Legislature(2013 - 2014)HOUSE FINANCE 519

04/08/2013 01:30 PM FINANCE

Download Mp3. <- Right click and save file as

Audio Topic
01:37:41 PM Start
01:37:55 PM SB21
04:59:27 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Scheduled But Not Heard
+ Bills Previously Heard/Scheduled TELECONFERENCED
CS FOR SENATE BILL NO. 21(FIN) am(efd fld)                                                                                    
     "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;                                                                    
     providing a  tax credit against the  corporation income                                                                    
     tax  for   qualified  oil  and  gas   service  industry                                                                    
     expenditures; relating  to the  oil and  gas production                                                                    
     tax rate; relating  to gas used in  the state; relating                                                                    
     to  monthly installment  payments  of the  oil and  gas                                                                    
     production tax; relating to oil  and gas production tax                                                                    
     credits for  certain losses and  expenditures; relating                                                                    
     to  oil and  gas  production  tax credit  certificates;                                                                    
     relating  to  nontransferable   tax  credits  based  on                                                                    
     production;  relating to  the  oil and  gas tax  credit                                                                    
     fund; relating  to annual  statements by  producers and                                                                    
     explorers;    establishing    the     Oil    and    Gas                                                                    
     Competitiveness  Review  Board; and  making  conforming                                                                    
1:37:55 PM                                                                                                                    
DAMIAN  BILBAO, HEAD  OF  FINANCE,  BRITISH PETROLEUM  (BP),                                                                    
provided  an  overview  of  his  comments.  He  presented  a                                                                    
PowerPoint  presentation  "Mr.  Pulliam Testimony  to  House                                                                    
Finance on HCS CSSB 21(RES)."                                                                                                   
Mr. Bilbao discussed slide 2: "Overview."                                                                                       
   · BP in Alaska - working with the State over 50 years                                                                        
   · Alaska has great resource potential and people                                                                             
   · Under Alaska's Clear and Equitable Share (ACES),                                                                           
     Alaska is  at the back  of the line in  competition for                                                                    
   · HCS CSSB 21(RES) meets the Governor's four principles                                                                      
     and  will   put  Alaska  back   in  the  game   of  oil                                                                    
Mr. Bilbao detailed slide 3: "BP in Alaska - 54 years, and                                                                      
     BP presence in Alaska since 1959                                                                                           
        · Operating area                                                                                                        
             o 250 miles north of the Arctic Circle                                                                             
             o 1200 sq. miles (approximately the size of                                                                        
               Rhode Island)                                                                                                    
             o Prudhoe Bay Unit, Endicott, Milne Point,                                                                         
        · People                                                                                                                
             o 2,300 BP Alaska employees                                                                                        
             o 6,000 contract employees                                                                                         
        · Facilities (start-up 1977)                                                                                            
             o 11 major production facilities                                                                                   
             o 2 major gas facilities                                                                                           
             o 3 water handling facilities                                                                                      
             o 2000 production/injection wells                                                                                  
        · Prudhoe Bay                                                                                                           
             o Original production estimate ~9.6 billion                                                                        
             o Cumulative   production   has   exceeded   12                                                                    
               billion barrels                                                                                                  
             o More than 2 billion barrels remaining                                                                            
             o Largest field in North America - 35 years                                                                        
             o COP ~36%, XOM ~36%, BP ~26%, CVX ~2%                                                                             
1:43:04 PM                                                                                                                    
Mr. Bilbao  discussed slide  4: "Estimated  Capital Spending                                                                    
for Exploration and Development  Alaska North Slope vs. U.S.                                                                    
and Worldwide  Spending 2003-2012."  The graph  was prepared                                                                    
by  Econ  One Research.  He  noted  that  the price  of  oil                                                                    
increased  steadily  as  illustrated by  the  graph's  black                                                                    
line. He noted  that the price of oil  provided the greatest                                                                    
determinate   for  investment.   From   2003   -  2008   the                                                                    
