing   and  disclosing   certain                                                               
information. In  addition, they are  bound by  their shareholders                                                               
from  disclosing sensitive  proprietary,  and maybe  commercially                                                               
advantageous, information.  The section  8 provision  would allow                                                               
the DOR to release almost  anything regarding company activities,                                                               
and  this  is  particularly  important  in  looking  at  the  net                                                               
operating loss  (NOL), which is  determined by looking at  what a                                                               
company  sold a  product  for  all and  all  its  costs way  down                                                               
through the  value chain.  Would that  make their  contracts open                                                               
for disclosure, because that is how they get their revenue?                                                                     
4:20:13 PM                                                                                                                    
MR. SECKERS  said along with  all the  tax increases, SB  130 has                                                               
procedural changes  that could also  raise taxes. Section  2, the                                                               
hardening  of the  minimum tax  floor  and the  inability to  use                                                               
credits on a  monthly basis, is made retroactive to  January 1 of                                                               
the year. That  means by the time this bill  reaches its ultimate                                                               
conclusion,  taxpayers  would  have  already filed  a  number  of                                                               
estimated  installments  based   on  current  law.  Retroactively                                                               
applying  these changes  onto companies  that have  already filed                                                               
installments could expose them to punitive action.                                                                              
SB  130 would  reduce  Alaska's  overall global  competitiveness.                                                               
Raising taxes when many companies  are reporting record losses on                                                               
the very  activity that this  bill is trying  to tax is  poor tax                                                               
policy, and Ms. Moriarty numbers  are correct: it costs companies                                                               
more to produce a  barrel of oil on the North  Slope than the oil                                                               
is  currently  worth. All  are  losing  money. Raising  taxes  on                                                               
companies like  that at  that time will  force them  to reexamine                                                               
short and long-term investment behavior  and is inconsistent with                                                               
the  state's   long  term  vision   of  promoting  oil   and  gas                                                               
MR. SECKERS said  ExxonMobil is committed to Alaska  and wants to                                                               
be here  for a long time.  They look forward to  investing in all                                                               
attractive investment opportunities, but  if taxes are increased,                                                               
especially  in  this  economic environment,  they  will  have  no                                                               
choice but to reevaluate all their investment decisions.                                                                        
4:24:28 PM                                                                                                                    
SENATOR COSTELLO  asked him what  is happening in other  areas of                                                               
the  world.  How are  other  governments  responding to  the  low                                                               
commodity prices?                                                                                                               
MR.  SECKERS  answered  that  he couldn't  speak  about  all  the                                                               
jurisdictions, but when he talked  to the legislative consultant,                                                               
Mr.  Mayer,  he  said  most countries'  regimes  are  looking  to                                                               
incentivize or  encourage continued  investment in  their states.                                                               
He  is not  aware of  any jurisdiction  that is  trying to  raise                                                               
taxes or government take when companies are losing money.                                                                       
4:25:35 PM                                                                                                                    
SENATOR  STEDMAN  said when  legislators  look  at tax  code,  no                                                               
matter which one Alaska  is in - PPT, ACES or  SB 21 - complexity                                                               
is enemy  to both, and  instability doesn't do anybody  any good.                                                               
Currently, the  system is way  too complex. Even  the legislature                                                               
has a  hard time understanding  under certain  price environments                                                               
what its side of the table is going to look like.                                                                               
The current  tax code  provides for  a 35  percent tax  with some                                                               
credits moving  around. He personally  had never seen a  firm pay                                                               
the 35  percent tax rate  since the state  has had it  and didn't                                                               
think  he ever  would, because  of the  deductions it  allows. In                                                               
trying to find a way of  stabilizing this environment, he was not                                                               
so  sure they  shouldn't  go  back and  listen  to some  previous                                                               
testimony from  another major back  during PPT when  the proposal                                                               
was 8, 10, or 15 percent or even zero.                                                                                          
SENATOR STEDMAN said  he had a 13-page amendment  that would just                                                               
have a time out  on taxes below $55. It would get  rid of all the                                                               
credits and complexity  and allow the state  to collect royalties                                                               
and income  tax (which  he doubts  there is  any at  low prices),                                                               
property  tax,  which you  can't  get  away  from, and  zero  out                                                               
severance. Would that increase or decrease stability?                                                                           
4:28:27 PM                                                                                                                    
MR.  SECKERS  commented that  it's  hard  to provide  a  detailed                                                               
response without seeing  the entire proposal, because  of all the                                                               
variables. Would  prior investment be grandfathered  or would the                                                               
losses just  disappear all  of a sudden?  He also  cautioned that                                                               
when companies look to invest,  they look at the total government                                                               
take,  the  bottom   line.  But  he  admitted  that   it  was  an                                                               
interesting concept.                                                                                                            
He  underscored  the  desirability  of stability  and  said  that                                                               
constantly reviewing tax law is  troubling. He strongly suggested                                                               
running it  by a consultant and  getting an idea of  how it would                                                               
rank Alaska globally in terms of fiscal competitiveness.                                                                        
SENATOR  STEDMAN said  it wouldn't  be  retroactive and  wouldn't                                                               
take place until the end of  this calendar year. But he wanted to                                                               
know if Mr. Seckers  thought it would be a tax  increase or a tax                                                               
decrease in this price environment.                                                                                             
MR. SECKERS  replied that  it is  hard to  project that  on every                                                               
company,  because  they  are  all  different. It  may  be  a  tax                                                               
decrease for a  company that is in a  current taxpaying position.                                                               
For companies with  a lot of credits it may  be neutral, but they                                                               
might lose the benefit going forward.                                                                                           
4:32:34 PM                                                                                                                    
CHAIR  GIESSEL said  section 27  provides that  a company  gets a                                                               
transferable  or  cashable  credit  based on  percent  of  Alaska                                                               
resident hire of and asked if it applies to ExxonMobil.                                                                         
MR.  SECKERS   answered  that  provision  relates   to  cashable,                                                               
refundable credits and under law,  ExxonMobil doesn't qualify for                                                               
them and  he also  has a concern  about the  constitutionality of                                                               
such a  provision. However,  he said that  ExxonMobil has  a very                                                               
high level of Alaskan employment.                                                                                               
SENATOR STEDMAN  said he  has very few  constituents who  work in                                                               
the  oil patch,  but  a  couple of  young  guys  worked at  Point                                                               
Thomson  and were  very impressed  with the  operation there  and                                                               
want to stay working in the industry.                                                                                           
CHAIR  GIESSEL  said  one  of her  constituents  announced  at  a                                                               
community  meeting that  she  is a  contract  housekeeper at  the                                                               
Point Thomson development and was very excited about it.                                                                        
4:35:44 PM                                                                                                                    
JOE  REESE,  Sr.  Managing Tax  Counsel,  BP  Alaska,  Anchorage,                                                               
Alaska, said  BP is a member  of AOGA and supports  the testimony                                                               
Ms.  Moriarty provided  earlier  today  on SB  130.  He said  the                                                               
success of Alaska's oil and gas  tax policy is critical to BP, to                                                               
the  AKLNG  Project,  and  to  all Alaskans  who  depend  on  the                                                               
successful exploration,  development, and production  of Alaska's                                                               
oil and gas resources. A  durable, predictable, administrable tax                                                               
policy must be in place to unlock those benefits.                                                                               
From BP's  perspective, he said  a durable tax policy  means that                                                               
BP can  count on  it being the  same tomorrow as  it is  today. A                                                               
predictable  tax policy  means  it  can be  modeled  and from  an                                                               
investment perspective BP  can determine how the  tax policy will                                                               
impact their  investment decisions. Administrable means  they can                                                               
