Legislature(2011 - 2012)HOUSE FINANCE 519

03/24/2011 08:00 AM FINANCE

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08:08:07 AM Start
08:10:24 AM HB110
04:22:22 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Continued at 1:30 pm Today --
Heard & Held
- Committee Discussion
- Presentation by Dept. of Natural Resources
- 1:30 - Presentation by Rick Harper,
Energy Consultant
- 3:00 - Dept. of Revenue
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 110                                                                                                            
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
8:10:24 AM                                                                                                                    
DAN   SULLIVAN,   COMMISSIONER,    DEPARTMENT   OF   NATURAL                                                                    
RESOURCES,  presented  a   PowerPoint  presentation:  "North                                                                    
Slope  Alaska and  Arctic  OCS Oil  and  Gas Potential."  He                                                                    
encouraged  the committee  to ask  about  the background  of                                                                    
each presenter.                                                                                                                 
Commissioner Sullivan discussed slide  3: "Good News, Alaska                                                                    
Oil and  Gas Resource  Potential: 'World Class.'"  He stated                                                                    
that   33  percent   (40   billion   barrels)  of   Alaska's                                                                    
undiscovered, technically  recoverable oil resources  was in                                                                    
the  Arctic.  He furthered  that  13  percent (230  tcf)  of                                                                    
Alaska's    undiscovered,   technically    recoverable   gas                                                                    
resources was in the Arctic.   He furthered that the numbers                                                                    
did not  include unconventional resources. He  stressed that                                                                    
the resource potential  of the Arctic was  in "the backyard"                                                                    
of the largest petroleum consuming market in the world.                                                                         
Commissioner  Sullivan  remarked  that   the  focus  of  the                                                                    
Department of Resources was to  work towards a comprehensive                                                                    
strategy.  He  stressed  that the  taps  throughput  decline                                                                    
issue  was the  main source  of  concern for  the state.  He                                                                    
expressed  concern with  some oil  companies' commitment  to                                                                    
exploration in the state, should the taxes be lowered.                                                                          
8:14:37 AM                                                                                                                    
Commissioner  Sullivan  stressed  that  the  tax  throughput                                                                    
decline was the  most important current issue.  He felt that                                                                    
the  issue  needed to  be  dealt  with greater  urgency.  He                                                                    
remarked that the Department of  Revenue (DOR) forecasts for                                                                    
the taps  throughput were  too optimistic.  He felt  the DOR                                                                    
incorporated   assumptions  and   billions  of   dollars  in                                                                    
investments  that  had not  yet  been  anticipated in  other                                                                    
Commissioner  Sullivan  stated  that Alaska  needed  to  get                                                                    
involved on the national level when  it comes to oil and gas                                                                    
contribution and  participation. He  pointed out  many large                                                                    
oil and  gas companies had  invested billions of  dollars in                                                                    
the  oil  and  gas  production and  exploration  outside  of                                                                    
Alaska. He stressed  that Alaska is rarely  mentioned in the                                                                    
plans  of the  oil and  gas company  investments. He  stated                                                                    
that Shell  Oil announced a  $100 billion four  year capital                                                                    
spending program; British  Petroleum (BP) publicly announced                                                                    
a  $10 billion  deal  in  Russia, and  $10  billion deal  in                                                                    
India; Conoco  Philips was doubling  spending to  $3 billion                                                                    
in the  lower 48, while  not increasing spending  in Alaska;                                                                    
and  Exxon Mobil  has discussed  doubling  US production  by                                                                    
2020. He reiterated that Alaska  was rarely mentioned in the                                                                    
spending plans of the oil companies.                                                                                            
8:19:34 AM                                                                                                                    
Co-Chair Stoltze  wanted to be  sure that  when Commissioner                                                                    
Sullivan   highlighted  "his   perspective",   it  was   the                                                                    
perspective  of  the administration.  Commissioner  Sullivan                                                                    
said that it was the perspective of the administration.                                                                         
Commissioner Sullivan stressed that  Alaska had the greatest                                                                    
conventional  and  unconventional hydrocarbon  resources  in                                                                    
the world.  He explained that  Alaska was often seen  as the                                                                    
world's  greatest hydrocarbon  basins. He  stated that  many                                                                    
see Alaska  as economically challenged because  of its harsh                                                                    
Arctic  environment; high  cost of  exploration; remoteness;                                                                    
lack   of  infrastructure;   transportation  costs;   strict                                                                    
environmental  regulations;  consistent environmental  group                                                                    
lawsuits;  permitting   inefficiencies;  federal  government                                                                    
anti-development policies;  litigation; and  the perspective                                                                    
that Alaska is  one of the highest tax regimes  in regard to                                                                    
upside  prices. He  stressed  that tax  reform  should be  a                                                                    
cornerstone  to   help  address   the  cost  to   create  an                                                                    
economically attractive environment.                                                                                            
8:22:37 AM                                                                                                                    
Commissioner Sullivan  stated that some viewed  Alaska's tax                                                                    
regime  relatively  uncompetitive.  He felt  that  the  high                                                                    
taxes turned a high-class  hydrocarbon basin into a mediocre                                                                    
hydrocarbon  basin.   He  pointed  out  that   there  was  a                                                                    
comparative  lack of  activity in  Alaska. He  stressed that                                                                    
there needed  to be  a balance  of the  tax regime  soon, to                                                                    
ensure  long  term prosperity.  He  felt  that there  was  a                                                                    
sequencing   of  opportunity   for   the  state:   increased                                                                    
production  in Legacy  Fields; focus  on smaller  pools; and                                                                    
opening federal lands.                                                                                                          
Commissioner  Sullivan stressed  that the  governor did  not                                                                    
put forward a tax reform  bill to benefit the oil companies,                                                                    
but to benefit  Alaskans in the long run.  He explained that                                                                    
the  purpose of  the discussion  was to  present the  expert                                                                    
view from DNR of the resource base.                                                                                             
Representative Guttenberg  stated that some of  the industry                                                                    
had remarked that Alaska was  profitable, but not profitable                                                                    
enough.  He  wondered  if  because  the  industry  took  the                                                                    
leases, that the companies have  an obligation to the state.                                                                    
Commissioner  Sullivan  stressed  that  there  should  be  a                                                                    
partnership with  industry, and  looking for  common ground.                                                                    
He stressed  that the leases  with the state  had provisions                                                                    
within the contracts.  He stressed that Alaska,  as a lessor                                                                    
had  a responsibility  to  be sure  the  lessee follows  the                                                                    
terms of the contract. He was  not sure that the lease terms                                                                    
required productions.  He remarked  that Alaska  was looking                                                                    
for  the  additional  billion dollar  investment  with  many                                                                    
different providers. He stressed  that the companies' global                                                                    
capital is spent throughout the  world, and not much is used                                                                    
in Alaska. He remarked that  there is a provision that could                                                                    
be  added to  a lease  term that  requires the  companies to                                                                    
spend more money in Alaska.                                                                                                     
Representative Doogan wondered if  the major producers would                                                                    
let the  pipeline go dry if  the Alaska did not  finance the                                                                    
producers. Commissioner  Sullivan responded that he  did not                                                                    
know  what  the industry  would  do.  He remarked  that  the                                                                    
companies might  stop supplying if  the state  tax structure                                                                    
did  not  change.  He  stressed that  the  state  of  Alaska                                                                    
competes for  global capital. He  stressed that there  was a                                                                    
global spending boom, with much economic growth.                                                                                
Representative   Doogan   requested    a   clearer   answer.                                                                    
Commissioner Sullivan declared that he did not know.                                                                            
8:34:39 AM                                                                                                                    
Representative  Costello wondered  why assurance  to develop                                                                    
was  not   given  in  writing   when  reducing   taxes.  She                                                                    
specifically referred  to the cruise ship  industry, and the                                                                    
recent  re-writing  of their  taxes.  She  wondered why  the                                                                    
state was unable to receive  assurance, after the effort was                                                                    
made to  change the  tax environment.  Commissioner Sullivan                                                                    
understood that  concern. He remarked that  there could have                                                                    
been anti-trust issues, and there  were legal constraints on                                                                    
the independent  providers. He stressed that  the settlement                                                                    
contained  a  statement from  the  cruise  ship industry  to                                                                    
ensure that Alaska is recognized  as a competitive entity in                                                                    
the  tourism  industry. He  remarked  that  he believed  the                                                                    
settlement was currently upheld.                                                                                                
Representative Costello wondered if  there was a fundamental                                                                    
difference between  the oil,  tourism, and  film industries.                                                                    
Co-Chair   Stoltze  further   queried  if   each  of   those                                                                    
industries  responded similarly  to  a  better tax  climate.                                                                    
Representative  Costello  further  wondered  what  summation                                                                    
could  be  made  at  what   was  driving  these  industries.                                                                    
Commissioner Sullivan  replied that the  state had to  be an                                                                    
attractive   place   to    do   business,   which   includes                                                                    
competition, production.  He felt it  would be nice  to have                                                                    
assurances, but did not know if that would be easy.                                                                             
8:42:47 AM                                                                                                                    
Representative  Gara   stressed  that  some   companies  had                                                                    
expressed that their lack of  exploration did not have to do                                                                    
with  ACES. He  stated that  Exxon had  said that  even with                                                                    
lower taxes,  they would not  drill an exploration  well. He                                                                    
stated that  Conoco Phillips' investment  was flat.  He felt                                                                    
that  issues that  Commissioner Sullivan  had addressed  had                                                                    
nothing to do  with ACES. He said that  some small companies                                                                    
requested credits be given after  one year, rather than two.                                                                    
Commissioner Sullivan replied  that he was trying  to give a                                                                    
sense  of how  Alaska  lined up  with  other investments  in                                                                    
other parts  of the  world related to  the oil  industry. He                                                                    
stressed  that there  was an  overall issue  of the  cost of                                                                    
doing  business   in  Alaska.  He  felt   that  the  federal                                                                    
government  put  up  many restrictions  towards  people  and                                                                    
companies attempting  to do business in  Alaska. He stressed                                                                    
that  Alaska had  a world  class hydrocarbon  base, but  the                                                                    
federal government could not allow drilling in Alaska.                                                                          
8:47:38 AM                                                                                                                    
Representative   Gara   remarked   that   the   restrictions                                                                    
mentioned  by  Commissioner  Sullivan only  dealt  with  the                                                                    
federal   government,   but   the   bill   was   about   the                                                                    
restructuring of  ACES. He also  stated that  investment had                                                                    
gone up four  times the rate of inflation  over the previous                                                                    
three  years:  from  4.7  billion  to  5.1  billion  to  5.5                                                                    
billion.  He requested  that Commissioner  Sullivan converse                                                                    
with each oil company representative,  and tell them that if                                                                    
they believe the tax rate  is too high-reduce their royalty.                                                                    
He stressed  that the  companies should  prove that  the tax                                                                    
structure was  too high. Commissioner Sullivan  replied that                                                                    
he  was using  that proposal,  and it  sometimes worked.  He                                                                    
stressed  that   there  were  some   statutory  restrictions                                                                    
pertaining  to   obtaining  royalty   relief,  but   it  was                                                                    
important  to continue  to  talk to  the  oil companies.  He                                                                    
reiterated that every  mechanism needed to be  used in order                                                                    
to ensure a prosperous future.                                                                                                  
Vice-chair Fairclough  wondered if there was  proof that the                                                                    
producers  had moved  the capital  expenditure off  of state                                                                    
property  because of  ACES.  Commissioner  Sullivan did  not                                                                    
Vice-chair Fairclough requested an answer.                                                                                      
8:53:39 AM                                                                                                                    
Representative  Neuman  requested  a  list  of  five  policy                                                                    
issues that should  be changed in DNR to  ensure that Alaska                                                                    
is  more  economically   attractive.  Commissioner  Sullivan                                                                    
stated that  there was  an issue  of permitting  backlog, so                                                                    
there  was a  request for  further funding  to relieve  that                                                                    
issue. He  hoped that regulatory  and statutory  ideas would                                                                    
be presented  in the next  legislative session.  He stressed                                                                    
that there were  about 75 different steps that  one needs to                                                                    
take when getting a permit to drill.                                                                                            
Representative  Neuman requested  information regarding  the                                                                    
impact of  lack of Trans-Alaska Pipeline  (TAPS) throughput.                                                                    