investments  were consistent  with investments  tracking the                                                                    
price of oil. The graph's  blue bar no longer increased with                                                                    
the  price of  oil beginning  in 2007.  The trend  continued                                                                    
through 2012. The U.S. spending  continued to increase. When                                                                    
the  price of  oil  dropped to  $60  per barrel,  investment                                                                    
followed.  Following the  decrease, global  spending tracked                                                                    
the increasing  price of oil  with the exception  of Alaska.                                                                    
The  level  of investment  in  Alaska  was higher  in  2007;                                                                    
however   lost  opportunities   resulted  from   growth  and                                                                    
investment occurring elsewhere.                                                                                                 
1:46:43 PM                                                                                                                    
Mr. Bilbao  discussed slide 5: "Crude  Oil Production Alaska                                                                    
North  Slope  vs. United  States  and  OECD Countries  2003-                                                                    
2012."  The   graph  depicted  oil  production.   In  Alaska                                                                    
production continued  to decline. Globally new  drilling and                                                                    
new  pads led  to  increases in  production following  2008.                                                                    
Unfortunately the  increase in production seen  in the Lower                                                                    
48 did not occur in Alaska.                                                                                                     
1:48:12 PM                                                                                                                    
Mr.  Bilbao  discussed  slide   6:  "Both  conventional  and                                                                    
unconventional oil  production has  grown in the  Lower 48."                                                                    
He  commented on  the  opinion that  new  production in  the                                                                    
Lower 48  resulted from  new technology  from the  shale oil                                                                    
revolution. He  pointed out that Alaska  production declined                                                                    
from year to  year. He compared the onshore  to the offshore                                                                    
production.  The   shale  oil   or  "tight   oil"  increased                                                                    
significantly in production. He  added that conventional oil                                                                    
production had  increased as well. He  concluded that Alaska                                                                    
did not  benefit from  the increase  in investment  as other                                                                    
jurisdictions had.                                                                                                              
1:49:53 PM                                                                                                                    
Mr. Bilbao discussed  slide 7: "Alaska does  not compete for                                                                    
investment."  The graph  was constructed  by PFC  Energy. He                                                                    
explained  that   PFC  Energy   compared  Alaska   to  other                                                                    
Co-Chair Stoltze  asked about the  logo and PFC  Energy. Mr.                                                                    
Bilbao replied that the source of the graph was PFC Energy.                                                                     
Representative Gara asked if PFC  Energy was working for BP.                                                                    
Mr. Bilbao  replied no.  The material  was generated  by PFC                                                                    
Energy and then used by BP to simplify the conversation.                                                                        
Mr. Bilbao noted that the  red arrows showed how Alaska fell                                                                    
under   ACES.   Investment   in  Alaska   moved   to   other                                                                    
jurisdictions   where  the   investment  climate   was  more                                                                    
attractive.   He   added   that  Alaska   fell   behind   in                                                                    
competitiveness for investment. He  noted the geographic and                                                                    
environmental  challenges that  made Alaska  a fundamentally                                                                    
high-cost region of operation.                                                                                                  
1:52:16 PM                                                                                                                    
Mr. Bilbao discussed  slide 8: "Why doesn't  ACES work?" The                                                                    
graph depicted a  representation of the sharing  of a barrel                                                                    
of oil  between the  state, the  federal government  and the                                                                    
industry, when  it sold  for $110 per  barrel. The  data was                                                                    
gathered  from  the  Department   of  Revenue's  (DOR)  Fall                                                                    
Forecast, 2012. The top of  the barrel depicted Alaska state                                                                    
revenue  at $36  per  barrel. The  federal government  would                                                                    
benefit in the  amount of $12 per barrel. He  added that the                                                                    
deductible costs  amounted to approximately $40  per barrel,                                                                    
which was used  to support operations and  investing for the                                                                    
future. Adding  all of  the costs  together equaled  $88 per                                                                    
barrel  leaving $22  as  the industry  share.  The $22  must                                                                    
first cover  BP's non-deductible  expenses. Under  ACES, the                                                                    