file their  tax return  accurately and when  it's due.  These are                                                               
the three things BP thinks about when they consider tax policy.                                                                 
MR.  REESE  said  BP  is  committed to  maintaining  a  safe  and                                                               
compliant business in  Alaska that is sustainable.  Over the past                                                               
two  years there  has been  a 70  percent drop  in oil  price. In                                                               
2015, BP paid approximately $263  million in taxes and royalties.                                                               
That  resulted in  a financial  loss of  $194 million.  These are                                                               
publically available numbers that are in their 20F filing.                                                                      
Under the  current market  conditions, he  said BP's  business in                                                               
Alaska is  spending more than it  is bringing in and  that is not                                                               
sustainable.  As  a  result,  BP is  taking  the  very  difficult                                                               
decision  to undertake  a 17  percent reduction  in force  and is                                                               
working  with  their  Prudhoe  Bay  working  interest  owners  to                                                               
analyze  the  activity  level  at   Prudhoe  Bay  and  adjust  it                                                               
according to the current price environment.                                                                                     
SENATOR MICCICHE joined the committee.                                                                                          
4:38:40 PM                                                                                                                    
MR. REESE  said a 1-percent  increase in the minimum  tax equates                                                               
to approximately  six months of rig  time at Prudhoe Bay;  it's a                                                               
significant  increase in  taxes and  cost to  their business.  He                                                               
repeated  that  operating  under   a  predictable,  durable,  and                                                               
administrable oil and gas tax  policy is essential to maintaining                                                               
the activity level of Prudhoe Bay  and the long term viability of                                                               
the AKLNG Project.                                                                                                              
SENATOR COSTELLO said  the administration is asking to  go from 4                                                               
to 5  percent and some are  considering that to actually  be a 25                                                               
percent  increase and  asked  what he  means when  he  says a  1-                                                               
percent increase.                                                                                                               
4:40:49 PM                                                                                                                    
MR. REESE clarified that the 1  percent raise from 4 to 5 percent                                                               
is a 25 percent increase in the  minimum tax. He added that BP is                                                               
committed to complying with tax  laws in a responsible manner and                                                               
to  having open  and constructive  relationships with  tax policy                                                               
makers. One of the major costs  of BP's business in Alaska is the                                                               
oil  production   tax,  and  while  BP   is  currently  cash-flow                                                               
negative,  they still  pay oil  production  tax, because  certain                                                               
cash costs  are not  deductible such as  their investment  in the                                                               
AKLNG Project and other specifically delineated restrictions.                                                                   
At  current prices,  Prudhoe Bay  doesn't  currently receive  oil                                                               
production  tax  credits, but  BP  doesn't  support limiting  the                                                               
production  tax credits  under SB  21. That  is because  it would                                                               
negatively impact the  oil and gas industry as  a whole including                                                               
the  many  companies that  made  investments,  created jobs,  and                                                               
added production in Alaska based off of that tax policy.                                                                        
Just as the  industry is struggling to make ends  meet, the state                                                               
also  faces  severe budget  shortfalls  and  BP recognizes  that.                                                               
While reasonable  people may disagree  about how to  make changes                                                               
to improve  the current oil  and gas tax  policy, now is  not the                                                               
right time  to increase taxes  on businesses that  are struggling                                                               
to make ends meet, and it  would further inhibit their ability to                                                               
maintain their activity  level at Prudhoe Bay.  Near term changes                                                               
in  the state's  oil  and  gas tax  policy  will  have long  term                                                               
consequences for all.                                                                                                           
4:41:55 PM                                                                                                                    
MR. REESE said  the presenters before him had  hit the highlights                                                               
of the issues  with SB 130 and  he wanted to touch  on six items.                                                               
He wouldn't belabor them because they had been stated before.                                                                   
One  is  the  administration  has proposed  an  increase  in  the                                                               
minimum  tax from  4 to  5  percent and  it does  represent a  25                                                               
percent tax increase that equates  to approximately six months of                                                               
rig  time at  Prudhoe Bay.  It would  have a  chilling effect  on                                                               
additional investment in Alaska.                                                                                                
Second, the administration is  proposing an artificial limitation                                                               
to  the use  of  credits.  Their concern  that  law provides  for                                                               
production  tax  to  be  calculated  on  an  annual  basis  using                                                               
forecasted  prices  and  estimated  costs as  opposed  to  actual                                                               
numbers,  and  having  an   end-of-the-year  "true-up."  The  new                                                               
provision in  SB 130 would cap  the amount of credits  that could                                                               
be  used based  on what  a company  claims in  a given  month. BP                                                               
doesn't   believe   that  would   lead   to   a  predictable   or                                                               
administrable tax policy, because it  would be impossible to file                                                               
tax returns correctly at the time they are due.                                                                                 
Third,  the administration  is proposing  a material  increase in                                                               
the  interest rate  for tax  overpayments and  underpayments. The                                                               
current rate  is 3 percent over  the federal fund rate  and it is                                                               
calculated using simple  interest methodology. The administration                                                               
has proposed a significant increase  to that and for the interest                                                               
to  be   compounding.  However,   Mr.  Reese  pointed   out,  the                                                               
administration typically takes the full  six years of the statute                                                               
of  limits to  provide companies  with their  assessments and  as                                                               
that interest clicks  along, 7 percent compounded could  be up to                                                               
$.55  per  dollar, a  significant  amount  of interest  before  a                                                               
company ever  knows there is  an issue.  That does not  allow for                                                               
predictability when they model their activities.                                                                                
Fourth, the  administration proposed a  limitation on use  of the                                                               
Net Operating Loss (NOL) tax  credit, which would penalize people                                                               
who made investment  decisions based on the tax law  and now that                                                               
they  are in  a position  where the  cash flow  doesn't meet  the                                                               
expenses,  they wouldn't  be allowed  to utilize  that NOL  going                                                               
forward. BP believes that is not durable or predictable.                                                                        
Fifth,  Mr.  Reese  said,  the  administration  has  proposed  an                                                               
erosion of  taxpayer confidentiality.  Mr. Reese  emphasized that                                                               
the production tax  is a self-reporting tax much  like the income                                                               
tax, and the quid pro quo  for that is that the taxpayer, because                                                               
they give the  information to the DOR or the  IRS, in return they                                                               
get confidentiality of that data.  It's different than a property                                                               
tax,  for   instance,  where  the  government   looks  at  market                                                               
indicators of a  property, sets the value, assesses  the tax, and                                                               
you pay the tax. That's  public. The difference really comes down                                                               
to anti-competitive behavior. How  will that information be used?                                                               
Will their  competitors be able  to see BP's  commercial dealings                                                               
and will  that lead to  anti-competitive behavior?  And secondly,                                                               
there is  a constitutional  question around  violating privileges                                                               
and immunities  to be forced to  provide confidential information                                                               
and have that be disclosed by someone.                                                                                          
For both  reasons, BP believes that  taxpayer confidentiality and                                                               
the erosion of taxpayer confidentiality is bad tax policy.                                                                      
4:45:45 PM                                                                                                                    
Last, Mr. Reese said, retroactive  and mid-year changes to law or                                                               
regulations  make it  extremely  difficult if  not impossible  to                                                               
administer the tax.  BP can't file its returns  accurately if the                                                               
game  changes  mid-way.  Again,  he   said  BP  is  committed  to                                                               
maintaining safe  operations in  Alaska that are  sustainable and                                                               
they  are committed  to complying  with tax  laws and  developing                                                               
relationships   with   tax   policy  makers.   They   support   a                                                               
predictable, administrable oil and gas  tax policy and that's why                                                               