Commissioner    Sullivan   replied    that   the    pipeline                                                                    
coordinators  would be  more knowledgeable.  He stated  that                                                                    
when  he  was  in  Anchorage  just  after  the  most  recent                                                                    
pipeline shutdown, he  was struck that every  minute with no                                                                    
oil in the pipeline was incredibly important.                                                                                   
9:00:32 AM                                                                                                                    
Representative Wilson  asked questions, and did  not mind if                                                                    
the answers  would provided later. She  wondered what leases                                                                    
had been provided, she wondered  how many of the leases were                                                                    
oil companies,  how many may  have left because  of backlog,                                                                    
and she wondered  what the audits were in  the Department of                                                                    
Natural Resources.                                                                                                              
9:01:55 AM                                                                                                                    
Representative  Edgmon appreciated  the Commissioner's  view                                                                    
that the  issue was about  the welfare of Alaskans,  not the                                                                    
benefit   of   oil   companies.   He   wondered   what   the                                                                    
Commissioner's perspective was on  how ACES had impacted the                                                                    
global   marketplace    investment   climate    in   Alaska.                                                                    
Commissioner Sullivan  replied that there were  many factors                                                                    
of why  there was a  boom in  energy production in  2010. He                                                                    
stressed that  there was an  issue of a combination  of high                                                                    
prices, turmoil in oil producing  regions, and strong global                                                                    
economic growth. He stressed that  high prices hurt Alaskans                                                                    
but  high  prices, from  the  state's  perspective, were  an                                                                    
opportunity to collect more taxes.  He emphasized that there                                                                    
were  many factors  that contributed  to cost  component and                                                                    
investment  decisions  that  the  global  and  small  energy                                                                    
companies  made. He  stated  that taxes  were  one of  those                                                                    
factors, but  not the  only factor. He  felt that  the state                                                                    
should  be  focusing  on being  competitive  on  the  global                                                                    
level. Alaska  was competing for global  capital, and Alaska                                                                    
should be part of that competition.                                                                                             
Representative  Guttenberg pointed  out  that the  committee                                                                    
had  only heard  from the  industry  up until  this day.  He                                                                    
asked about  Point Thompson. He  was interested in  the main                                                                    
argument  about capital  related  to the  project. After  22                                                                    
years of  development plans  the lease  had been  pulled and                                                                    
litigation had ensued.  Commissioner Sullivan responded that                                                                    
Exxon had  been doing quite a  bit up at Point  Thompson and                                                                    
had been  spending a lot  as well. The state  was cautiously                                                                    
optimistic that the issue would  be settled soon. Working on                                                                    
common  interests   was  important.  He  was   reluctant  to                                                                    
characterize exactly what had  happened in the litigation as                                                                    
he had  not been directly  involved, it was the  largest gas                                                                    
field in  the world and  hopefully they could  work together                                                                    
to bring the gas to market.                                                                                                     
Representative Guttenberg queried  marketability and capital                                                                    
in Point  Thompson. Commissioner Sullivan agreed  to provide                                                                    
that information.                                                                                                               
9:10:35 AM                                                                                                                    
REPRESENTATIVE MIKE  HAWKER noted  a universal  agreement of                                                                    
the challenge  of production decline.  He stated  that there                                                                    
were many things that could  not be fixed, and perhaps there                                                                    
were  issues  with  things  that were  out  of  control.  He                                                                    
wondered  what  the  main  solution  would  be  to  the  oil                                                                    
production  decline problem.  Commissioner Sullivan  replied                                                                    
that  the point  of his  testimony was  intended to  provide                                                                    
discussion.  He  stated  that there  were  many  direct  and                                                                    
indirect solutions. He stated  that there is not necessarily                                                                    
an obvious solution,  but it was important for  Alaska to be                                                                    
a more economically competitive state.                                                                                          
Co-Chair  Stoltze   stated  that   he  would  like   to  see                                                                    
Commissioner Sullivan again in the week.                                                                                        
9:17:09 AM                                                                                                                    
KEVIN BANKS,  DIRECTOR, DIVISION OF OIL  AND GAS, DEPARTMENT                                                                    
OF NATURAL RESOURCES  presented the PowerPoint presentation:                                                                    
"Northern Alaska  and Arctic  OCS Resource  Estimates" (copy                                                                    
on file). He discussed his experience.                                                                                          
Mr. Banks  discussed slide  2, and the  lines of  data: land                                                                    
capital,  regulations,  exploration, and  production.  These                                                                    
lines were what the industry  looked at when determining the                                                                    
profitability of a specific area.                                                                                               
Mr.  Banks displayed  slide 3,  and pointed  out the  active                                                                    
units, and potential for exploration  on the North Slope. He                                                                    
stated that most of the units were on state lands.                                                                              
Representative  Guttenberg  wondered  if  the  northern-most                                                                    
line  represented the  barrier between  state lands  and the                                                                    
Outer Continental  Shelf (OCS). Mr. Banks  affirmed that the                                                                    
line  indicated OCS,  which contained  the three  mile state                                                                    
limit for resource development.                                                                                                 
Representative  Guttenberg wondered  how far  the OCS  shelf                                                                    
extended.  Mr. Banks  replied that  the  shelf extended  for                                                                    
approximately 100 miles.                                                                                                        
9:24:34 AM                                                                                                                    
Mr.  Banks  discussed  slide   4:  "North  Slope  'Reserves'                                                                    
Estimates, Developed  or Delineated."  He stressed  that the                                                                    
total North Slope  Oil estimate was 5166  Million Barrels of                                                                    
Oil  (MMBO) and  the gas  reserves was  estimated at  34,827                                                                    
Billion Cubic Feet  (BCF). He stated that all  of the fields                                                                    
on the list  had been producing oil, or would  soon begin to                                                                    
produce  oil. He  pointed out  that Prudhoe  Bay held  2,450                                                                    
MMBO,  and stressed  that the  resources in  any area  would                                                                    
follow a  regular pattern.  He pointed  out that  there were                                                                    
very few large prospects, but  many very small prospects. He                                                                    
reiterated that  Prudhoe Bay  held the  largest oil  and gas                                                                    
reserve in North America.                                                                                                       
Mr. Banks  presented slide 5:  "North Slope and  Arctic OCS,                                                                    
Discovered  and Undeveloped  Resource Estimates."  He stated                                                                    
that there  were some  other recently  discovered prospects.                                                                    
The numbers  and locations on the  chart illustrated ranges.                                                                    
He looked  at Umiat, and  stated that it could  have between                                                                    
70 and 300 MMBO. He stated  that Gubik could have 600 BCF of                                                                    
gas. He pointed out that  the challenge was determining what                                                                    
percentage of the resource could be recovered.                                                                                  
Co-Chair Thomas  wondered who had  found the  prospects. Mr.                                                                    
Banks replied that they were  discovered by different groups                                                                    
and people.  He believed that  Umiat had been  discovered by                                                                    
the  Navy;   Gubik  was  developed  by   Anadarko  Petroleum                                                                    
Corporation;  Sivilliq was  developed by  Atlantic Richfield                                                                    
Company (ARCO),  and Shell  is looking  to take  over; North                                                                    
Tarn was developed  by Brooks Range; Kulim  was developed by                                                                    
ARCO; Sandpiper may  have been developed by  Standard Oil of                                                                    
Ohio (SOHIO); and  FEX NPRA was a series of  wells that were                                                                    
drilled by FEX Talisman Energy.                                                                                                 
9:27:43 AM                                                                                                                    
Representative  Doogan  wondered  if   there  was  no  Exxon                                                                    
exploration and  development pertaining to those  areas. Mr.                                                                    
Banks  replied that  Exxon was  given  credit for  prospects                                                                    
around Nikaitchuq and Oooguruk.                                                                                                 
Mr. Banks displayed  slide 6: "Other North  Slope and Arctic                                                                    
OCS,  Undeveloped Resource  Estimates." He  stated that  the                                                                    
two  most  important  prospects were  Ugnu  and  Burger.  He                                                                    
stated that Ugnu had up to  20 billion barrels of heavy oil,                                                                    
and  British  Petroleum  (BP)   estimated  that  roughly  10                                                                    
percent  could   be  recoverable:  2  billion   barrels.  He                                                                    
explained that Burger had 31  million to 1.7 billion barrels                                                                    
of condensate, and 8 to 27 TCF of natural gas.                                                                                  
Co-Chair Thomas  queried the definition of  "heavy oil." Mr.                                                                    
Banks replied  that heavy  oil was  measured by  its gravity                                                                    
related to  water. He stressed  that it was a  difficult oil                                                                    
to produce. It  is very cold and viscous, had  to be held in                                                                    
shallow  reservoirs,   and  did  not  hold   easily  in  the                                                                    
reservoir.  The products  that one  could derive  from heavy                                                                    
oil are limited.                                                                                                                
Co-Chair Thomas requested more  information about what would                                                                    
be considered  a shallow reservoir. He  replied that shallow                                                                    
would be between 3000 to 5000 feet.                                                                                             
Representative Neuman  wondered what  it would take  to spur                                                                    
development. Mr.  Banks replied that the  real challenge was                                                                    
technology.   Technology  translates   to  high   costs.  He                                                                    
stressed  the   there  should  be  encouragement   from  the                                                                    
government to undertake production.                                                                                             
9:32:51 AM                                                                                                                    
Representative Neuman  wondered what  the chance  to acquire                                                                    
the undeveloped resources. Mr. Banks  replied that there was                                                                    
some development of  heavy oil prospects. He  stated that BP                                                                    
was beginning to work on  developing heavy oil, but stressed                                                                    
that  technology  needed  to   move  forward  for  continued                                                                    
development  success.   He  reiterated  that  most   of  the                                                                    
technology was experimental, so  it was difficult to predict                                                                    
how quickly development would progress.                                                                                         
Representative Neuman  remarked that  there was  a potential                                                                    
to change tax structures and  policies, so he wanted to know                                                                    
if it would get done because of changes.                                                                                        
BOB  SWENSON,  DIRECTOR,  DEPARTMENT OF  NATURAL  RESOURCES,                                                                    
presented  the  "Arctic  Alaska  Conventional  Oil  and  Gas                                                                    
Exploration  Potential" (copy  on  file).  He remarked  that                                                                    
there  was a  broad range  of possibilities  for exploration                                                                    
and  development. He  stated that  the red  dots on  the map                                                                    
represented  exploration  wells  on   the  North  Slope.  He                                                                    
pointed out that most of  the exploration was in the Prudhoe                                                                    
Bay  region.  He  discussed  "maturity  of  expiration."  He                                                                    
stressed  the distance  and vastness  of  the space  between                                                                    
Burger and Prudhoe  Bay covered the same  distance across as                                                                    
the  entire state  of Wyoming.  He stated  that the  area of                                                                    
exploration covered approximately  150,000 square miles, and                                                                    
there were about 500 exploration wells in that space.                                                                           
9:36:49 AM                                                                                                                    
Mr.  Swenson looked  at slide  2:  "Global Conventional  Oil                                                                    
Resources." He explained that the  slide displayed work from                                                                    
the  United   Stated  Geological   Survey  (USGS),   and  it                                                                    
displayed  estimates of  undiscovered technical  recoverable                                                                    
reserves.  The  map did  not  display  economic filters.  He                                                                    
stressed that  the larger green dots  represented areas that                                                                    
had potential  greater than  20 billion  barrels of  oil. He                                                                    
stressed  that the  map displayed  estimates  from the  year                                                                    
2000. He  said that  new numbers should  be released  in the                                                                    
next couple  of years.  He pointed out  that Alaska  did fit                                                                    
into a world class province,  and did not include the recent                                                                    
assessment by the USGS on the circum-Arctic.                                                                                    
Mr.  Swenson discussed  slide 3:  "Arctic Alaska  Province -                                                                    
30BB." He  explained that  the map displayed  was a  view of                                                                    
the North Pole, and a study  by the USGS and DNR on resource                                                                    
assessments  of  all the  circum-Arctic  basins  of oil.  He                                                                    
noted  that the  darker green  portions represented  greater                                                                    
than 10  billion barrels of oil  (BB), and were only  in the                                                                    
Alaskan province.  He stressed that there  was a significant                                                                    
amount  of  data in  Arctic  Alaska  to help  constrain  the                                                                    