employees  in   Anchorage  were   considered  non-deductible                                                                    
costs, which  must first  be covered  by the  industry share                                                                    
before   the   remaining   amount  was   returned   to   the                                                                    
shareholders. A change  in the tax structure  would allow BP                                                                    
the opportunity to invest further in Alaska.                                                                                    
1:55:09 PM                                                                                                                    
Representative Wilson requested a  graph similar to slide 8,                                                                    
utilizing  HCS  CSSB 21(RES)  instead  of  ACES. Mr.  Bilbao                                                                    
replied that under  HCS CSSB 21(RES), the  state share would                                                                    
be $33, with $13 as  the deductible cost. The industry share                                                                    
increased to $24 per barrel with HCS CSSB 21(RES).                                                                              
Representative Gara asked  about slide 4. He  noted that the                                                                    
slide  stopped at  FY 12.  He pointed  out that  the Revenue                                                                    
Source Book  cited $1.5 billion  in capital  expenditures in                                                                    
2007 prior  to ACES. He  stated that the "Fall  2012 Revenue                                                                    
Source Book" stated the forecast  as $3.8 billion in capital                                                                    
expenditures or  over 100 percent  increase. He  wondered if                                                                    
the slide could be extended past 2012.                                                                                          
1:57:46 PM                                                                                                                    
Mr. Bilbao  stated that BP did  not make any changes  to the                                                                    
material  provided  by  the  consultants.  He  deferred  the                                                                    
question  to the  consultants.  He stated  that  BP did  not                                                                    
expect their investments to change between 2012 and 2013.                                                                       
Representative  Gara asked  for an  investment forecast  for                                                                    
next year. Mr. Bilbao offered  to obtain the information for                                                                    
the committee.                                                                                                                  
1:58:32 PM                                                                                                                    
Vice-Chair Neuman  asked about slide 8:  The deductible cost                                                                    
under ACES  at $40  for capital and  operating expenditures.                                                                    
He  understood that  the operating  cost  remained the  same                                                                    
under HCS CSSB  21(RES) and wondered if  the amount included                                                                    
the  33  percent  along  with  the  $45  slide.  Mr.  Bilbao                                                                    
responded that  the overall representation  of DOR  data was                                                                    
presented, but the allowed costs  were primarily the capital                                                                    
and  operating expenditures.  Included were  the investments                                                                    
in new wells  and facilities along with  salary payments for                                                                    
North Slope employees.  He stated that the  impact linked to                                                                    
the production was  reflected in the amount  of revenue that                                                                    
the state derived.                                                                                                              
Representative Gara  stated that ConocoPhillips  earned $2.3                                                                    
billion  in  profits  on  the  North  Slope  in  Alaska.  He                                                                    
wondered if BP's earnings were comparable.                                                                                      
Mr.  Bilbao replied  that the  slide  represented cash  flow                                                                    
rather  than net  income. In  the  oil and  gas industry,  a                                                                    
considerable  amount of  capital  depreciated  leading to  a                                                                    
significant difference between net  income and cash flow. He                                                                    
was not permitted  to disclose the net  income or financials                                                                    
for BP in Alaska.                                                                                                               
Representative   Gara  replied   that   he  had   difficulty                                                                    
believing that  BP was not  earning enough money  in Alaska,                                                                    
when the financial details were  secret. He asked why it was                                                                    
fair  to the  legislators  to  be asked  to  modify the  tax                                                                    
structure without full disclosure of financial information.                                                                     
Mr.  Bilbao  replied that  the  evidence  that business  was                                                                    
going elsewhere  indicated that Alaska was  not competitive.                                                                    
He was not referencing  BP's specific financial results, but                                                                    
rather  the  global data,  which  reinforced  the fact  that                                                                    
Alaska was not competing. He  noted that the higher price of                                                                    
oil ought to summarize the issue effectively.                                                                                   
2:02:40 PM                                                                                                                    