they do not support SB 130.                                                                                                     
4:46:32 PM                                                                                                                    
SENATOR MICCICHE said everyone agrees  that transparency with the                                                               
public  is good  when  possible,  and asked  him  to explain  the                                                               
problems with taxpayer confidentiality.                                                                                         
MR.  REESE  explained  the  best analogy  to  use  is  everyone's                                                               
individual  income  taxes. The  federal  income  tax is  a  self-                                                               
reporting  system. This  means the  taxpayer writes  down on  his                                                               
return  his  income, deductions,  and  credits  and submits  that                                                               
under penalties of  perjury to the IRS, and then  they review and                                                               
determine whether  it has been  reported accurately or  not. That                                                               
is a very similar system to  the production tax, which is a self-                                                               
reporting system.                                                                                                               
The  concern  is  that  the  appetite  for  disclosure  is  never                                                               
satisfied until everything is disclosed,  and as an individual in                                                               
the community,  he would not want  his income taxes shown  to his                                                               
neighbor; it's none  of their business. In  the business context,                                                               
there  are  anti-trust   laws  that  require  BP  to   act  in  a                                                               
competitive  way,  and  if  they are  forced  to  disclose  their                                                               
commercial relationships  to their  competitors, especially  in a                                                               
place  like Alaska  where  there aren't  as  many competitors  as                                                               
there may  be in  the Lower  48, one  can quickly  get to  a spot                                                               
where  there is  anti-competitive  behavior going  on that  would                                                               
violate federal law.                                                                                                            
Secondly,   a  company   has  a   constitutional  right   to  not                                                               
incriminate itself regarding whether  they know about a violation                                                               
of the  law or  not and  they can't  be forced  to give  up their                                                               
constitutional right  to keep confidential information  that will                                                               
be used only to administer the tax.                                                                                             
SENATOR MICCICHE said that was a  partial answer, and asked if he                                                               
were to disclose details of  a commercial contract how that could                                                               
disadvantage BP in competition with other companies.                                                                            
MR. REESE answered that he is  not an anti-trust attorney, but he                                                               
could share  a simple  example of how  that information  could be                                                               
used  to manipulate  the marketplace.  If a  party was  forced to                                                               
disclose their contract  for a helicopter, and  they had retained                                                               
that helicopter to  perform services for them and  they paid them                                                               
a certain  amount. If  their competitors were  to have  access to                                                               
that  information, then  they  could go  to  the same  helicopter                                                               
operator and  say I want a  better deal, $99 instead  of the $100                                                               
that the  first party was charged.  So now it's no  longer a free                                                               
market, competitive environment. Private  information can be used                                                               
to manipulate the marketplace.                                                                                                  
CHAIR   GIESSEL  said   one  of   the  arguments   made  by   the                                                               
administration to increase the interest  rate and compound it for                                                               
tax  returns is  their assertion  that companies  short-pay their                                                               
taxes. So,  this would  be a  motivator for  companies to  not do                                                               
that. She asked if that is a realistic argument.                                                                                
MR.  REESE  answered  that  is   just  false  and  a  little  bit                                                               
offensive. He elaborated:                                                                                                       
     They are basically  accusing us of lying  or maybe even                                                                    
     less  than basically,  and we  have every  incentive to                                                                    
     pay our  tax when it is  due. We want to  pay the right                                                                    
     amount of tax.  We want to pay the right  amount of tax                                                                    
     when  it's due.  We sign  a return  under penalties  of                                                                    
     perjury,  and   none  of  us  would   intentionally  do                                                                    
     anything  that  would   jeopardize  ourselves  in  that                                                                    
Secondly, he said,  many laws are already in  place to discourage                                                               
short-paying  taxes. "BP  does not  short-pay  their taxes,"  Mr.                                                               
Reese stated.  A provision  would have to  be created  to resolve                                                               
uncertain tax issues.                                                                                                           
4:54:19 PM                                                                                                                    
SENATOR  STEDMAN said  this is  the  same question  he asked  the                                                               
ExxonMobil  representative. Why  not  take the  severance tax  to                                                               
zero in trying to get some  stability and fairness in the state's                                                               
tax structure.  His amendment uses  the trigger price of  $55 and                                                               
it is not retroactive.                                                                                                          
MR.  REESE  responded that  a  simple  tax  policy is  easier  to                                                               
administer,  but  he  would  have   to  model  Senator  Stedman's                                                               
proposal to see  how it impacts business. He said  there are four                                                               
areas  of  government  take  in  Alaska, at  a  minimum:  one  is                                                               
royalty,  one is  production tax,  one is  property tax,  and the                                                               
last is state corporate income  tax. Those all represent costs to                                                               
the business  and the more  their costs  go up the  less activity                                                               
they are  able to conduct in  the state. If their  costs go down,                                                               
then they can make judgments about increasing their activity.                                                                   
SENATOR STEDMAN said  severance tax, of the  four components they                                                               
struggle  with, is  the hardest  to  resolve. That  is where  the                                                               
instability lies, and making it  zero would simplify that matter.                                                               
He asked Mr. Reese to comment.                                                                                                  
MR. REESE agreed that the  production tax gets the most attention                                                               
and it  has been the  most volatile of  the four taxes.  For them                                                               
the  equation  is  simple:  an increase  to  the  production  tax                                                               
increases their  costs and reduces their  investment; a reduction                                                               
to  production  tax  reduces  their  costs  and  allows  them  to                                                               
increase their investment.                                                                                                      
4:58:20 PM                                                                                                                    
SCOTT JEPSON,  Vice President, External  Affairs, ConocoPhillips,                                                               
Anchorage, Alaska, introduced himself.                                                                                          
PAUL RUSCH,  Vice President, Finance,  ConocoPhillips, introduced                                                               
MR. JEPSEN related  that ConocoPhillips is not a  member of AOGA,                                                               
so they may  have some slight differences of  perspective, but by                                                               
and large they are basically aligned.                                                                                           
He  walked them  through the  activities that  ConocoPhillips has                                                               
embarked upon since SB 21 was passed  in 2013 and then took a few                                                               
minutes  to talk  about  how ConocoPhillips  has  reacted to  the                                                               
current economic  environment. Mr. Rusch would  walk them through                                                               
SB 130  and talk  about their key  concerns. They  would conclude                                                               
with a few observations.                                                                                                        
Since SB  21, Mr. Jepsen  said, ConocoPhillips has done  a number                                                               
of things: added two rigs to  the Kuparuk rig fleet, which helped                                                               
stem the decline out of the  Kuparuk River field, and ordered two                                                               
new rigs to  be built, one which has already  been delivered. The                                                               
other one  will be  delivered later  this year.  Prior to  SB 21,                                                               
ConocoPhillips had  three rigs  in its  rig fleet  between Alpine                                                               
and Kuparuk. Since then, they have  averaged about 5 - 6 rigs for                                                               
the two fields, but they are down  to four right now. One rig was                                                               
sent over  to BP, but  they will pick  up another rig  later this                                                               
year and be  back up to 4  rigs later this year.  More rigs leads                                                               
to more production.                                                                                                             
ConocoPhillips  has also  invested  $500 million  in bringing  on                                                               
stream the  first new drill  site at  Kuparuk in 13  years, drill                                                               
site 2S. It will produce  about 8,000 barrels/day. They have also                                                               
embarked upon expanding their viscous  oil production at West Sac                                                               
in the Kuparuk field called 1H-News  (North East West Sac). It is                                                               
similar to drill site 2S in  terms of the kind of production they                                                               