resource assessments.                                                                                                           
Mr.  Swenson displayed  slide 4:  "CARA  Gas Provinces."  He                                                                    
pointed out that the gas  prospects were very similar to oil                                                                    
prospects.  He reiterated  that Arctic  Alaska held  greater                                                                    
than  100 trillion  cubic  feet  of technically  recoverable                                                                    
Mr.  Swenson  presented  slide   5:  "North  Slope  Regional                                                                    
Geology." He  stressed the  importance of  understanding the                                                                    
contributing   factors   in  determining   the   technically                                                                    
recoverable resource estimates. He  explained that the slide                                                                    
showed a regional  map of the North Slope,  which showed the                                                                    
Brooks  Range in  light blue,  and the  lighter green  color                                                                    
displayed the Colville Basin. He  stated that the main focus                                                                    
of  resource  development  was in  the  Colville  Basin.  He                                                                    
explained  that  the map  was  surface  geological, but  the                                                                    
resources  lie in  the  sub-surface.  Although, without  the                                                                    
understanding of  the distribution and history  of the rocks                                                                    
across  the   slope,  recoverable  resource   estimates  are                                                                    
9:40:10 AM                                                                                                                    
Mr. Swenson  discussed slide 6: "Simplified  and Generalized                                                                    
Regional Cross-section." He explained  that the chart showed                                                                    
the sub-surface of  the earth, from the Brooks  Range to the                                                                    
Beaufort Sea  area. He stressed  that the  thrusted material                                                                    
near  the  Brooks  Range had  very  high  temperatures.  The                                                                    
Colville Basin was represented in  green, and it was made up                                                                    
of cretaceous and tertiary rocks.  The arch in the middle of                                                                    
the  diagram represented  Prudhoe  Bay. It  was  known as  a                                                                    
barrel rock,  and the  migration of the  hotter oil  to move                                                                    
upward was located in Prudhoe Bay.                                                                                              
Mr.  Swenson  displayed  slide  7:  "Brooks  Range  Geologic                                                                    
Mapping." He stated that one  of the key aspects of resource                                                                    
development  assessments  was  the  geological  mapping.  He                                                                    
stressed  the importance  of understanding  the distribution                                                                    
and  history  of the  rocks  in  relation to  the  petroleum                                                                    
systems.  He explained  that the  highlighted sections  were                                                                    
areas that had relatively detailed geologic mapping.                                                                            
Mr. Swenson presented slide 8:  "Geologic Mapping." This was                                                                    
an example of  one of the published maps  that was produced.                                                                    
He showed  a cross-section  that represented the  history of                                                                    
rocks  were through  the last  million  years, and  detailed                                                                    
descriptions  of the  rock packages-including  the important                                                                    
9:43:17 AM                                                                                                                    
Mr.  Swenson discussed  slide 9:  "Topical Petroleum-related                                                                    
Studies."  He  stated  that   reservoir  studies  were  also                                                                    
important,  when determining  the possible  extraction of  a                                                                    
conventional resource. He stressed that  a key aspect of the                                                                    
Colville Basin was the quality  of the reservoir. He pointed                                                                    
out that depositional sequence of  the rocks was imperative,                                                                    
when determining extrapolating data.                                                                                            
Mr.  Swenson displayed  slide  10:  "Revising and  Codifying                                                                    
Stratigraphic  Nomenclature."  He  stated that  the  earlier                                                                    
stratigraphic  column displayed  the  age and  type of  rock                                                                    
across the North Slope.                                                                                                         
Mr.  Swenson  presented  slide   11:  "Merging  Surface  and                                                                    
Subsurface Data."  He stated that  it was important  to take                                                                    
all of  the information and  fit it into the  context basin.                                                                    
He  showed a  cross-section from  Umiat to  Prudhoe Bay.  He                                                                    
explained that  the findings were put  into the well-control                                                                    
in the exploration wells, and  determine an understanding of                                                                    
the  phases.  He  stated  that  the  diagram  displayed  the                                                                    
location of the expected reservoirs.                                                                                            
9:45:24 AM                                                                                                                    
Mr. Swenson discussed slide  12: "Foothills Structural Plays                                                                    
Seismic Interpretation." He stated  that the chart displayed                                                                    
a  seismic line  from  the  Brooks Range  to  just south  of                                                                    
Prudhoe Bay. He  stated that there was  also a consideration                                                                    
for how the petroleum system operates in the earth.                                                                             
Mr.   Swenson   presented   slide   13:   "USGS   Assessment                                                                    
Methodology--Geologic  Basis." He  explained that  after all                                                                    
the data  is gathered,  the USGS looks  at each  region, and                                                                    
conducts  an analysis  of what  would be  expected petroleum                                                                    
and reservoir system accumulations.                                                                                             
Mr.  Swenson displayed  slide 14:  "Undiscovered Mean  field                                                                    
Size   Distributions-USGS."  He   stated   that  after   the                                                                    
analysis,   field-size   distribution  is   determined.   He                                                                    
reiterated  that there  were many  small  fields. After  the                                                                    
field-size is  determined, the USGS  needs to  determine the                                                                    
extrapolating capability of the field.                                                                                          
Mr.  Swenson   presented  slide  15:  "USGS   Potential  for                                                                    
Undiscovered  Petroleum in  Arctic Alaska."  This slide  was                                                                    
the   USGS  publication   of  the   technically  recoverable                                                                    
resources  for  the  North   Slope  region:  Chukchi  Shelf,                                                                    
Beaufort  Shelf, NPRA,  ANWR,  and Central  North Slope.  He                                                                    
noted  that the  numbers  were determined  by a  logarithmic                                                                    
distribution, based  on the mean  of the  commonly occurring                                                                    
field  sizes.   He  explained  that   the  numbers   in  the                                                                    
parenthesis represented the  broad distribution. He stressed                                                                    
that the if  the range was very narrow  in the distribution,                                                                    
the amount of information was very good.                                                                                        
9:50:01 AM                                                                                                                    
Mr.  Swenson  discussed   slide  16:  "'Unconventional'  Gas                                                                    
Resources (continuous resources)." He  stated that there was                                                                    
a  fair amount  of activity  of  gas hydrates  on the  North                                                                    
Slope. He furthered  that the USGS estimated  that there was                                                                    
about  83 trillion  cubic  feet  of potentially  technically                                                                    
recoverable resources  in the Prudhoe Bay  and Tarn regions.                                                                    
He pointed  out that  gas hydrates  occur across  the entire                                                                    
North  Slope. He  stated that  there were  no estimates  for                                                                    
shale  gas,  or  "over-pressured, basin-centered  gas",  but                                                                    
felt the  number would  be very large.  He pointed  out that                                                                    
the  shale gas  in the  deeper parts  of the  Coalbed region                                                                    
would  be predominant.  He explained  that the  coal in  the                                                                    
Coalbed  region  was one  of  the  largest accumulations  in                                                                    
North America, and produced methane gas.                                                                                        
Representative  Wilson wondered  if there  was a  comparison                                                                    
between  estimates   and  actual  production.   Mr.  Swenson                                                                    
replied  that the  analysis considers  the original  oil and                                                                    
place  numbers were,  and remarked  that the  estimates were                                                                    
continually evolving.                                                                                                           
Representative Wilson wondered if  a returned lease was ever                                                                    
questioned. Mr. Swenson replied  that there were discussions                                                                    
with companies  over a returned  lease. He added  that lease                                                                    
returns hardly ever occurred.                                                                                                   
9:53:08 AM                                                                                                                    
Representative   Gara   remarked   that  oil   jumped   from                                                                    
$20/barrel  in  2004  to  $40/barrel   in  2006,  which  was                                                                    
considered a high  price at the time. He  remarked that even                                                                    
with  the high  price  of  oil, the  fields  were not  being                                                                    
developed at that  time. Mr. Swenson replied  that there was                                                                    
a  significant   change  in  the  technology   that  perhaps                                                                    
contributed to the change and development of exploration.                                                                       
Representative Gara  noted that some of  the formations were                                                                    
modest  in size,  and wondered  if that  contributed to  the                                                                    
restrictions. He wondered  if building processing facilities                                                                    
might enhance  development. He suggested  a credit  to build                                                                    
processing facilities  for modest-sized fields.  Mr. Swenson                                                                    
affirmed  that   access  to  processing  facilities   was  a                                                                    
concern. He noted  that the Prudhoe Bay field  was almost an                                                                    
anomaly in nature, because it is so enormous.                                                                                   
PAUL DECKER,  MANAGER, DIVISION OF  OIL AND  GAS, DEPARTMENT                                                                    
OF  NATURAL RESOURCES  presented a  PowerPoint Presentation:                                                                    
"Source-Reservoired Oil  Resources Alaskan North  Slope." He                                                                    
spoke to the possibility of  producing oil directly from the                                                                    
source rocks on the North Slope.                                                                                                
9:57:44 AM                                                                                                                    
Mr.  Decker discussed  slide 2:  "Unconventional Resources."                                                                    
He distinguished unconventional  and conventional resources.                                                                    
He  stated that  conventional  resources  were produced  for                                                                    
several decades  on the North Slope:  discrete accumulations                                                                    
of oil or  gas that had migrated into a  trap by buoyancies.                                                                    
Unconventional  resources represented  much more  continuous                                                                    
accumulations, and held a lower  geologic risk, but a higher                                                                    
engineering  risk because  there was  no certainly  that the                                                                    
rocks would  be commercially viable. He  stressed that there                                                                    
needed  to   be  good   success  with   massive  engineering                                                                    
stimulations of the reservoirs.                                                                                                 
Mr. Decker presented  slide 3: "Unconventional Terminology."                                                                    
He stated that when the  various phrases were used, they may                                                                    
pinpoint a  technology component that needed  to happen with                                                                    
the   rock  stimulations.   He  stressed   that  the   three                                                                    
components:  source, reservoir,  were the  key to  producing                                                                    
any conventional or unconventional resource.                                                                                    
Mr.  Decker  displayed slide  4:  "North  Slope Region."  He                                                                    
stated that the  state lands and waters were  in the central                                                                    
portion of the  map, and they were flanked  by federal lands                                                                    
and  waters. He  explained that  state lands  had seen  much                                                                    
exploration and  development. During  the most  recent lease                                                                    
sale, Great Bear Petroleum announced  that they would try to                                                                    
produce oil from the source rocks.                                                                                              
10:01:27 AM                                                                                                                   
Mr.  Decker  discussed  slide   5:  "North  Slope  Petroleum                                                                    
Systems."   He   stated   that  the   stratigraphic   column                                                                    
simplified the  geology to  the layer  cakes. He  pointed to                                                                    
the  red-outlined   boxes,  which  represented   three  main                                                                    
source-rock intervals.                                                                                                          
Mr. Decker  presented slide 6: "Central  North Slope Seismic                                                                    
Transect."  He  stated  that   the  east-west  seismic  line                                                                    
highlighted the  Shublick and Kingak  seismic line,  and the                                                                    
GRZ  and Hu  Shale line.  He explained  that the  rocks that                                                                    
prospective oil producing rocks  were approximately 8,000 to                                                                    
13,000  feet deep.  He stressed  that  the permafrost  could                                                                    
reach  depths  of  up  to  2000 feet,  and  just  under  the                                                                    
permafrost  were  fresh water  aquifers  that  needed to  be                                                                    
protected from injection or fracking operations.                                                                                
Mr. Decker  displayed slide 7: "Key  Geologic Factors--Shale                                                                    
Resource Plays."  He explained that there  were many factors                                                                    
that governed  the prospectivity  and productivity  of shale                                                                    
resource place. Some  included organic geochemistry; thermal                                                                    
and tectonic history, petrophysics; and geomechanics.                                                                           
10:05:24 AM                                                                                                                   
Mr.  Decker discussed  slide 8:  "Close  Well Spacing,  Many                                                                    
Pads." He stated that close  well spacing was infrastructure                                                                    
intensive. The  slide was from  the North  Dakota Industrial                                                                    
Commission,  and  it  displayed   the  Williston  Basin.  He                                                                    
pointed out  the seven mile  dirt road with  fourteen 5-acre                                                                    
drill  sites. The  intent was  to drill  one well  from each                                                                    
surface locations.  The drill went straight  down two miles,                                                                    
and  horizontal  for two  miles.  He  stated that  the  site                                                                    
conducted multiple stages  of fracturing to open  as much of                                                                    