Representative Gara  testified that he questioned  BP during                                                                    
HB  110   hearings  two  years   ago,  regarding   BP's  new                                                                    
production units  and the  answer he  received was  that new                                                                    
production would not  be implemented by BP  with the passing                                                                    
of HB 110. He asked if  BP had plans for new exploration and                                                                    
units if HCS CSSB 21(RES) were to pass.                                                                                         
Mr. Bilbao  replied no. He  stated that BP would  not embark                                                                    
on any new exploration with  the passage of HCS CSSB 21(RES)                                                                    
because  there was  so much  opportunity  within the  legacy                                                                    
fields. Representative  Gara asked how the  comment that the                                                                    
legacy  fields were  full of  opportunity  squared with  the                                                                    
statements that new production and  new investment were tied                                                                    
and  new  exploration   was  the  key  to   an  increase  in                                                                    
investment in Alaska.                                                                                                           
Mr. Bilbao replied  that if BP invested  nothing, the fields                                                                    
would  decline at  20 percent.  He stated  that BP  saw more                                                                    
opportunities with  the right fiscal environment.  He wished                                                                    
to   provide  examples   where   a   more  positive   fiscal                                                                    
environment  led to  more  investment  flowing to  locations                                                                    
other than Alaska.                                                                                                              
2:05:23 PM                                                                                                                    
Co-Chair  Stoltze  wished   for  a  differentiation  between                                                                    
exploration  investment   and  production   investment.  Mr.                                                                    
Bilbao  responded that  exploration included  the review  of                                                                    
areas that  had not  yet been  tested, drilled,  explored or                                                                    
developed.  If  a  company had  an  opportunity  with  basic                                                                    
seismic  information, but  had  not yet  drilled  a well  to                                                                    
prove that  oil could be found,  was considered exploration.                                                                    
The  hope was  that the  risk would  yield a  higher reward.                                                                    
Development occurred  in areas where  the oil was  proven to                                                                    
exist via exploration wells.                                                                                                    
Co-Chair  Stoltze imagined  that  different companies  would                                                                    
provide a  different emphasis regarding the  company and the                                                                    
scope of  their size and  the nature of their  business. Mr.                                                                    
Bilbao  replied  that   different  companies  had  different                                                                    
strategies  for  unique   geographies.  Each  company  could                                                                    
choose  a different  blend of  investment for  their company                                                                    
Co-Chair  Stoltze  wished   to  understand  questions  about                                                                    
exploration. He  wished to understand why  one company might                                                                    
have a greater emphasis on exploration than another.                                                                            
2:08:24 PM                                                                                                                    
Mr.  Bilbao  appreciated the  complexity  of  the topic.  He                                                                    
clarified  that   the  legacy  fields  presented   a  unique                                                                    
opportunity, but  a large portion of  the opportunities were                                                                    
not economically  competitive. He  repeated that BP  did not                                                                    
need to  drill leases outside  of the legacy fields  to find                                                                    
additional oil.  The company strove to  develop the existing                                                                    
resource  in the  most efficient  way. He  agreed that  some                                                                    
companies would  seek new fields  and pursue  exploration as                                                                    
part of their strategy in Alaska.                                                                                               
2:09:19 PM                                                                                                                    
Representative  Kawasaki  asked  if  BP  explored  in  other                                                                    
countries for new oil. Mr. Bilbao replied yes.                                                                                  
Representative  Kawasaki  asked  which  major  countries  BP                                                                    
chose to  explore for  new oil. Mr.  Bilbao replied  that BP                                                                    
explored  in the  United States,  Indonesia,  China and  the                                                                    
Gulf  of  Mexico.  He  noted   that  a  broad  portfolio  of                                                                    
opportunities existed throughout the world.                                                                                     
Representative  Kawasaki revisited  the statement  regarding                                                                    