expect to  get, the amount of  money it cost to  develop, and the                                                               
people they  used to  construct it.  However, they  have deferred                                                               
drilling on 1H-News in response to low oil prices.                                                                              
MR. JEPSEN said  they had built the modules  and transported them                                                               
to drill site 1H on the North  Slope. They are powered up to stay                                                               
warm for drilling  next year and 1H-News should see  first oil in                                                               
MR. JEPSEN said that ConocoPhillips  has also been pursuing their                                                               
new developments in the National  Petroleum Reserve Alaska (NPRA)                                                               
having received the key permits  for Greater Mooses Tooth (GMT) 1                                                               
and have made the  decision to move forward on it.  It is about 9                                                               
miles west  of CD-5  (this development is  moving west).  It will                                                               
cost  about $900  million to  develop and  a peak  gross rate  of                                                               
30,000 barrels a  day is expected. Hundreds  of construction jobs                                                               
will be  generated and  first oil is  anticipated in  2018. Right                                                               
now they are in the  process of ordering materials and finalizing                                                               
their engineering.                                                                                                              
5:03:26 PM                                                                                                                    
ConocoPhillips  has  another development  9  miles  west of  GMT1                                                               
called GMT-2.  It will  be a bigger  development than  GMT-1, but                                                               
its engineering is not  as far along as it is  for GMT-1. It will                                                               
cost  in excess  of  $1  billion and  take  about  700 people  to                                                               
construct  it. He  didn't have  an estimated  production rate  at                                                               
this time.                                                                                                                      
MR. JEPSEN said  ConocoPhillips made the decision  to pursue CD-5                                                               
in 2012  before SB 21 was  passed having spent quite  a few years                                                               
since 2002  trying to  get it permitted.  They were  hopeful that                                                               
they had made a good decision.                                                                                                  
5:04:07 PM                                                                                                                    
The last thing Mr. Jepsen said  they had done since 2013 is drill                                                               
two exploration wells at NPR-A.  They shot seismic over the GMT-1                                                               
area so  they could better  ascertain the  size of the  field and                                                               
plan its development. This year  they are drilling three wells in                                                               
NPR-A;  two of  them are  about  9 miles  west of  GMT-2 and  the                                                               
other, called Hyperion, is off of CD-5.                                                                                         
MR. JEPSEN  said he wanted to  correct the record about  a number                                                               
of things.  One is  that none of  their production  qualifies for                                                               
the  GVR.  Some  of  it  could potentially,  but  they  felt  the                                                               
regulatory  requirements  would  be difficult  and  expensive  to                                                               
meet,  and didn't  even file  for it.  So, the  comment that  all                                                               
fields since 2002 are getting the GVR is not accurate.                                                                          
To put  things in  context, ConocoPhillips has  a total  of three                                                               
rigs in the Lower  48: one in the Bakken and  2 in the Eagleford.                                                               
One  of  the   reasons  they  are  continuing   to  pursue  their                                                               
development  in  Alaska is  because  of  the positive  investment                                                               
climate,  especially  after  SB   21  was  passed.  Ramping  down                                                               
activity in  Alaska is not  easy. It's not  like in the  Lower 48                                                               
where you  have short-term  rig contracts  and can  go pick  up a                                                               
Jones rig next  week. There is a lot of  momentum when things are                                                               
rolling and it is difficult to shut them down.                                                                                  
Right now  BP is  their key  partner at  Kuparuk and  Anadarko is                                                               
their key  partner at  NPR-A, and  BP supports  ConocoPhillips in                                                               
these decisions. They have momentum and  want to try to keep that                                                               
momentum going  and hopefully outlast  this trough in  oil price.                                                               
If the  price doesn't go up,  they will have to  take measures to                                                               
try to get back to a neutral cash flow, at least.                                                                               
5:07:00 PM                                                                                                                    
He said  slide 4, labeled  "Capital Spending Trends," had  a line                                                               
plot that  showed oil price  versus time and  a bar chart  in the                                                               
upper left corner that  showed ConocoPhillips's corporate capital                                                               
expenditures during  the same time  period. They peaked  at about                                                               
$17  billion in  2014  and have  been ramping  down  at a  steady                                                               
decrease that  mirrors the price  of oil since then.  Their capex                                                               
is down about 63 percent from 2014.                                                                                             
Slide  4  provided a  graph  of  ConocoPhillips's investments  in                                                               
Alaska since 2012  and a graph of the percentage  of their Alaska                                                               
investments relative to  ConocoPhillips's total corporate capital                                                               
expenditures was  below it.  During the key  ACES years  of 2007-                                                               
2012, and when oil prices  were considerably higher than they are                                                               
today, ConocoPhillips averaged about $800 million per year.                                                                     
After SB 21 passed, in  partial response to the better investment                                                               
climate, ConocoPhillips started to  ramp up its investments. This                                                               
year  (late  2015)  they  had  anticipated  spending  about  $1.3                                                               
billion in  Alaska, but  that has  been ramped  back to  about $1                                                               
billion, still a pretty healthy-sized investment.                                                                               
MR. JEPSEN  said the bottom  plot showed the percentage  of their                                                               
Alaska   expenditures   relative   to   their   total   corporate                                                               
expenditures, which  has been  coming up  as a  total percentage.                                                               
The take  away message here  is that ConocoPhillips  is investing                                                               
differentially in  Alaska and  for all  the reasons  he mentioned                                                               
5:09:20 PM                                                                                                                    
He said  that slide 5  graphed the "crux  of the issue."  The "Y"                                                               
axis  shows net  cash flow;  the "X"  axis shows  ANS West  Coast                                                               
price and the  different colored bars show how much  the state is                                                               
making, how much the federal  government takes in income tax, and                                                               
how much the investors get from the North Slope in the blue.                                                                    
The state's share excludes tax  credits other than the per barrel                                                               
production  tax credits.  The reason?  It's  pretty difficult  to                                                               
figure out  how and when  they are going to  be taken, or  if the                                                               
state  will allow  them or  not.  It's one  of the  discretionary                                                               
items that  the state has  in its  control. In the  current price                                                               
environment the  state has positive  cash flow and  the investors                                                               
are  negative. It  stays that  way  up until  somewhere north  of                                                               
$50/barrel.  But even  above  that price,  the  state's share  is                                                               
larger than the investor's share under the current tax regime.                                                                  
MR. JEPSEN said that there  have been comments that severance tax                                                               
isn't high enough or it  should be higher, but ConocoPhillips and                                                               
others  in the  industry don't  just look  at severance  tax when                                                               
they make their investments, they  look at total government take.                                                               
It  plays the  biggest part  in  their assessment  of the  fiscal                                                               
framework in the  areas in which they invest.  Severance tax goes                                                               
up as  the price goes  up, and it's a  majority of the  free cash                                                               
flow. He  turned the presentation over  to Mr. Rusch to  give his                                                               
perspective on these key items.                                                                                                 
5:10:52 PM                                                                                                                    
MR. RUSCH  said slide 6  identifies key  concerns with SB  130, a                                                               
number  of  which  have been  detailed  by  previous  presenters.                                                               
However,  these  represent some  very  important  issues for  the                                                               
industry. The  previous slide demonstrating that  the industry is                                                               
losing  money is  the strongest  argument against  increasing the                                                               
minimum  tax from  4  to  5 percent  and  will  continue in  that                                                               
position until upwards of $50/barrel.                                                                                           
ConocoPhillips'  net cash  flow  last year  was  a negative  $100                                                               
million-plus,  at   $52/barrel.  Oil   price  is  now   south  of                                                               
$40/barrel.  If prices  don't improve  they  will be  in an  even                                                               
worse position that will result in reduced investment in Alaska.                                                                
The concern they have with hardening  the floor is that they will                                                               