the  formation   as  possible.  The  intent   was  for  most                                                                    
efficient drainage pattern possible.                                                                                            
Representative  Neuman  pointed  out   that  the  state  was                                                                    
considering assisting  in road construction to  help develop                                                                    
oil  and  gas. He  felt  that  there  would be  many  shared                                                                    
services that would  be used, and the  connecting road would                                                                    
help in  reducing costs. Mr.  Decker replied that  there was                                                                    
no road  to resources development would  being considered in                                                                    
shale oil development.                                                                                                          
Representative  Neuman stressed  that  if  the state  helped                                                                    
cover the cost of the roads,  it would help the state in the                                                                    
long run because it keeps  development at low costs over the                                                                    
long  haul.  Mr. Decker  replied  that  additional roads  to                                                                    
resources would  spur exploration.  He reiterated  that none                                                                    
of the proposed roads  to resources concerned unconventional                                                                    
Representative Neuman  stressed that  he was looking  at the                                                                    
cost of permitting. He pointed  out that the shared services                                                                    
would reduce  costs to the state  and increase opportunities                                                                    
to the development because of credits on exploration wells.                                                                     
10:09:55 AM                                                                                                                   
Mr.  Decker presented  slide 9:  "Close  Well Spacing,  Many                                                                    
Pads-Infrastructure-Intensive  Development." The  map showed                                                                    
the  sub-surface horizontal  wells that  would be  developed                                                                    
two  adjacent parts  of  the Bakken  Shale.  He stated  that                                                                    
there  were two  different lease  holdings represented,  and                                                                    
showed  a different  approach but  systematic plan.  After a                                                                    
general well-plan was  set up, a well was  drilled one after                                                                    
the  other  at  the  proper distance  and  length  from  one                                                                    
another. He stated that the  determination of how many acres                                                                    
per well  could be drained  varied from source rock  play to                                                                    
Mr.  Decker displayed  slide 10:  "Frac FAQs."  He explained                                                                    
how fracking worked: "Fluid is  pumped into an isolated part                                                                    
of the  borehole under increasing  pressure. When  the fluid                                                                    
pressure exceeds the rock  strength, the formation fractures                                                                    
and the sand-rich fluid shoots  out into the growing cracks.                                                                    
The  sand props  the  fractures open  after  the frac  fluid                                                                    
flows  back  into the  wellbore.  Frac  jobs for  horizontal                                                                    
producers  in  L48 shale  plays  consume  1 to  5.5  million                                                                    
gallons  of water  per well,  depending on  rock properties,                                                                    
number of  stages pumped, etc. Contamination  of fresh water                                                                    
aquifers  with hydrocarbons  and/or  frac  fluids can  occur                                                                    
where   the  hydrocarbon   target   and   aquifer  are   not                                                                    
sufficiently separated. This should be avoidable.                                                                               
10:13:07 AM                                                                                                                   
Mr.  Decker discussed  slide 11:  "Frac Jobs."  He explained                                                                    
that there  was a technique called  micro seismic monitoring                                                                    
that  monitoring fracking,  and microscopic  earthquakes. He                                                                    
stated that the  map displayed a well drilled  for shale gas                                                                    
play. He  stated that each  diamond represented  a different                                                                    
stage in a fracking job.                                                                                                        
Mr. Decker displayed  slide 12: "Single well  flow rate over                                                                    
time." He explained  that flow rates drop  quickly early on,                                                                    
and then  decline at a  steady pace for years.  He suggested                                                                    
that wells  could remain  in production for  as long  as one                                                                    
can afford to operate them.                                                                                                     
Mr. Decker  presented slide 14: "Texas  Analogue." The slide                                                                    
was  of the  Eagle Ford  shale play  in southeast  Texas. He                                                                    
stated that a critical component  of the shale play was that                                                                    
the rocks were brittle, with 70 percent calcite.                                                                                
Mr. Decker  discussed slide 15: "North  Dakota Analogue." He                                                                    
stated that the light  blue represented the Bakken Formation                                                                    
presence,  and  the  dark  blue  represented  the  thermally                                                                    
mature  Bakken  source rock.  The  large  darker green  dots                                                                    
reflect  the higher  producing wells.  He  also stated  that                                                                    
there were  other producing wells, because  North Dakota was                                                                    
a much lower cost operating environment.                                                                                        
Mr. Decker  displayed slide 16:  "Bakken Well  Economics and                                                                    
Production."  He  stated that  wells  in  North Dakota  were                                                                    
three to four times less to operate and develop.                                                                                
Mr.  Decker  presented  slide 17:  "Shublik  Formation."  He                                                                    
explained that there were some variable lithologies                                                                             
Mr.  Decker discussed  slide  18:  "Shublik Formation."  The                                                                    
Shublik  Formation was  the main  formation that  Great Bear                                                                    
Petroleum  was interested  in. He  stated that  sub-zones of                                                                    
the formations could  be mapped out and carried  with a high                                                                    
degree of predictability.                                                                                                       
10:18:37 AM                                                                                                                   
Mr.  Decker discussed  slide 19:  "Lower Kingak  Formation."                                                                    
The  slide displayed  a screening  technique  that was  seen                                                                    
between the well logs from 175 feet to 550 feet thick.                                                                          
Mr. Decker displayed slide 20:  "Hue Shale/GRZ." The diagram                                                                    
showed a correlation for the Hue and GRZ zones.                                                                                 
Mr.  Decker presented  slide 21:  "Shublik and  Lower Kingak                                                                    
Formations"  and   slide  22:  "Hue  Shale/GRZ."   The  maps                                                                    
displayed the  distribution of  the thermal  maturity zones.                                                                    
The  rocks needed  to be  thermally mature  to generate  and                                                                    
produce oil and gas.                                                                                                            
Mr. Decker presented slide 23:  "Comparison." He pointed out                                                                    
that Eagle Ford  in Texas was a good analog  for the Shublik                                                                    
Mr.  Decker displayed  slide  24:  "Summary." He  reiterated                                                                    
that there  were many variables that  impact productivity of                                                                    
source-reservoired  oil   and  gas:   organic  geochemistry;                                                                    
thermal  and tectonic  history; petrophysics;  geomechanics;                                                                    
and  drilling and  completion practices.  He explained  that                                                                    
the  development  of  North Slope  shale  oil  would  likely                                                                    
depend   on  successful   exploration  drilling,   and  data                                                                    
gathering to  establish geological  favorability; successful                                                                    
production pilot  projects; lowering drilling  and operating                                                                    
costs;  all-season roads  for year-round  surface access  to                                                                    
new  areas;  more  hydraulic frac  crews;  sufficient  water                                                                    
supplies for  frac make-up fluid; and  factual understanding                                                                    
and operator transparency regarding frac practices.                                                                             
Representative Guttenberg  referred to thermal  maturity. He                                                                    
wondered if  there was an  expectation of acreage  going out                                                                    
west, if Great Bear was  successful. Mr. Decker replied that                                                                    
the state lands would be the first places to explore.                                                                           
Co-Chair Thomas wondered if Great  Bear was planning to move                                                                    
forward  with   the  current   tax  structure.   Mr.  Decker                                                                    
understood  that they  would move  forward with  the current                                                                    
tax structure.                                                                                                                  
10:22:54 AM                                                                                                                   
Representative Neuman  stated that fracking had  occurred on                                                                    
the slope  for many  years, and  he wondered  the difference                                                                    
between types of fracking. Mr.  Decker explained the some of                                                                    
the conventional  plays used staged  fracs, where  there was                                                                    
isolation of various  parts of the wellbore.  In the current                                                                    
fracking intent, there  was an effort to  be more aggressive                                                                    
with  the   tight  rocks.  He  stressed   that  without  the                                                                    
fractures,  the  conduits   through  which  the  hydrocarbon                                                                    
molecules  could flow  were only  slightly  bigger than  the                                                                    
molecules themselves.  The basic  difference is the  size of                                                                    
the frac, as well as the aggression.                                                                                            
Vice-chair Fairclough  clarified that  Great Bear  was happy                                                                    
to accept the exploration credits,  but were in support of a                                                                    
modification of ACES.  She queried the time  frame to permit                                                                    
the leasing for  Great Bear. Mr. Banks  replied that average                                                                    
awarding of leases took about six months.                                                                                       
Vice-chair  Fairclough wondered  when the  streamlining took                                                                    
place. Mr.  Banks responded  that the  change took  place 11                                                                    
years prior.                                                                                                                    
Vice-chair  Fairclough  wondered  when  the  drilling  would                                                                    
begin for  Great Bear. Mr.  Banks replied that  the drilling                                                                    
season  would  not  begin  until  the  next  winter  at  the                                                                    
10:30:40 AM                                                                                                                   
Vice-chair Fairclough expressed  appreciation for Great Bear                                                                    
exploring Alaska.                                                                                                               
Co-Chair  Thomas  remarked  that  Great Bear  had  years  of                                                                    
planning with the current royalty rate change.                                                                                  
Representative Wilson  remarked that the Division  of Mining                                                                    
was still a part of DNR. Mr. Banks affirmed.                                                                                    
Representative  Wilson wondered  if  the  reason Great  Bear                                                                    
could  not begin  drilling was  because  of year-long  state                                                                    
regulations. Mr. Banks stated that  she was not correct. The                                                                    
lease award process  was clear to most who  were bidding. He                                                                    
believed  that Great  Bear understood  that  they could  not                                                                    
begin drilling until late fall 2011.                                                                                            
Representative  Wilson was  trying to  figure out  why there                                                                    
was  such pressure  because of  permitting. She  stated that                                                                    
the administration  was putting pressure on  the legislature                                                                    
to pass HB  110, but the permitting and  other processes did                                                                    
not allow that.                                                                                                                 
10:34:31 AM                                                                                                                   
Mr.  Banks presented  the PowerPoint  Presentation: "Royalty                                                                    
Modification" (copy  on file). He  stated that in  1995, the                                                                    
legislature  modified AS  38.05.180  (j) and  created a  new                                                                    
opportunity for DNR.                                                                                                            
Mr.  Banks  displayed  slide 2:  "Royalty  Modification,  AS                                                                    
38.05.180(j)."  He explained  that the  statute allowed  for                                                                    
the commissioner  to modify royalty to  allow for production                                                                    
from a field or pool  that was not in production, producing,                                                                    
or shut-in.                                                                                                                     
Mr.  Banks  presented  slide 4:  "Royalty  Modification,  AS                                                                    
38.05.180(j)."  He  stated  that the  commissioner  may  not                                                                    
approve unless he  determines that lessee makes  a clear and                                                                    
convincing showing  that relief is  in the best  interest of                                                                    
the   state  except   for   royalty  modification,   because                                                                    
development  would  not  proceed. Royalty  modification  was                                                                    
applied only  to the point  where the investor  was inclined                                                                    
to develop, nothing more. He  explained that DNR may hire an                                                                    
independent contractor  at the  applicant's expense,  for up                                                                    
to  $150,000  per application.  He  stated  that the  relief                                                                    
mechanism  must adjust  percentage  based on  price and  may                                                                    
also adjust based on production  rate and ultimate recovery.                                                                    
He announced  that between issuing  the preliminary  and the                                                                    
final  findings, DNR  must offer  to appear  before LB&A  to                                                                    
explain the preliminary finding.                                                                                                
10:40:36 AM                                                                                                                   
Mr.   Banks  discussed   slide   5:  "Royalty   Modification                                                                    
Applications."   He   explained   the   February   1995   BP                                                                    
application  for   Milne  Point.   It  was   an  application                                                                    
explicitly made only to comply  with BP's contract with OXY.                                                                    
He stated that BP called  the application formality, and did                                                                    
not intend  to push  it. He explained  that in  1997, Unocal                                                                    
applied  for  10  platforms  in  Cook  Inlet,  but  did  not                                                                    
continue to pursue the application.  He stated that in 1999,                                                                    
ConocoPhillips applied  for Tyonek  Deep in Cook  Inlet, but                                                                    
withdrew the application.                                                                                                       
Mr.   Banks  displayed   slide   6:  "Royalty   Modification                                                                    