the 2  billion barrels  currently existing under  the legacy                                                                    
fields. He asked if the oil was considered new or old oil.                                                                      
Mr. Bilbao replied  that oil that had not  yet been produced                                                                    
was considered new oil. He  stated that timing of production                                                                    
might further define and classify oil as new or old.                                                                            
Representative  Kawasaki  stated  that the  legislature  and                                                                    
governor  were   striving  for   a  production   curve  that                                                                    
increased rather  than declined.  He believed  that policies                                                                    
incentivizing new oil would  change the declining production                                                                    
curve.  He  wondered about  new  exploration  and China  and                                                                    
Indonesia. He asked  if there was current  production in the                                                                    
countries   mentioned   earlier,   where   exploration   was                                                                    
considered. Mr. Bilbao replied that  BP shared the desire to                                                                    
see increased  production in Alaska  because when  the state                                                                    
benefitted,  BP  benefitted.  He  responded  to  the  second                                                                    
question  by  stating  that BP  had  Liquefied  Natural  Gas                                                                    
Production in  Indonesia, and a non-operated  producing area                                                                    
in China.                                                                                                                       
2:12:42 PM                                                                                                                    
Representative  Kawasaki pointed  to the  barrel illustrated                                                                    
in  slide 8  and he  noticed that  the Alaska  state revenue                                                                    
represented  a large  portion of  the  barrel. He  suggested                                                                    
that drawing  the depiction  to scale  might provide  a more                                                                    
fair assessment.  Mr. Bilbao replied that  the space between                                                                    
the royalties illustrated a  graphic representation, but the                                                                    
intent  was   not  to   provide  a   disproportionate  scale                                                                    
representation of the split of the barrel.                                                                                      
2:13:48 PM                                                                                                                    
Representative  Thompson   asked  about  slide  8   and  the                                                                    
industry share. He requested a  comparison of industry share                                                                    
in Alaska to that in North  Dakota or West Texas. Mr. Bilbao                                                                    
replied  that  he  did  not have  the  information,  but  he                                                                    
suggested asking the state's consultants.                                                                                       
Representative  Wilson asked  about how  many projects  were                                                                    
analyzed  at  one  time.  She  wondered  how  projects  were                                                                    
prioritized for  the company. Mr.  Bilbao responded  that BP                                                                    
had  many opportunities.  The economic  nature of  a project                                                                    
enabled  it  to  gain  higher priority.  He  noted  that  BP                                                                    
reviewed    projects   annually    to   determine    whether                                                                    
circumstances had changed and  whether new technology or new                                                                    
efficiencies had changed the economics of a project.                                                                            
Mr. Bilbao noted that three  things would alter the level of                                                                    
investment  for BP:  efficiency, new  technology and  fiscal                                                                    
policy.  He explained  that BP  first  reviewed whether  the                                                                    
efficiency   or   technology  changed.   The   conversations                                                                    
occurred locally  and allowed the company  to prioritize the                                                                    
opportunities locally.  He pointed out that  the large scale                                                                    
investment  opportunities such  as the  additional rigs  and                                                                    
new  pads competed  globally for  investment. He  added that                                                                    
the amount  of global  investment for BP  was fixed  and all                                                                    
projects competed for the investment.                                                                                           
2:17:42 PM                                                                                                                    
Representative   Munoz  recalled   testimony  from   BP  and                                                                    
ConocoPhillips in  2012 stating that $5  billion in projects                                                                    
were potentially  economic in  Alaska with  a change  in the                                                                    
tax structure. She  asked how HCS CSSB  21(RES) might affect                                                                    
the  economic  nature  of projects  in  Alaska.  Mr.  Bilbao                                                                    
replied that  without a  final bill to  model, BP  could not                                                                    
recalibrate   their   economic    model   to   provide   the                                                                    
information.  He stated  that HCS  CSSB 21(RES)  made Alaska                                                                    