lose the ability  to use those losses, and those  are real losses                                                               
on expenditures  made in Alaska  at a  time when the  industry is                                                               
losing money. ConocoPhillips continues  to be committed to Alaska                                                               
and wants  to invest  for the future,  but with  that restriction                                                               
those investments effectively got more expensive.                                                                               
5:13:17 PM                                                                                                                    
MR. JEPSEN  commented that  just because they  are in  a negative                                                               
cash flow does  not mean they incur net operating  losses. A fair                                                               
amount of expenses and costs  don't get included when calculating                                                               
NOLs. Last  year, for example,  ConocoPhillips was not in  an NOL                                                               
situation. He wasn't sure about this year.                                                                                      
5:13:36 PM                                                                                                                    
MR.  RUSCH said  they just  received their  tax audit  from 2009,                                                               
which  was six  years  and three  months after  the  end of  that                                                               
calendar  year. Interest  was accruing  for  that entire  period.                                                               
That  interest clock  doesn't start  when the  audit is  done; it                                                               
starts in the first month of the year.                                                                                          
ConocoPhillips also  just closed  out their  2006 audit,  but the                                                               
appeal process took  nine years. That is not a  trivial amount of                                                               
time  and compound  interest component  can  actually be  greater                                                               
than the underlying audit issues.                                                                                               
He  said the  current  system, partly  because it  is  a net  tax                                                               
system, has a  fair level of uncertainty  about the deductibility                                                               
of certain  expenses. In one year  an item may be  deductible and                                                               
the  following year  it may  get challenged.  The bottom  line is                                                               
that  uncertainty makes  it very  difficult to  predict what  the                                                               
final tax assessment will be.                                                                                                   
5:15:35 PM                                                                                                                    
MR. RUSCH said  the DOR has expressed concern  that oil companies                                                               
might migrate the  per-barrel tax credits across  months. The tax                                                               
law is  very clear that it  is an annual tax,  and the suggestion                                                               
that  it  isn't goes  against  the  clearer guidelines  that  are                                                               
already in statute.                                                                                                             
He also  pointed out  that a  significant amount  of confidential                                                               
data is already  being reported to the DOR and  the DNR about and                                                               
companies are in  no way saying they aren't going  to comply with                                                               
5:17:27 PM                                                                                                                    
MR. JEPSEN  observed in  summary that  any significant  change in                                                               
the tax law  just reemphasizes their concern  about the inability                                                               
of the State  of Alaska to implement a stable  oil and gas fiscal                                                               
policy. It's only been 19 months  since SB 21 was ratified by the                                                               
voters.   They  understand   the  state's   fiscal  issues,   but                                                               
ConocoPhillips is  basically in  the same position.  Everyone has                                                               
to  do something  to manage  their way  through this,  and asking                                                               
just industry to solve the problem is not fair.                                                                                 
He  said ConocoPhillips  makes multiple  billions  of dollars  of                                                               
investments  in Alaska  and  since  2007, it  has  paid over  $26                                                               
billion  to  the  State  of  Alaska. However  a  pattern  of  tax                                                               
instability raises  the question  whether or not  Alaska actually                                                               
competes for capital  relative to other places  where their money                                                               
can be invested. The most  damaging thing about continual changes                                                               
in  tax policy  is  what  it does  to  a corporations'  long-term                                                               
philosophy for investing in Alaska.                                                                                             
MR. JEPSEN added that they  thought the House Resources Committee                                                               
Substitute (CS) was  a vast improvement and  amendments are being                                                               
taken right  now. So, they  will see what  comes out of  that and                                                               
tell them what they think. He  repeated if there are increases in                                                               
tax that  increase their  costs, they  will take  it out  of what                                                               
they  are spending  today. They  don't have  excess cash  flow to                                                               
spend on taxes.                                                                                                                 
5:19:33 PM                                                                                                                    
SENATOR  STEDMAN asked  to go  back  to slide  5 and  said it  is                                                               
helpful for industry  to use the same dataset as  the state does,                                                               
the Revenue  Sources Book. It  shows in  FY17 there will  be $570                                                               
million in  credits but when they  get applied is up  in the air.                                                               
The  Revenue Sources  Brook used  $39/barrel and  the chart  uses                                                               
$40/barrel. It  would be  helpful to have  that bar  chart parsed                                                               
when the NOLs are discussed.                                                                                                    
SENATOR STEDMAN said the state  continually tries to get a stable                                                               
tax environment,  but they never seem  to get there and  it might                                                               
actually be  making it worse,  to the  point where the  state has                                                               
trouble understanding it. He asked  Mr. Jepsen's thoughts on just                                                               
getting rid of the severance tax - "Take it to zero."                                                                           
5:21:32 PM                                                                                                                    
MR. JEPSEN responded that he would  have to look at that in terms                                                               
of  their past  investments, their  current investments,  and the                                                               
price framework they intend to be  in, and see if it makes sense.                                                               
"Is  it substantially  better, and  is it  worth going  down that                                                               
path?" It  sounds intriguing,  but one of  the concerns  would be                                                               
that it is just another  substantial change in the tax framework,                                                               
and there is  no guarantee that after next  year someone wouldn't                                                               
think they gave away the farm  with a zero severance tax and want                                                               
to revisit it.                                                                                                                  
5:22:59 PM                                                                                                                    
SENATOR STEDMAN  said both sides of  the table are trying  to get                                                               
stability, because this  isn't good for the  state's business nor                                                               
the industry's business,  and they are in  business together. So,                                                               
jointly nobody wins in this game.                                                                                               
He asked if CD-5  is on private land and how  that works with the                                                               
tax  code.   It's  not  a   loaded  question,  but  more   of  an                                                               
informational question, because most of  the time they talk about                                                               
what is on state land.                                                                                                          
MR. JEPSEN responded  that CD-5 is a combination  of Arctic Slope                                                               
Regional  Corporation (ASRC)  minerals and  federal minerals.  So                                                               
production there is  predominantly coming off of  state lands and                                                               
ASRC  lands.  ASRC  obviously  gets   the  royalties  from  their                                                               
production  and 50  percent  of the  royalties  from the  federal                                                               
production come back  to the State of Alaska.  Those royalties is                                                               
directed to  be spent on  the villages in the  National Petroleum                                                               
Reserve  Alaska  (NPRA) that  surround  that,  basically for  the                                                               
benefit of the North Slope Borough.                                                                                             
CD-5 is located on Kuukpik  Corporation surface land, so it's the                                                               
first  development   that  is   on  Native-owned   surface  land.                                                               
ConocoPhillips  has  worked  very  closely with  the  Village  of                                                               
Nuiqsut and Kuukpik Corporation and  the ASRC in its development.                                                               
So far,  they are drilling  wells and  fully expect to  see their                                                               
initial  expectation of  about 16,000  barrels a  day of  average                                                               
SENATOR STEDMAN  said he  thought it  was good  to point  it out,                                                               
because  it is  a significant  issue that  the committee  and the                                                               
public should know about.                                                                                                       
MR. JEPSEN emphasized that they do  pay severance tax even if the                                                               
development is on private land or federal lands.                                                                                
5:25:39 PM                                                                                                                    
CHAIR GIESSEL pointed out an  important fact: that ConocoPhillips                                                               
does something  that the other  two majors don't. It  reports its                                                               
quarterly  profits  and losses  in  a  procedure that  is  called                                                               