Applications."  He  explained  that  in  2005,  the  Pioneer                                                                    
Natural  Resources application  for leases  was in  and near                                                                    
the Oooguruk  Unit, with the approval  effective February 2,                                                                    
2006. He  stated that the  KerrMcGee application  for leases                                                                    
in the  Nikaitchuq and  Tuvaaq units  was denied  on October                                                                    
31, 2006. He  explained that the ENI  application for leases                                                                    
in  the   Nikaitchuq  Unit  was  approved   with  conditions                                                                    
effective January  30, 2008. He  furthered that there  was a                                                                    
2007 Chevron  application for leases  in the Ivan  River and                                                                    
Stump Lake units, but Chevron withdrew the application.                                                                         
10:45:47 AM                                                                                                                   
Mr.  Banks  continued  with  the   Appendix,  and  slide  8:                                                                    
"Oooguruk  Unit."  He  explained that  the  Pioneer  Natural                                                                    
Resources  application for  the existing  Oooguruk Unit  and                                                                    
adjacent leases  was applied May  20, 2005; and  the amended                                                                    
application  was  filed  November  1,  2005,  with  approval                                                                    
effective February  2, 2006. He  explained that  the royalty                                                                    
modification  mechanism  was based  on  payout  on one  net-                                                                    
profit   share  lease   was  centrally   located  over   two                                                                    
Representative Edgmon wondered if  the Department of Revenue                                                                    
had  any role  in the  decision making  process and  royalty                                                                    
modifications. Mr. Banks replied  that there was an indirect                                                                    
role  of DOR.  He  stressed that  there  were some  auditing                                                                    
records that  were required in  the application  process. He                                                                    
stated that  often DOR would  produce a price  forecast that                                                                    
was generally part of the application.                                                                                          
Representative   Edgmon  surmised   that  the   tax  regimes                                                                    
provided a  better mechanism to  receive information  on the                                                                    
tax  structure. Mr.  Banks replied  that  the mechanism  was                                                                    
there.  It  provided  DOR  a  way to  audit  the  costs  and                                                                    
activity associated  with Oooguruk. The question  related to                                                                    
the kind of data that was available to the department.                                                                          
Representative  Hawker wondered  why  Alaska  would want  to                                                                    
pursue  royalty  relief  when   every  time  royalties  were                                                                    
reduced,  money  was  taken   directly  out  of  the  Alaska                                                                    
Permanent Fund.  He thought  it was odd  to take  money away                                                                    
from Alaskans. Mr. Banks responded  that the state needed to                                                                    
exercise all  of the levers  it had. Royalty  relief offered                                                                    
more  incentive   for  development,   and  it   provided  an                                                                    
opportunity  to be  very surgical  about the  incentive. The                                                                    
tax system had to apply to everyone.                                                                                            
10:52:21 AM                                                                                                                   
Representative   Hawker    stated   that    royalties   were                                                                    
contractual  and the  department had  the ability  to adjust                                                                    
them  as needed.  He stated  that there  were many  steps to                                                                    
achieve  royalty   relief,  and  was  not   desired  by  the                                                                    
legislature. He  stressed that  the peoples'  entitlement to                                                                    
the resource wealth was not  sacrificed "glibly." He pointed                                                                    
out  slide  9:  "Nikaitchuq   (Kerr-McGee)"  and  slide  10:                                                                    
"Nikaitchuq  (Eni)."  He  wondered  if  the  date  was  ACES                                                                    
special session  and wondered if  the economics  had changed                                                                    
because of  the application approval. Mr.  Banks replied and                                                                    
stressed that the significant impact was the cost.                                                                              
Representative Hawker clarified that  the tax regime was not                                                                    
taken  into consideration  in granting  royalty relief.  Mr.                                                                    
Banks replied  that ACES was  considered in the  analysis of                                                                    
the application.                                                                                                                
Representative  Hawker   looked  at   a  take-away   of  the                                                                    
consequences of what he saw  as ACES having no causal affect                                                                    
granting in the royalty relief.  Mr. Banks stressed that the                                                                    
prospect was modeled with ACES as the tax regime.                                                                               
10:58:33 AM                                                                                                                   
Representative   Hawker   stressed   that   the   ACES   tax                                                                    
legislation increased taxes.                                                                                                    
Representative Gara stated that  royalty relief could not be                                                                    
granted if  the field  were economic.  He felt  that royalty                                                                    
relief  was granted  under  circumstances  that produced  no                                                                    
royalty.  Mr. Banks  affirmed,  but  clarified that  royalty                                                                    
relief was  limited to three  instances when  royalty relief                                                                    
could be applied.                                                                                                               
Representative Gara  noted four applications denied  and two                                                                    
granted, and wondered  if the taxes were not  a deterrent if                                                                    
there  were  no  royalty   relief  applications.  Mr.  Banks                                                                    
replied that  many new projects  had not moved forward  in a                                                                    
short period of time. He  stated it was a difficult question                                                                    
to answer.  He stressed  that the  discretion was  placed on                                                                    
the commissioner.                                                                                                               
11:03:04 AM                                                                                                                   
Representative  Hawker  looked  at   the  issue  of  royalty                                                                    
relief.  He questioned  whether the  fields would  have been                                                                    
developed, if they were not  granted royalty relief. He felt                                                                    
that  royalty relief  was an  unnecessary  sacrifice of  the                                                                    
Permanent Fund.                                                                                                                 
Representative Wilson wondered if  there was relief interior                                                                    
Alaska  for heating  oil and  gasoline  question. Mr.  Banks                                                                    
replied that  it was unconstitutional  to offer  royalty in-                                                                    
kind for a value that was  less than what the state receives                                                                    
as royalty  when paid by  the lessees. He stated  that there                                                                    
was some  discussion in changing  the price of oil  paid for                                                                    
by  Flint Hills,  and  it was  determined  that Flint  Hills                                                                    
should  go  through the  same  analysis  a lessee's  royalty                                                                    
relief.  Flint Hills  turned  over  information about  their                                                                    
refinery, and there  was an analysis of the  validity of the                                                                    
request. He  concluded that there  could not be an  offer of                                                                    
relief  for less  than  what was  collected  as royalty  and                                                                    
value; and  if there  was a  discussion about  changing that                                                                    
conclusion, it would require a thorough analysis.                                                                               
Representative  Wilson  stressed  that there  was  a  region                                                                    
holding financial stress of making  money for the state, and                                                                    
burdening   the  residents.   Mr.   Banks  appreciated   the                                                                    
Vice-chair Fairclough felt that  Fairbanks could make a case                                                                    
that they were paying the  same price for the transportation                                                                    
on a barrel of oil that reaches Valdez.                                                                                         
11:07:08 AM                                                                                                                   
Representative Costello  wondered if the royalty  relief was                                                                    
contractual  through  the  life  of  the  lease.  Mr.  Banks                                                                    
affirmed, and  clarified that  it was  a matter  of changing                                                                    
the terms of the lease. He  stated that it was a contractual                                                                    
Representative  Costello remarked  that  royalty relief  was                                                                    
not the resolution  for the state. She  wondered if pursuing                                                                    
royalty  relief  made  a difference  in  progressivity.  Mr.                                                                    
Banks  replied  that  the   analysis  incorporated  the  tax                                                                    
system, and  stated that  the price  might be  different now                                                                    
than what it was years  ago when the analysis was developed.                                                                    
He stated progressivity was an issue.                                                                                           
Representative  Costello  remarked  that she  was  surprised                                                                    
that rates  could be negotiated.  She wondered if  the point                                                                    
of  royalty  relief  was  to  bring  it  down  a  couple  of                                                                    
percentage points.  Mr. Banks  stated that  anywhere between                                                                    
12 and  5 percent  was the  minimum and  based on  a sliding                                                                    
scale.  He stressed  that awarding  royalties required  care                                                                    
when determining royalty relief.                                                                                                
Representative  Costello wondered  if there  was a  value of                                                                    
Alaskans in the Permanent Fund  versus the value assigned if                                                                    
not put in the Permanent  Fund. Mr. Banks replied that there                                                                    
was a  concern about whether the  royalty modification would                                                                    
be affected. He stressed maintaining  as much of the reserve                                                                    
and  Permanent  Fund as  possible.  He  stated that  royalty                                                                    
relief  was not  awarded  when there  was  no difference  in                                                                    
11:13:51 AM                                                                                                                   
Vice-chair  Fairclough queried  the  definition of  economic                                                                    
Representative  Neuman  liked  the  royalty  relief  option,                                                                    
because it  was the  only flexibility that  DNR had  to work                                                                    
with  a producer  to bring  a field  online. He  wondered if                                                                    
there was an ability to  change the royally share. Mr. Banks                                                                    
replied  that   royalty  relief   was  the   only  financial                                                                    
mechanism  available  to DNR  after  the  lease was  issued.                                                                    
There were  financial opportunities that could  be exercised                                                                    
when the  leases were offered, that  could create incentives                                                                    
for rapid development.                                                                                                          
Representative Neuman stated that  royalty was the mechanism                                                                    
that was  given to DNR and  the legislature to help  bring a                                                                    
field online. Mr. Banks agreed with Representative Neuman.                                                                      
11:18:35 AM                                                                                                                   
Representative Doogan  stressed that  there was  an indirect                                                                    
way  to measure  the royalty  relief of  ten million  in the                                                                    
permanent   fund.  He   wanted   to  know   what  the   term                                                                    
"granularity  of the  information" meant.  Mr. Banks  stated                                                                    
that tax  returns were filed with  regulations that required                                                                    
company wide information. He stated  that there was not much                                                                    
information   about    costs   related    to   road-building                                                                    
facilities, building  costs, drilling costs, etc.  He stated                                                                    
that the  DOR would get  to those numbers when  auditing tax                                                                    
returns.  He  stated  that  DNR had  access  to  tax  filing                                                                    
information,  but  it  was difficult  to  determine  royalty                                                                    
11:20:43 AM                                                                                                                   
1:36:10 PM                                                                                                                    
REPRESENTATIVE  BETH KERTTULA,  MINORITY LEADER,  introduced                                                                    
Mr.  Rick Harper.  She discussed  that he  was a  person who                                                                    
could  break down  complex ideas  into information  that was                                                                    
easy for  people to  understand. He  was present  to provide                                                                    
his independent review of HB 110.                                                                                               
RICK  HARPER,  ENERGY  OF  BUSINESS  CONSULTING  ASSOCIATES,                                                                    
provided  a PowerPoint  presentation titled  "An Independent                                                                    
View of  HB 110"  dated March  24, 2011  (copy on  file). He                                                                    
discussed his  background, which  included PPT and  ACES. He                                                                    
had worked at  ARCO Gas for a long period  of time. He hoped                                                                    
to help with  the committee's understanding of  the bill. He                                                                    
had been in  the oil and gas industry for  over 38 years. He                                                                    
had involvement  in international exposure and  was involved                                                                    
with ARCO for over 15  years. After leaving ARCO he remained                                                                    
as an independent consultant for 10 years.                                                                                      
1:46:21 PM                                                                                                                    
Mr.  Harper  had  advised New  Mexico,  Oregon,  Texas,  and                                                                    
Alaska. He  looked at the  view from the perspective  of how                                                                    
the  industry would  act or  behave with  the passage  of HB                                                                    
110. He referred  to page 3 of the presentation.  He did not                                                                    
believe that the  industry had made their case  at that time                                                                    
that  a tax  rollback of  the scale  in the  governor's bill                                                                    
would be offset by production  gains. He had seen the debate                                                                    
steered by industry in the  direction of competitiveness for                                                                    
the state on an on-going basis.  He did not believe that was                                                                    
the appropriate  way to  go about  things. He  believed that                                                                    
the bill  disproportionately benefited  existing production.                                                                    
He  believed  that  the  industry's  response  to  the  bill                                                                    
suggested that the  state's goals would not be  met and that                                                                    
there were alternatives to HB 110.                                                                                              
1:51:10 PM                                                                                                                    