"separate  accounting."   She asked  him why  ConocoPhillips does                                                               
MR.  JEPSEN corrected  her that  it's not  "separate accounting;"                                                               
it's called "segment reporting."                                                                                                
CHAIR GIESSEL asked him to explain why they do that.                                                                            
MR. RUSCH answered that they  don't do it voluntarily, because it                                                               
puts a bit  of a microscope on their results.  It's purely driven                                                               
by   Securities   and   Exchange   Commission   (SEC)   reporting                                                               
requirements.  What triggered  it  for  ConocoPhillips was  their                                                               
upstream/downstream  business, which  simply made  their upstream                                                               
business smaller. As they created  the segments to report, Alaska                                                               
became a material segment for SEC reporting.                                                                                    
SENATOR MICCICHE  asked why  ConocoPhillips is  investing heavier                                                               
in  Alaska than  in the  rest  of the  Lower 48.  ConocoPhillips'                                                               
Alaska capex  went from 6 percent  in FY12 to 13  percent in FY15                                                               
and to 16 percent in FY16.                                                                                                      
MR. JEPSEN answered that ConocoPhillips  ramped up investments in                                                               
Alaska after  passage of SB 21  and have a lot  of momentum going                                                               
now and  think they have  some good opportunities  here. Momentum                                                               
is important because  it's difficult to get the  permits and rigs                                                               
in place as  well as alignment with the partners.  Once a project                                                               
gets started,  ramping down  is equally  difficult. If  you think                                                               
there's an opportunity  you want to maintain  that optionality to                                                               
continue with  the level of  investment that you have.  Right now                                                               
they  have a  lot of  stuff in  place and  are "investing  in the                                                               
future," although they aren't making money in Alaska.                                                                           
5:29:16 PM                                                                                                                    
DAVID  WILKENS,   Sr.  Vice   President,  Hilcorp   Alaska,  LLC,                                                               
Anchorage,  Alaska, said  Hilcorp is  the largest  privately held                                                               
oil and gas  company in the U.S. It is  headquartered in Houston,                                                               
Texas,  and  has  operations  in  the Gulf  Coast  of  Texas  and                                                               
Louisiana, the northeast  U.S. in Ohio and  Pennsylvania, as well                                                               
as Alaska's  Cook Inlet and  the North  Slope. It was  founded in                                                               
1989 and  has 1400 full  time employees.  Just over 500  of those                                                               
employees  support their  Alaska  operations and  90 percent  are                                                               
Alaskans including himself.                                                                                                     
MR.  WILKENS said  Hilcorp  operates  approximately 53,000  gross                                                               
barrels of  oil per day and  150 million cubic feet  of gross gas                                                               
sales per  day from approximately  500 producing wells for  a net                                                               
production of approximately 57,000  barrels of oil equivalent per                                                               
day. Hilcorp's  assets are  primarily, although  not exclusively,                                                               
older fields  with extensive production  histories of  steady and                                                               
predictable  performance  that  carry  an  incredible  amount  of                                                               
opportunity for getting more oil and  gas out of the ground. It's                                                               
the company's business  model. They do it  safely and responsibly                                                               
while extending production lives  through efficiency in thousands                                                               
of small-scale projects.                                                                                                        
MR. WILKENS said  the state needs to attract  more companies like                                                               
Hilcorp  as  its  infrastructure   continues  to  age.  Hilcorp's                                                               
production  in Alaska  is  approximately 40  percent  of what  it                                                               
produces company-wide.  So, their  success in Alaska  is critical                                                               
to their  overall company's success. From  Hilcorp's perspective,                                                               
the  credits in  question have  resulted in  more investments  in                                                               
Alaska, and more  production both on the North Slope  and in Cook                                                               
He  said it's  no secret  that  Hilcorp has  been a  big part  of                                                               
reviving energy  security in Southcentral  Alaska. Over  the past                                                               
four years  they have  invested over $1  billion in  projects and                                                               
have drilled  over 50 wells in  the Cook Inlet area.  As a result                                                               
of  this  investment  and  the  increased  production,  they  are                                                               
sending more oil to be refined and used in Alaska.                                                                              
5:33:11 PM                                                                                                                    
Due  to  Hilcorp's significant  investments  over  the past  four                                                               
years,  Mr. Wilkens  said, they  are now  making longer  term gas                                                               
supply commitments at a lower price  out into the year 2023. They                                                               
continue to stand  by their commitment to  serve Alaskan's energy                                                               
needs first and  are working to ensure a  reliable and affordable                                                               
energy source for Alaska's largest population hub.                                                                              
MR.  WILKENS reminded  them that  prior to  Hilcorp's entry  into                                                               
Alaska in 2012,  brown outs were a widespread concern  as well as                                                               
the  need for  utilities to  import natural  gas to  meet demand.                                                               
Expecting outages,  many people  bought electric  generators, but                                                               
he is proud that with  Hilcorp's results none of those generators                                                               
were needed.                                                                                                                    
He  said that  Hilcorp's  success certainly  didn't come  without                                                               
challenges.  Developing oil  and natural  gas in  the Cook  Inlet                                                               
basin carries a very high  cost of production coupled with annual                                                               
decline rates  that vary from  15-50 percent. The simple  fact is                                                               
that if  they did  not continue spending  money on  projects that                                                               
bring  on  new production  the  declines  cannot be  curbed.  So,                                                               
Hilcorp believes  it is  in their best  interest and  the state's                                                               
best interest to  continue spending dollars on  trying to produce                                                               
more  oil and  gas  in the  Cook Inlet  basin.  Victory can't  be                                                               
declared or  Alaska will be  back in the same  boat it was  in at                                                               
the end  of 2011. It's  also no  secret that Alaska's  tax credit                                                               
system  and the  Cook  Inlet  Recovery Act  were  key drivers  in                                                               
bringing Hilcorp to Alaska and their investments to date.                                                                       
Since 2012,  Mr. Wilkens said,  Hilcorp has spent  $3.5-4 billion                                                               
total  in   capital  and  acquisition  costs   in  Alaska.  Those                                                               
investments were  aimed at one  primary goal: increasing  oil and                                                               
gas production.  And since 2012,  they have  increased production                                                               
by about  40 percent. How  do they do  it? The answer  is simple.                                                               
They  have   and  continue   to  make   significant  investments,                                                               
investments  that  were  encouraged  by the  state's  tax  credit                                                               
program and  investments that did  just exactly what  the credits                                                               
were intended to do: increase energy supply for Alaskans.                                                                       
Their success has  been meaningful to many,  including the state.                                                               
Increase production  levels of  oil and natural  gas in  the Cook                                                               
Inlet  basin has  resulted in  increased royalty  rates, property                                                               
taxes, and jobs. One example of  this is looking at their monopod                                                               
offshore platform. In January 2012  right after Hilcorp took over                                                               
operations, the realized oil  price was approximately $95/barrel.                                                               
Production on  the monopod  was 600 barrels  per day,  a marginal                                                               
rate for an offshore platform that has a high operating cost.                                                                   
5:37:07 PM                                                                                                                    
Because  of the  marginal  rate and  low  profitability from  the                                                               
monopod, it  qualified for royalty  relief under HB 185  that was                                                               
passed in  2003. The  royalty rate was  reduced to  help maintain                                                               
profitability for  the platform  so it  would not  be shut  in or                                                               
permanently  abandoned. As  the royalty  owner, the  state's take                                                               
from  the monopod  at  that time  was  approximately $90,000  per                                                               
month. This was when oil was $95 a barrel.                                                                                      
Over the past four years, Mr.  Wilkens said Hilcorp has done over                                                               
150  projects on  the  monopod,  most of  which  were smaller  in                                                               
scope,  and  has  increased  production  to  approximately  3,000                                                               
barrels of oil a day. Because  of the increase in production, the                                                               
state's royalty  share is  back up to  the standard  12.5 percent                                                               
and  even with  prices at  $35/barrel, the  state's royalty  take                                                               
from the  monopod has increased  to about a  half-million dollars                                                               
per month,  five times  more royalty going  to the  state despite                                                               
prices declining  by 60 percent.  Furthermore, and  probably more                                                               
important, their success  at the monopod has  added 20-plus years                                                               
of production life and approximately  8 million barrels of future                                                               
oil production.  The monopod  is not  an isolated  anomaly. Since                                                               
Hilcorp's entry into the Cook  Inlet area in 2012, oil production                                                               
has  doubled, which  has increased  oil royalty  to the  state in                                                               
these four years by over $70  million. And even though oil prices                                                               
are   lower  this   year,  estimated   oil   royalties  will   be                                                               
approximately  $10 million  more this  year than  what they  were                                                               
right before Hilcorp took over.                                                                                                 
5:39:46 PM                                                                                                                    
Hilcorp's  success in  increasing  oil production  over the  past                                                               
four years has also increased  future estimated oil production by                                                               
20-30 million  barrels in the Cook  Inlet area. That is  just the                                                               
oil. That's  meaning future  royalty to the  state. He  said, "We                                                               
need more results like this."                                                                                                   
He also  offered that the state  needs a system in  place that is                                                               
stable, predictable and incentivizes  - not penalizes - continued                                                               
investments. Hilcorp's  Cook Inlet success  is a good  example of                                                               
the  state putting  good policy  in  place aimed  at achieving  a                                                               
positive result and then getting one.                                                                                           
MR.  WILKENS  remarked  that  the  credits  Hilcorp  earned  were                                                               
"absolutely reinvested in  the state." They have  managed to work                                                               
their way above the 50,000/barrel/day  mark through both projects                                                               
and  acquisitions   and  a  lot   of  hard  work.   Breaking  the                                                               
50,000/barrel/day  mark  means they  can  no  longer cash-in  the                                                               
credits in  question, but other  budding companies can  still use                                                               
those  credits, and  Hilcorp is  a company  that always  welcomes                                                               
competition  and   encourages  other  companies,   especially  in                                                               
Alaska,  to succeed.  Hilcorp  wants to  help  promote a  healthy                                                               
industry throughout  the state, because an  active industry means                                                               
additional service  companies will not  only stay but  maybe even                                                               
come to Alaska, which will in turn lower costs.                                                                                 
5:41:24 PM                                                                                                                    
MR. WILKENS  said a lot  of the discussion regarding  the credits                                                               
has involved  the Cook Inlet  basin, primarily because  they were                                                               
wildly successful.  Their success in  the Cook Inlet is  what has                                                               
fueled Hilcorp's interest in expanding  to the north in November,                                                               
2014,  when they  purchased three  of  BP's fields  on the  North                                                               
Slope: Milne Point,  Endicott, and North Star.  When Hilcorp took                                                               
over   operations  there,   all  three   fields  were   producing                                                               
approximately   36,000  gross   barrels/day.   Today,  they   are                                                               
producing  about 37,000  gross barrels/day  and after  a year  of                                                               
working these assets, he is  very excited about the opportunities                                                               
he sees. They  have a comprehensive list that they  can invest in                                                               
for years  to come:  wells needing to  be drilled,  projects that                                                               
will put  more oil in  the pipeline  and support hundreds  if not                                                               
thousands of jobs in Alaska.                                                                                                    
Hilcorp has  one drilling  rig running on  the North  Slope today                                                               
and would like  to pick up a  second before the end  of 2016. But                                                               
in  today's price  environment and  in the  face of  an uncertain                                                               
state fiscal structure, it is  yet to be determined what projects                                                               
move  forward and  when. They  have  to be  very thoughtful  with                                                               
every penny they spend.                                                                                                         
MR.  WILKENS  said  investment budgets  are  shrinking  and  they                                                               
compete with  other oil  and gas  producing areas  throughout the                                                               
world,  and   within  Hilcorp,  as   well.  He   wants  Hilcorp's                                                               
investment dollars  to come to  Alaska. They have to  continue to                                                               
work hard to  build efficiencies and cut costs  while ensuring it                                                               
is  done safely  and  without causing  harm  to the  environment.                                                               
"Cutting  costs, not  corners, is  the only  way we  will survive                                                               
this downturn," he said.                                                                                                        
5:44:12 PM                                                                                                                    
He   asked  legislators   to   recognize   that  change   creates                                                               
uncertainty  and uncertainty  affects investments  and jobs,  and                                                               
investments,  whether for  exploration  or  development, are  the                                                               
only  way to  increase production.  Increasing production  is the                                                               
only way  to get out  of this spot.  Alaska can't afford  to have                                                               
less production.                                                                                                                
MR. WILKENS  said that he  had worked over  the past 30  years in                                                               
several other basins throughout  the U.S. and internationally and                                                               
can say  with confidence that  Alaska has changed its  tax policy                                                               
more in  the past few  years than he has  seen in other  areas in                                                               
decades.  He  wants to  keep  Alaskans  working and  to  increase                                                               
production, but  his company  simply isn't  going to  continue to                                                               
invest  hundreds of  millions of  dollars  in Alaska  nor is  his                                                               
owner going to let him take a loan  out to pay his tax bill. That                                                               
is just not what they are going  to do, and the only other choice                                                               
is to cut something out.                                                                                                        
He  concluded  by  saying  that   the  uncertainty  they  are  in                                                               
threatens  their  ability  to plan  their  investments,  and  the                                                               
decisions  they make  today  will impact  the  economics and  the                                                               
opportunities to increase tomorrow's  production both in the Cook                                                               
Inlet and the North Slope.                                                                                                      
5:45:23 PM                                                                                                                    
SENATOR  COSTELLO related  that the  director of  the Alaska  Tax                                                               
Division,  Ken Alper,  came before  the  committee and  basically                                                               
said they  tried to incentivize  activity and that  happened. The                                                               
state got what it wanted with  the credits, and now it's going to                                                               
pull  them  back.  She  asked  him to  respond  to  that  way  of                                                               
MR.  WILKINS answered  that in  his  view the  tax credit  system                                                               
incentivizing  the behavior  the state  wants worked  beautifully                                                               
for the  Cook Inlet. Without them,  Cook Inlet would have  had an                                                               
"out of  business" sticker  in 2011/12. The  state propped  it up                                                               
with  wonderful success.  If  the implication  is  that they  are                                                               
going to  call victory and  be done, Cook  Inlet will be  back in                                                               
the same boat  very soon. He added that  policy that incentivizes                                                               
the behavior  the state  wants can  work on  the North  Slope, as                                                               
well.  He explained  that Hilcorp  reacts to  policies the  state                                                               
sets and the tax credit system  is one of the things that brought                                                               
them to Alaska in the first place.                                                                                              
5:47:50 PM                                                                                                                    
CHAIR  GIESSEL  said SB  130  addresses  transferable credits  in                                                               
section 27 and  bases them on Alaska resident hire,  and asked if                                                               
Hilcorp takes  advantage of those and  if so, how he  feels about                                                               
the requirement that they will be  based on the percent of Alaska                                                               
MR.  WILKINS responded  that he  isn't  the tax  person and  that                                                               
Hilcorp is proud  of the fact that they have  90 percent Alaskans                                                               
working.  He could  see where  tying  the credits  to that  would                                                               
result in  changing numbers and  tying it to  something arbitrary                                                               
like  that might  not  be sound  tax policy.  There  is also  the                                                               
constitutional question.                                                                                                        
SENATOR MICCICHE  asked him  to comment  on the  effect commodity                                                               