Mr.  Harper  continued  to  discuss page  7:  "What  is  the                                                                    
alignment with industry?" He  recommended that the committee                                                                    
consider  the  premise   of  a  study  given   that  if  the                                                                    
fundamental premise  of a study  was flawed that it  was not                                                                    
valuable. He believed that what  the committee had not heard                                                                    
was more  important than what  they had heard.  He discussed                                                                    
page 10  "Authorizations for Expenditure." He  remarked that                                                                    
there  would  not  be  a  fiscal  comparison  placed  before                                                                    
decision  makers.   He  discussed  the  net   present  value                                                                    
calculation.  The  "expected  case"  included  decisions  to                                                                    
invest in  capital the  focus was  always on  the down-side.                                                                    
There would  be a downside  on resources, taxation,  etc. In                                                                    
the end the approval was based on the expected case.                                                                            
1:55:58 PM                                                                                                                    
Representative Hawker  referred to page 10  and Mr. Harper's                                                                    
opinion that  most proposals  use an  expected oil  price in                                                                    
the 60  to 70 range, and  wondered if there was  evidence to                                                                    
demonstrate that opinion.  Mr. Harper did not  know what the                                                                    
companies were  using because of confidentiality.  He stated                                                                    
that his professional  opinion was that it was in  the 60 to                                                                    
70 range.  He suggested  that Representative Hawker  ask the                                                                    
industry directly.                                                                                                              
Representative Hawker remarked that  he did not believe that                                                                    
anyone had  asked the industry  the particular  question. He                                                                    
felt that the  industry was not denying  those requests. Mr.                                                                    
Harper replied that  he appreciated the comment  and that he                                                                    
would want  to see the  hard document before  moving forward                                                                    
with a decision. He believed  it would be a critical element                                                                    
that he  would want to  see. He would  not want to  get away                                                                    
from the  upside of high oil  prices. He would want  to know                                                                    
what the industry was basing their decisions on.                                                                                
Representative Hawker referred to  page 10 related to fiscal                                                                    
and non-fiscal  issues. He stressed  that there was  a suite                                                                    
of  considerations  that  the  industry  takes  when  making                                                                    
determinations.  He thought  that the  slide represented  an                                                                    
over-simplification of the issue.  Mr. Harper responded that                                                                    
he was  correct. When it came  time to make a  decision in a                                                                    
company  the  decision makers  were  not  shown all  of  the                                                                    
details capital requests were streamlined.                                                                                      
2:00:42 PM                                                                                                                    
Mr. Harper  discussed page 11 "What  Issues are considered?"                                                                    
He  referred to  testimony from  Ken Thompson  and the  term                                                                    
"prospectivity." He  believed that prospectivity was  by far                                                                    
the  main  driver  in  any  economic  decision  to  evaluate                                                                    
whether to go  forward. The oil industry  was very concerned                                                                    
about  protecting the  downside,  better  protection on  the                                                                    
downside  was  important.  He  moved  on  to  page  12  that                                                                    
continued  to  discuss  what   issues  were  considered.  He                                                                    
explained that  timing, permits,  and technical  issues were                                                                    
important  and the  effective  tax rate  was  the rate  that                                                                    
ruled the  day. The bottom  line was that the  effective tax                                                                    
rate based on the effective  case was the most important and                                                                    
primary driver.                                                                                                                 
2:04:46 PM                                                                                                                    
Mr. Harper  discussed page  13. He  was concerned  about the                                                                    
debate  related to  Alaska's  competitiveness. Each  capital                                                                    
investment stood  individually, and he stressed  that Alaska                                                                    
was not  competing against  the rest  of the  world. Capital                                                                    
was not  limited at all;  however, it  may be limited  in an                                                                    
individual company.  The energy sector  was by far  the best                                                                    
performing sector,  along with commodity producers.  He felt                                                                    
that if  a project  was expected  to generate  a substantial                                                                    
rate  of  return, it  would  attract  the capital  that  was                                                                    
Representative  Hawker did  not believe  that the  statement                                                                    
was true  about competition against  the rest of  the world.                                                                    
He  wondered  how  it  was that  everyone  else  was  saying                                                                    
something  different and  why did  Mr.  Harper believe  that                                                                    
Alaska was not  competitive with the rest of  the world. Mr.                                                                    
Harper responded  that he had  not had the  same experience.                                                                    
He discussed  his experience in  working with  oil companies                                                                    
in the past. Companies were  entitled to do what they wanted                                                                    
to do; however,  they had a legal obligation  to develop the                                                                    
lease that  they took from  a lessor.  In a broad  sense, he                                                                    
did not believe  that capital constraints were  an issue for                                                                    
development in Alaska.                                                                                                          
2:10:35 PM                                                                                                                    
Representative Hawker  did not  understand the  concept that                                                                    
capital was unlimited.  Mr. Harper did not  agree. A company                                                                    
would  have the  obligation to  move forward  on a  lease as                                                                    
long as there was an  expectation of profit. The company had                                                                    
an obligation to make the  investment on the leased land, as                                                                    
long  as there  was a  reasonable expectation  of a  prudent                                                                    
officer standard.                                                                                                               
Representative  Hawker  discussed  Mr.  Harper's  statements                                                                    
about  capital.  He   believed  competition  was  absolutely                                                                    
inherent in where a company  would spend capital. Mr. Harper                                                                    
responded that  capital was not unlimited;  however, a solid                                                                    
rate of  return would  attract capital.  When he  had worked                                                                    
for an oil company their mantra  was that if they could make                                                                    
a project happen they would.                                                                                                    
Representative  Gara relayed  that the  committee had  heard                                                                    
from  the Department  of Revenue  about the  Frasier survey.                                                                    
The survey discussed  that there was a page  that ranked tax                                                                    
systems  around   the  world.  He  explained   that  it  was                                                                    
determined that  Alaska was viewed  either favorably  or not                                                                    
as a deterrent to investment  by 75 percent of the companies                                                                    
that  were  surveyed. He  wondered  whether  Mr. Harper  was                                                                    
familiar with the  report. Mr. Harper was  familiar with the                                                                    
report.  He  felt that  each  project  and each  field  bore                                                                    
stand-alone economics.                                                                                                          
2:16:28 PM                                                                                                                    
Representative Gara discussed  companies that were investing                                                                    
in  Libya and  Venezuela.  Alaska had  never nationalized  a                                                                    
company  and  he  wondered  whether  that  played  into  how                                                                    
attractive investment  in the state was.  Mr. Harper replied                                                                    
that oil executive committees always  discuss that issue. He                                                                    
pointed  out that  Alaska  would  rank at  the  top in  that                                                                    
Representative  Costello wondered  if capital  was infinite.                                                                    
Mr. Harper  responded that capital  was not  truly infinite;                                                                    
however,  capital was  present. He  was involved  in venture                                                                    
capital  and   remarked  that   money  was   moving  towards                                                                    
Representative  Costello  surmised  that if  a  project  was                                                                    
profitable, it would be developed. Mr. Harper agreed.                                                                           
Representative  Costello wondered  how  he  would explain  a                                                                    
project   that  became   unprofitable  in   the  middle   of                                                                    
development. Mr. Harper responded  that many projects became                                                                    
unprofitable during progress.                                                                                                   
Representative  Costello  ascertained  that Mr.  Harper  was                                                                    
saying there  was risk  for the  company when  industry went                                                                    
out   looking  for   oil.  Mr.   Harper   answered  in   the                                                                    
affirmative.  The bill  seemed to  provide a  great deal  of                                                                    
benefit to existing  production and did not  seem to advance                                                                    
the state in the exploration and development area.                                                                              
2:23:48 PM                                                                                                                    
Representative Costello  she discussed that the  fiscal note                                                                    
that was  included in the bill  did not read $2  billion per                                                                    
year  and that  the $2  billion was  included in  a multiple                                                                    
year projection. She discussed  that the industry was taking                                                                    
a high  risk and that  the state was providing  incentive to                                                                    
invest in Alaska. She discussed  that there was a production                                                                    
problem; she  referred to  previous testimony  that reported                                                                    
to  the  committee  that  the  pipeline  was  in  danger  of                                                                    
shutting down.                                                                                                                  
Representative Hawker discussed Repsol,  and that they would                                                                    
take  advantage  of   the  extremely  competitive  front-end                                                                    
system.  Repsol  had  announced that  they  would  invest  a                                                                    
significant amount  in exploration  and the company  was not                                                                    
capital  constrained; however,  they needed  some relief  on                                                                    
the upside. He  felt they were case point  that was contrary                                                                    
to Mr.  Harper's presentation. Mr.  Harper replied  that the                                                                    
comment on  page 13  regarding a  "zero sum"  game was  in a                                                                    
different  context. He  pointed out  that it  was not  about                                                                    
drilling  in either  North Dakota  or  Alaska, because  they                                                                    
were  both going  to  be drilled.  He  stressed that  within                                                                    
those states,  which prospects had a  reasonable expectation                                                                    
of profitability. He recommended  that the companies present                                                                    
the hard analysis, when convincing the legislature.                                                                             
Representative Wilson  understood that  if a company  had 20                                                                    
projects, they  would take risk factors  into account before                                                                    
they begin a project, then  the company would rank a project                                                                    
with profitability being one of the most important factors.                                                                     
2:31:28 PM                                                                                                                    
Representative Wilson  suggested that ACES could  bring that                                                                    
from 20 to  3, and wondered if that might  have an impact on                                                                    
whether a  project was completed.  Mr. Harper  stressed that                                                                    
all  20 projects  would be  profitable. He  stated that  the                                                                    
companies have an obligation to  the lessor to complete work                                                                    
on  the   lease.  Some  companies  were   cash-rich,  others                                                                    
capital-constrained.  The  company  has  a  firm  obligation                                                                    
within a reasonable period of time to every project.                                                                            
Representative Wilson  did not know what  "reasonable" would                                                                    
mean.  She  asked whether  the  tax  regime would  rank  the                                                                    
projects aside from the other  factors. Mr. Harper responded                                                                    
that he was  trying to advocate as an advisor  to accept the                                                                    
premise  that  the  companies have  an  obligation.  If  not                                                                    
accepting  the premise,  there could  be ranking  change. He                                                                    
advised that at the time  the lease was made available-terms                                                                    
were negotiated, not  a term saying to agree  to develop the                                                                    
property only  if in  the upper  50 percentile.  He stressed                                                                    
that  a  lessee was  obligated  within  the lease  terms  to                                                                    
develop the property within a reasonable period of time.                                                                        
2:35:20 PM                                                                                                                    
Representative Wilson stated that  she stated that ACES does                                                                    
have  an impact  on where  Alaska would  rank on  a list  of                                                                    
projects.  Mr.  Harper  responded  that the  lessee  had  an                                                                    
obligation to the state to  fulfill every profitable project                                                                    
with a reasonable period of time.                                                                                               
Representative  Wilson stated  that she  did not  accept the                                                                    
term  "reasonable   period  of  time";  she   preferred  the                                                                    
projects to be completed immediately.                                                                                           
Representative  Guttenberg  wondered  why the  oil  projects                                                                    
were  not   being  completed,   and  were   considered  less                                                                    
profitable.  Mr.  Harper  responded  with  Slide  26  "Total                                                                    
capital  spending,  as  well  as  spending  per  barrel,  is                                                                    
increasing  rapidly."  He stated  that  the  trend has  been                                                                    
clear,  with robust  growth. The  kinds  of declines  seemed                                                                    
reasonable; there  had been discussions about  what could be                                                                    