price of  gas has  on Hilcorp  and others  if the  incentives had                                                               
been lower if they kept the  attractive delta with Henry Hub that                                                               
they had last year.                                                                                                             
MR.  WILKINS  answered  that  Hilcorp  can  no  longer  take  the                                                               
cashable credits  as they  have worked  themselves out  of those.                                                               
But other companies  are budding that can take  advantage of them                                                               
and  they  are  very  important  to them.  On  the  gas  side  of                                                               
Hilcorp's business,  their investment decisions to  drill all the                                                               
wells were based on predictability  and stability. Hilcorp is not                                                               
a "build  and flip" type  of company.  When they make  a decision                                                               
they enter in and their track record  is that they are in for the                                                               
long haul.  Their business model  uses a 5  to 10 year  period to                                                               
get their money  back. Before they came into  Alaska they studied                                                               
the fiscal  landscape, and the  gas side  is more stable  than on                                                               
the oil side and that is a good thing.                                                                                          
SENATOR MICCICHE  said Hilcorp operates largely  in his district,                                                               
its  effects on  his community  with the  resurgence in  the Cook                                                               
Inlet   has  been   undeniable  and   positive.  They   are  very                                                               
appreciative  not  only   of  the  energy  supply   but  for  the                                                               
employment,  increased property  taxes,  and all  kinds of  other                                                               
CHAIR GIESSEL noted  that where Mr. Wilkens works used  to be her                                                               
district and recognized  how much his company  contributes to the                                                               
community in not just jobs,  but to non-profit organizations like                                                               
senior centers and other community endeavors.                                                                                   
MR. WILKINS  accepted her  recognition on  behalf of  the Hilcorp                                                               
5:52:25 PM                                                                                                                    
TOM  WALSH,  member  of  the Board  of  Directors  and  Executive                                                               
Committee, Alaska  Support Industry Alliance (Alliance),  said he                                                               
is  also  the  founder  and managing  partner  of  Petrotechnical                                                               
Resources of Alaska (PRA), but he  is testifying on behalf of the                                                               
Alliance in  opposition to SB  130 based on the  negative impacts                                                               
to client  companies and his  own company.  He said that  PRA had                                                               
experienced  a decline  in activity  and revenue  much like  many                                                               
other Alliance members in every  sector of the industry in Alaska                                                               
from  major  and small  independent  oil  and gas  producers  and                                                               
explorers  to  Native  corporations,  state,  local  and  federal                                                               
government   agencies,  and   the  Southcentral   Alaska  utility                                                               
In 2010-12  Mr. Walsh  said he  was in  Juneau stating  that Cook                                                               
Inlet was  running out  of gas  and now they  are seeing  a major                                                               
turn-around because of the credits.   The oil and gas business in                                                               
Alaska has a  tremendous breadth of skills  and experience across                                                               
the  full spectrum  of disciplines.  Two of  PRA's employees  are                                                               
recognized experts  in the current oil  tax statutes, regulations                                                               
and  processes.  PRA  was  established  in  1997  and  has  grown                                                               
steadily  over  the  years  to  a  peak  staffing  level  of  102                                                               
employees  in early  2012.  Recently, due  to  the depressed  oil                                                               
price and  associated crisis in the  industry, employment numbers                                                               
have declined to levels not seen in the past decade.                                                                            
5:54:57 PM                                                                                                                    
MR. WALSH  said PRA's payroll  is down  to 48 employees  and they                                                               
haven't  seen the  bottom yet.  Last  year, PRA  had 55  contract                                                               
employees   supporting  the   Prudhoe  Bay   unit  operator,   BP                                                               
Exploration  Alaska, Inc.,  and presently  they have  15 contract                                                               
employees at  BP. Activity levels  have crashed in the  last year                                                               
impacting  everyone in  the oil  and gas  industry including  the                                                               
major  producers and  large and  small  independents, alike.  The                                                               
service industry has been hit  very hard. It has seen significant                                                               
layoffs at  CH2M and Parker  Drilling among others.  The Alliance                                                               
has  surveyed member  companies and  can account  for over  2,000                                                               
layoffs in the industry in the  last year. PRA has lost over one-                                                               
half of its business and employees.                                                                                             
He said that last week, BP  faced one of the most difficult times                                                               
in  memory  with  respect  to employee  layoffs  in  Alaska,  and                                                               
globally.  After significant  cuts  last  year, approximately  17                                                               
percent of  the remaining  employees in  Alaska were  informed of                                                               
their pending layoffs.  His phone had been ringing  all week with                                                               
severed employees looking for work, which simply does not exist.                                                                
On  another sad  note, Mr.  Walsh said,  Caelus Energy  announced                                                               
this week that they will delay  development of its Nuna Field for                                                               
at least  one year due to  the low oil price  and the uncertainty                                                               
of  Alaska's  tax  structure.  All of  PRA's  clients  have  been                                                               
impacted  by this  continual uncertainty  in tax  structure; even                                                               
the perception of  instability has major impact  on the industry.                                                               
The investment community, which  has been backing exploration and                                                               
development projects,  has all but  vanished in Alaska  making it                                                               
difficult to impossible to finance oil and gas projects.                                                                        
He  said SB  130, if  adopted,  could mortally  wound an  already                                                               
critically ill oil and gas  industry in Alaska. Raising taxes and                                                               
removing  credits is  a bad  idea under  any circumstance  and is                                                               
fatally flawed  policy in the current  price environment. Raising                                                               
taxes on the industry in this  moment is analogous to selling oil                                                               
stocks at a  low point in the market. Alaska  is heavily invested                                                               
in oil and  gas even to a  fault, and selling out  now by raising                                                               
taxes and further  crippling the partners who  have developed the                                                               
state's most  valuable resource  in good times  and have  for the                                                               
last six  decades, and who are  now in a cash  negative status is                                                               
simply irrational, he said.                                                                                                     
He countered  that since PRA is  down by 50 percent  in contracts                                                               
and  revenue,  perhaps he  should  double  his hourly  consulting                                                               
rates to correct  for that downturn in business and  see how many                                                               
of his clients agree to pay it. He didn't think many would.                                                                     
5:58:59 PM                                                                                                                    
SENATOR COSTELLO asked  how Mr. Walsh would  respond to community                                                               
leaders across Alaska  whose message on an hourly basis  is to do                                                               
it  all: cut  the budget,  address the  credits and  taxes, raise                                                               
revenue, and  change the Permanent Fund,  and if you don't  do it                                                               
all you are  not representing what the people of  Alaska want you                                                               
to do. This has been a  constant and consistent message since the                                                               
beginning of session  and before. He must be aware  of it. People                                                               
are joining arms and marching  in lock-step saying every industry                                                               
must pay  and fairness must be  the value they put  forward when,                                                               
in fact,  all they have heard  in this committee meeting  is that                                                               
taxing an  industry that is losing  money just doesn't get  you a                                                               
good result.                                                                                                                    
MR. WALSH  responded that  the challenge  is tremendous,  but her                                                               
last point  is the  critical one.  The industry  is hemorrhaging;                                                               
all  the  companies  he  is  aware of  are  in  a  cash  negative                                                               
situation  with these  low oil  prices,  and that's  not just  in                                                               
Alaska,  but globally.  So there  is a  major ongoing  crisis and                                                               
raising the  taxes is absolutely  the wrong  thing to do  at this                                                               
point. It  will just  accelerate the decline  of the  industry in                                                               
Alaska, and we can't afford to do that.                                                                                         
CHAIR GIESSEL thanked Mr. Walsh.                                                                                                

Document Name Date/Time Subjects
SB130-ConocoPhillips Testimony to SRES-4-8-2016.pdf SRES 4/8/2016 3:30:00 PM
SB 130
SB130AOGA Presentation to SRES-4-8-2016.pdf SRES 4/8/2016 3:30:00 PM
SB 130
SB130-SRES-Testimony-BP-04-08-16.pdf SRES 4/8/2016 3:30:00 PM
SB 130
SB130-Testimony-Hilcorp- 4-08-16.pdf SRES 4/8/2016 3:30:00 PM
SB 130
SB130-Testimony-AOGA-4-8-2016.pdf SRES 4/8/2016 3:30:00 PM
SB 130