done. BP  had stated that  they would go forward  with their                                                                    
2:39:39 PM                                                                                                                    
Mr. Harper  "Oil Industry  boosting Alaska  spending" (Slide                                                                    
     Alaska's oil  industry is boosting its  spending in the                                                                    
     state more than expected, which  may be good for future                                                                    
     oil production  and jobs, but  is limiting  the state's                                                                    
     profit from rising oil prices.                                                                                             
Mr. Harper  stated that the state's  official oil production                                                                    
tax  estimate was  down  slightly from  the  year prior.  He                                                                    
stressed that the  committee needed to focus  on the reserve                                                                    
projections   and  production   plans  directly   from  each                                                                    
Representative Gara was concerned  with the profitability of                                                                    
the governor's proposal, and pointed  out that the tax would                                                                    
be reduced  without any obligation  to invest in  Alaska. He                                                                    
believed  would be  smarter to  enhance processing  facility                                                                    
credit  and exploration  well credits.  Credits directed  at                                                                    
the activity would encourage  development. Mr. Harper agreed                                                                    
that  would make  sense. Credits  encourage investments.  He                                                                    
stated that there were also reasonable alternatives.                                                                            
2:43:01 PM                                                                                                                    
Mr. Harper Slide 15, "Obligations of a Lessee":                                                                                 
     1) The reason Alaska  is desirable is prospectivity. 2)                                                                    
     Companies bid  leases based on  belief in  these rocks.                                                                    
     3) Signing the  lease is a go / no  go document. 4) The                                                                    
     decision to sign  the lease is a  commitment to develop                                                                    
     given 'reasonable expectation of profit'. 5) After                                                                         
     that point Alaska is not expected to compete with the                                                                      
     rest of the world.                                                                                                         
Representative Hawker queried  the definition of "reasonable                                                                    
assumption of  profit", and  noted that  huge bodies  of law                                                                    
that dispute  in establishing the terminology.  He asked why                                                                    
production  was   declining,  and   wondered  a   course  of                                                                    
litigation should  be pursued.  Mr. Harper pointed  out that                                                                    
Prudhoe  Bay was  in decline,  because it  was a  mature oil                                                                    
field. He  stressed that the  state should and  does enforce                                                                    
the  lease  terms. He  stressed  that  the capital  will  be                                                                    
attracted,  and if  adjustments  need to  occur  to the  tax                                                                    
structure-the  changes  be  made  based  on  hard  certified                                                                    
numbers from the industry.                                                                                                      
Representative Hawker  stressed that  testimony in  the room                                                                    
was  not under  oath. He  wondered if  there were  any other                                                                    
situations  in  the  state   that  demonstrated  that  lease                                                                    
holders  were   not  living  up  to   the  prudent  operator                                                                    
standard. Mr. Harper did not know.                                                                                              
Representative Hawker did not want  people to think that Mr.                                                                    
Harper was claiming that leaseholders were not living up to                                                                     
2:47:26 PM                                                                                                                    
Mr.  Harper stated  he  had not  seen  evidence that  Alaska                                                                    
would be undesirable.  He understood the desire  to see more                                                                    
exploration  quicker,  might   be  evidence  that  something                                                                    
needed to be  done- like changing the tax  structure. He was                                                                    
concerned that  the industry  had not  proven its  case that                                                                    
the abatements and concessions in  the bill if granted would                                                                    
result in specific and firm obligations.                                                                                        
Representative  Hawker mentioned  the annual  report of  the                                                                    
Division of Oil  and Gas, and stated  that field projections                                                                    
and AFEs  were being presented  to DOR. He pointed  out that                                                                    
field  development  plans  were discussed  extensively  with                                                                    
DNR, and  stated that the  field development plans  were the                                                                    
entire foundations to the projections  of the annual report.                                                                    
He wondered if  Mr. Harper was certain  that information was                                                                    
not  provided. Mr.  Harper said  he was  certain he  had not                                                                    
seen that evidence presented to the legislature.                                                                                
Representative Hawker  restated Mr. Harper's  statement. Mr.                                                                    
Harper had  seen no evidence  that it had been  presented in                                                                    
any form in the House  Finance Meeting considerations of the                                                                    
ACES tax restructuring.                                                                                                         
Representative  Hawker   stated  that  AFEs  had   not  been                                                                    
requested in  the proceeding. Mr.  Harper had been  hired to                                                                    
advise likely  outcome as  result of HB  110 and  comment on                                                                    
evidence presented "here."  He had not seen  it presented by                                                                    
industry as  to whether or not  there would be a  payback to                                                                    
the state.                                                                                                                      
2:52:27 PM                                                                                                                    
Representative Guttenberg stated that  as a policy maker, he                                                                    
had not seen industry represent  facts. He stressed that the                                                                    
industry represented  corporate interest. The  committee had                                                                    
not seen  the items mentioned. The  industry had represented                                                                    
a unified message but the  legislature had not had access to                                                                    
the  development  plans  and projects.  Mr.  Harper  advised                                                                    
steering the debate  to what would happen  in concrete terms                                                                    
if the bill was passed and  not allow the debate to merge to                                                                    
a way to  manage the statistics. He  recommended a different                                                                    
approach to the argument.                                                                                                       
2:55:53 PM                                                                                                                    
AT EASE                                                                                                                         
3:00:26 PM                                                                                                                    
Mr.  Harper  discussed Slide  20  "How  Can We  Reverse  the                                                                    
Trend."  He stated  that the  commissioner of  Department of                                                                    
Revenue  had  acknowledged  that  there  were  a  number  of                                                                    
factors that influenced investment decisions.                                                                                   
Mr. Harper displayed Slide 21:                                                                                                  
   · In the absence of concrete and verifiable analysis of                                                                      
     specific prospects, a presumption should be made that                                                                      
     no change in taxation is warranted.                                                                                        
   · Alaska offers Royalty Relief if a producer can prove                                                                       
     the economics of a field require it.                                                                                       
   · It's only been requested four times since 2000, and                                                                        
     granted twice.                                                                                                             
Mr.  Harper Slide  30 "Firm  commitments  from industry  are                                                                    
lacking" He stressed that all  companies carefully word what                                                                    
they say,  but there was  no identifiable commitment  to add                                                                    
new oil or to reduce the rate of decline.                                                                                       
3:04:26 PM                                                                                                                    
Mr. Harper  stressed that industry's tone  was important. He                                                                    
emphasized that what was not seen was most important.                                                                           
Mr. Harper  Slide 32  "Is Industry About  to Walk  Away from                                                                    
   · Major producers own a piece of the line. The economics                                                                     
     of TAPS and oil production are integrated.                                                                                 
   · 6% decline highly unlikely given current ongoing                                                                           
     investment and updated projections.                                                                                        
Mr. Harper Slide  34 chart AOGA "North  Slope Oil Production                                                                    
with OCS" He highlighted the  potential that the OCS brought                                                                    
in terms of the life of TAPS.                                                                                                   
Representative Guttenberg  requested further  explanation of                                                                    
the chart  on slide 34. He  stated that it was  a chart that                                                                    
was presented  in February  2011 by DNR.  He just  wanted to                                                                    
show the potential that the OCS could bring to TAPS.                                                                            
Co-Chair Stoltze asked whether  the word "exacerbated" could                                                                    
be substituted for "completely eliminated." Mr. Harper yes.                                                                     
3:08:13 PM                                                                                                                    
Representative Hawker  stated concerns about the  chart. The                                                                    
implication would create false  precisions by putting things                                                                    
on charts.                                                                                                                      
Mr. Harper Slide 36 "Changes to Progressivity"                                                                                  
     This is where most of the revenue will be lost: $800                                                                       
     million to over $2 million /year depending on the                                                                          
     price of oil.                                                                                                              
Representative Hawker  felt that  the slide  presented false                                                                    
precision,   because  the   committee   had   not  had   the                                                                    
opportunity  do  view  or discuss  fiscal  note.  He  stated                                                                    
severe  concerns  on the  premise  of  the fiscal  note.  He                                                                    
referred   to  empirical   evidence  regarding   the  future                                                                    
projections that the state used  was over-stated. Mr. Harper                                                                    
corrected  the  suggestion  the   HB  110  would  result  in                                                                    
production.  He offered  the  concern  that the  incremental                                                                    
production  be   enough  to   offset  within   a  reasonable                                                                    
3:12:14 PM                                                                                                                    
Mr. Harper  slide 37  "Nominal Tax  Rates," and  stated that                                                                    
the graph was made by DOR comparing ACES and HB 110.                                                                            
Mr. Harper discussed Slide 38:                                                                                                  
     Under current  law (ACES), our taxes  can be envisioned                                                                    
     as  the area  inside  this rectangle.  The profits  per                                                                    
     barrel, on  the horizontal axis,  line up with  the tax                                                                    
     rate, on the vertical axis.                                                                                                
Mr.  Harper concluded  the presentation,  and  opened up  to                                                                    
Representative   Wilson  requested   a  dollar   for  dollar                                                                    
comparison between  current structure and the  proposal. Mr.                                                                    
Harper  had not  conducted analysis.  He urged  pursuing the                                                                    
Representative  Wilson wondered  if he  was not  able to  do                                                                    
that. Mr. Harper had not been asked to make a comparison.                                                                       
Representative  Wilson he  could do  it in  three days.  Mr.                                                                    
Harper replied no.                                                                                                              
3:15:06 PM                                                                                                                    
Representative  Guttenberg looked  at slide  42 "Changes  to                                                                    
Progressivity",  and  queried  the marginal  tax  rate.  Mr.                                                                    
Harper  stated  that  a  debate   had  been  pushed  in  the                                                                    
direction of  marginal tax rates. He  believed the effective                                                                    
rate  based  upon the  expected  case  assumptions was  most                                                                    
important. The  marginal rate was not  unimportant, but what                                                                    
is most important is the effective rate.                                                                                        
Vice-chair  Fairclough slide  22 related  to lost  jobs, and                                                                    
wondered why  the correlation did  not imply  causation. Mr.                                                                    
Harper stated that the first  axiom of economics stated that                                                                    
correlation does not necessarily  imply causation. He stated                                                                    
that there were many factors  that contributed to lost jobs,                                                                    
and directed  the committee  to slide  23, which  showed how                                                                    
employment had gone through the different tax regimes.                                                                          
Vice-chair  Fairclough  appreciated  Mr. Harper's  point  of                                                                    
view. He  noted Monday  hearings in Anchorage  with explicit                                                                    
numbers   on  how   service-industry  businesses   had  been                                                                    
negatively affected  from the decline  in production  on the                                                                    
North Slope.                                                                                                                    
Vice-chair Fairclough  pointed out  that North  Dakota's oil                                                                    
industry  was booming,  and she  asked  what economics  were                                                                    
contributing to  Louisiana, Oregon,  and New Mexico  for oil                                                                    
production. She queried employment and production levels.                                                                       
3:19:26 PM                                                                                                                    
Mr. Harper answered that he  had highlighted his involvement                                                                    
with  the  listed states,  and  was  currently class  action                                                                    
lawsuit in  Texas' oil  company's failure  to pay  taxes. He                                                                    
stated  that Oregon's  unemployment was  "horrific", but  it                                                                    
was not an oil-dependent state.                                                                                                 
Representative Hawker  recalled that Exxon had  prevailed in                                                                    
most  of  the cases  regarding  Point  Thompson. Mr.  Harper                                                                    
replied  that was  not his  understanding. He  stressed that                                                                    
post  implementation of  litigation was  radically different                                                                    
than what was happening before litigation.                                                                                      
Representative  Hawker  concurred,  and recommended  on  the                                                                    
record  they do  it  about  a year  and  a  half before.  He                                                                    
believed examining  the court record  would reveal  that the                                                                    
litigation may have been a bargaining chip.                                                                                     
Representative Hawker  wondered if Mr. Harper  felt the most                                                                    
important  metric was  the effective  tax  rate. Mr.  Harper                                                                    
stated that  the effective tax  rate was the  most important                                                                    
factor when determining whether or  not to invest capital in                                                                    
a specific  project. Exxon testified  that they  agreed with                                                                    
that premise.                                                                                                                   
Representative  Hawker  agreed  as   well.  He  stated  that                                                                    
bracketing  would reduce  the rate  to  a nominal  effective                                                                    
rate. He believed  the purpose of HB 17,  a bracketing bill,                                                                    
was to create an effective and reasonable rate.                                                                                 
3:24:12 PM                                                                                                                    
Representative Hawker  wondered if  brackets would  reduce a                                                                    
higher nominal  rate to a  lower effective rate.  Mr. Harper                                                                    
showed slide  46, which was  developed by DOR. He  would not                                                                    
be   making  a   determination,  but   suggested  that   the                                                                    
concessions   were  extremely   substantial.  Representative                                                                    
Hawker respected Mr. Harper's opinion.                                                                                          
Representative   Gara  directed   attention   to  Slide   55                                                                    
"Required Production  to Replace Loss Revenue"  and asked if                                                                    
this  was attempt  to estimate  how  much new  oil would  be                                                                    
needed to  offset the  tax losses under  HB 110.  Mr. Harper                                                                    
did not  develop the model.  He focused on the  first column                                                                    
under ACES, and  the last column under HB  110. He suggested                                                                    
that if one  presumed the assumptions that  were present, it                                                                    
would indicate  how much production  would equal  the amount                                                                    
of revenue currently being collected in taxes.                                                                                  
Representative Gara  noted that  DOR had promised  an answer                                                                    
on the question.                                                                                                                
3:27:43 PM                                                                                                                    
AT EASE                                                                                                                         
3:38:00 PM                                                                                                                    
BRYAN   BUTCHER,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                    
explained  that the  testifiers  would discuss  the bill  by                                                                    
SUSAN POLLARD,  OIL, GAS, AND MINING  SECTION, DEPARTMENT OF                                                                    
LAW,   discussed  a   PowerPoint   presentation  "CSHB   110                                                                    
Presentation Bill  Sectional" (copy  on file).  She outlined                                                                    
her  strategy  for  discussing   the  bill.  Section  3:  AS                                                                    
43.05.225  would  be amended  to  reduce  interest rates  on                                                                    
overdue taxes and refunds to  federal rate plus 3 percent or                                                                    
11 percent  (page 4). She  discussed the changes  to Section                                                                    
6: Levy of Tax. The tax  levied on oil and gas produced from                                                                    
leases or properties containing land  that was within a unit                                                                    
or in commercial production as  of December 31, 2008, was 25                                                                    
percent base plus progressivity.                                                                                                
Ms. Pollard  discussed changes  to Section  7 (page  6). The                                                                    
threshold was lowered for calculation  of minimum tax on oil                                                                    
and gas production from the North Slope.                                                                                        
3:43:53 PM                                                                                                                    
AT EASE                                                                                                                         
3:44:15 PM                                                                                                                    
Ms.  Pollard  moved   on  to  Section  8  on   page  7.  The                                                                    
incremental bracketed progressivity  rates applied if annual                                                                    
production tax  value was over  $30, to the fraction  of the                                                                    
production tax value that fell  within the incremental rate.                                                                    
The incremental rates  were up to 50  percent for production                                                                    
subject to  the 25 percent  base rate  and up to  40 percent                                                                    
for production subject to the 15 percent base rate.                                                                             
Ms. Pollard addressed Section 9  on page 8. The statute that                                                                    
required  monthly payments  was revised  to account  for the                                                                    
annual  progressivity  calculation  and  new  tax  rate  for                                                                    
certain fields. She discussed changes  to Section 27 on page                                                                    
8.  The way  annual production  tax was  calculated remained                                                                    
the  same  and there  was  no  intent  to change  the  basic                                                                    
calculations.  She  moved  to  page  9  and  discussed  that                                                                    
capital  credits  would  be  taken in  the  year  they  were                                                                    
earned. Section 11 removed the  requirement that tax credits                                                                    
for qualified capital expenditures be taken over two years.                                                                     
Vice-chair  Fairclough wondered  where the  date change  was                                                                    
located. Ms. Pollard  replied that it was at the  end of the                                                                    
3:50:04 PM                                                                                                                    
Ms. Pollard discussed changes to  Sections 15 and 16 on page                                                                    
10.  The only  change was  to  remove the  exclusion of  the                                                                    
North Slope.                                                                                                                    
Representative Guttenberg knew that  there was a reason that                                                                    
the line  had been  drawn. He wondered  what the  reason and                                                                    
rationale  was.  Commissioner  Butcher  clarified  that  the                                                                    
location was 68 degrees south and  he could not speak to the                                                                    
reason  for the  change.  The department  would provide  the                                                                    
Representative Doogan wondered what  the department meant by                                                                    
"fairly minor" in terms of  the change. Ms. Pollard had been                                                                    
referring to the revenue change that was relatively minor.                                                                      
Ms.  Pollard  continued  with  page 12.  Section  17  was  a                                                                    
completely  new section  that was  added to  allow a  credit                                                                    
against production  taxes for a producer  that incurred more                                                                    
than 80  percent of  its wages  and compensation  for Alaska                                                                    
residents. The credit was for  the percentage by which wages                                                                    
paid to  Alaska residents  exceeds 80  percent of  wages and                                                                    
compensation paid by the producer in the state.                                                                                 
3:55:36 PM                                                                                                                    
Representative  Joule  believed  that when  local  hire  was                                                                    
mandated  that  issues  developed.   He  was  interested  in                                                                    
hearing more as the discussions progressed.                                                                                     
Representative Hawker  wondered whether the agency  had done                                                                    
an  analysis  on  the  cost  per  job  that  was  available.                                                                    
Commissioner Butcher  replied that  there was  not currently                                                                    
an estimate.                                                                                                                    
Representative Hawker was concerned  that a small percentage                                                                    
using employee numbers calculated to a huge percentage.                                                                         
Vice-chair Fairclough  wondered whether the  committee could                                                                    
get  a  legal opinion  on  Section  17  for next  week.  She                                                                    
wondered whether  there was  severability clause  inside the                                                                    
bill  in the  event that  it passed.  Ms. Pollard  responded                                                                    
that it was possible to have a repeal.                                                                                          
Representative Guttenberg referred to  HB 308 from the prior                                                                    
legislative session,  and stressed that there  was much work                                                                    
on that issue.                                                                                                                  
3:59:44 PM                                                                                                                    
Representative Edgmon wondered whether  there was a producer                                                                    
that was  currently near the  80 percent  mark. Commissioner                                                                    
Butcher responded that they would provide an answer later.                                                                      
Ms.  Pollard pointed  to page  13 "Small  Producer Credits,"                                                                    
that related to  changes in Sections 18-20.  The sunset date                                                                    
for AS  43.55.024 (a) and (c),  non-transferable credits was                                                                    
extended from  2016 to 2021.  The small producer  tax credit                                                                    
for  a calendar  year was  raised  from $12  million to  $15                                                                    
million.   It applied  if average  production was  less than                                                                    
100,000 BTU equivalent barrels a day.                                                                                           
Representative  Wilson wondered  whether the  companies took                                                                    
advantage  of hiring  locally. Commissioner  Butcher replied                                                                    
in  the  affirmative. There  had  been  some concerns  about                                                                    
constitutionality with  the local  hire issue;  however, the                                                                    
other changes were fine with the department.                                                                                    
Representative  Wilson   wondered  about  the   figures  $12                                                                    
million  to  $15 million.  Ms.  Pollard  continued with  the                                                                    
presentation on  page 14  "North Slope  Exploration Credit,"                                                                    
that listed changes  to Sections 21 and 24  and Sections 22-                                                                    
Representative   Guttenberg  discussed   expansions  on   an                                                                    
existing  field.  Commissioner  Butcher would  be  happy  to                                                                    
provide  details at  a later  time. He  added that  he would                                                                    
also speak with DNR.                                                                                                            
Ms. Pollard continued on page  14. She discussed exploration                                                                    
expenses, which were extended.                                                                                                  
Representative Edgmon asked for  the technical definition of                                                                    
"unitization." Commissioner  Butcher replied that  DNR could                                                                    
provide a definition or they  could read the definition from                                                                    
the Department of Law.                                                                                                          
Representative  Doogan   discussed  the  credits   under  AS                                                                    
43.55.025  and wondered  what credits  were included  in the                                                                    
statute. Ms. Pollard replied that  the jack up rig was added                                                                    
to the provision.                                                                                                               
4:07:31 PM                                                                                                                    
Ms.  Pollard   addressed  page  15  "Disclosure   of  Credit                                                                    
Information,"  and  changes  to   Section  28.  The  section                                                                    
amended  AS  43.55.890  to  clarify  that  DOR  may  publish                                                                    
detailed information  related to tax credits,  including the                                                                    
statutory type  and amount of  each credit taken  under each                                                                    
statute, and  whether the  expenditure was  for exploration,                                                                    
development or production.                                                                                                      
Representative Edgmon  wondered whether  it would  be before                                                                    
or after  the audit. Commissioner Butcher  responded that it                                                                    
would be before the audit.                                                                                                      
Representative  Wilson wondered  whether  the statute  would                                                                    
include tax  information that companies  may not want  to be                                                                    
public for their  competitors. Commissioner Butcher remarked                                                                    
that there would not be  changes to the confidentiality laws                                                                    
that were already in place.                                                                                                     
Representative  Wilson wondered  why the  information should                                                                    
be  disclosed. Commissioner  Butcher replied  that the  data                                                                    
would be  for information  that was not  currently gathered.                                                                    
The  department  was  not provided  with  a  breakdown  from                                                                    
producers,   when  the   information   was  disclosed,   the                                                                    
department would be able to share the information.                                                                              
Representative  Gara  referred to  page  14  and changes  to                                                                    
credits. He  wondered if  there was  an increase  to credits                                                                    
in-field for  40 percent,  and an increase  to a  30 percent                                                                    
credit  for  exploration.  Ms. Pollard  responded  that  the                                                                    
change related to the 43.55.025  credit. The credit had been                                                                    
added in  House Resources  Committee. She stated  that there                                                                    
was  an   additional  provision   was  added   regarding  to                                                                    
exploration on the North  Slope. Representative Doogan asked                                                                    
whether the date moved back one year.                                                                                           
Co-Chair Stoltze  discussed the  schedule for  the remainder                                                                    
of the day and for Friday.                                                                                                      
4:21:45 PM                                                                                                                    
AT EASE                                                                                                                         
4:21:58 PM                                                                                                                    
Co-Chair Stoltze clarified that  the meeting on Friday would                                                                    
commence at 1:30pm.                                                                                                             
HB  110  was  HEARD  and   HELD  in  committee  for  further                                                                    

Document Name Date/Time Subjects
HB110North Slope Conventional Expl_Swenson.pdf HFIN 3/24/2011 8:00:00 AM
HB 110
HB110HFIN DOG Presentation 3-24-11.pdf HFIN 3/24/2011 8:00:00 AM
HB 110
HB110 Royalty Modification_110324HFIN.pdf HFIN 3/24/2011 8:00:00 AM
HB 110
HB 110 NAK Shale Resource Plays_HFIN_2011-03-23.pdf HFIN 3/24/2011 8:00:00 AM
HB 110
HB 110 DNR HFINSRES 3-24-11.pdf HFIN 3/24/2011 8:00:00 AM
HB 110
HB110 Rep. Doogan Letter.pdf HFIN 3/24/2011 8:00:00 AM
HB 110
Rick Harper HB110 presentation 032411.pdf HFIN 3/24/2011 8:00:00 AM
HB 110
HFIN DOR CSHB 110 sectional numerical order 0324 [Read-Only] [Compatibility Mode].pdf HFIN 3/24/2011 8:00:00 AM
HB 110
HB 110 Rick Harper BIO 032411.doc HFIN 3/24/2011 8:00:00 AM
HB 110