more  competitive for  investment, which  would present  the                                                                    
opportunity for new projects to move forward.                                                                                   
2:19:23 PM                                                                                                                    
Mr.  Bilbao  discussed slide  9:  "HCS  CSSB 21(RES)  versus                                                                    
     · Progressivity discourages investors                                                                                      
     · Links credits to spend                                                                                                   
     · Complex                                                                                                                  
     · High base rate                                                                                                           
   HCS CSSB 21(RES)                                                                                                             
     · Eliminates progressivity                                                                                                 
     · Links credits to production                                                                                              
     · Simpler                                                                                                                  
     · Higher base rate balanced with credits                                                                                   
Mr.  Bilbao  determined that  HCS  CSSB  21(RES) had  upside                                                                    
Co-Chair Stoltze asked  if risk and reward  should be viewed                                                                    
by  the  committee as  antonyms.  Mr.  Bilbao concurred  and                                                                    
stated that  that the each investment  opportunity presented                                                                    
a  risk  and  reward  decision  creating  a  very  important                                                                    
equation  for BP's  decision making  process. He  noted that                                                                    
HCS CSSB  21(RES) made a  policy decision to shift  the link                                                                    
from  spend  to production.  He  recognized  that the  shift                                                                    
placed  the   burden  onto  the  producer   to  deliver  the                                                                    
production in order to capture the benefit of the credit.                                                                       
Mr. Bilbao  stressed the complexity of  ACES administration.                                                                    
He noted volatility in the price  of oil from month to month                                                                    
could  completely shift  the cash  flow profile.  He claimed                                                                    
that  ACES  made the  process  of  running a  business  very                                                                    
difficult. He  noted that the  higher base rate of  HCS CSSB
21(RES) was balanced with the credits put in place.                                                                             
2:22:21 PM                                                                                                                    
Mr. Bilbao discussed slide 10: "In Summary."                                                                                    
   · TAPS is three quarters empty and ACES has not                                                                              
     delivered increased production                                                                                             
   · HCS CSSB 21(RES) is a game changer and a signal that                                                                       
     Alaska is ready to compete for investment                                                                                  
   · The HCS CSSB 21(RES) structure could work:                                                                                 
        o Balances a high base rate with appropriate                                                                            
        o Requires production to earn credits                                                                                   
        o Doesn't pick winners and losers                                                                                       
        o Provides a foundation for future opportunities                                                                        
Co-Chair Stoltze noted that the  awareness of the public was                                                                    
skewed as seen by a  recent poll. The public's opinion about                                                                    
oil flow  through the pipeline  was not consistent  with the                                                                    
data  provided  to  the  legislature.   He  added  that  the                                                                    
public's opinion as communicated in  the poll related to the                                                                    
amount of  the state  budget derived from  petroleum revenue                                                                    
was also  skewed. Mr. Bilbao  did not receive the  poll data                                                                    
yet he agreed that the  public was often surprised about the                                                                    
impact of oil on the state's economy.                                                                                           
2:25:46 PM                                                                                                                    
Representative Gara asked about slide  4. He referred to the                                                                    
"Fall 2012  Revenue Sources Book,"  page 35,  with projected                                                                    
capital expenditure figures  of $3.36 billion for  FY 13 and                                                                    
$3.8  billion for  FY  14. The  "Fall  2007 Revenue  Sources                                                                    
Book,"  page 36  illustrated the  FY07 historical  figure of                                                                    
$1.578 billion  in FY  07 and a  $3.26 billion  forecast for                                                                    
this year,  which was  a 100  percent increase.  Next year's                                                                    
forecast was  documented as $3.8  billion for a  130 percent                                                                    
increase.   He   couldn't   understand  why   DOR   provided                                                                    
information   displaying   such   an  increase   while   the                                                                    
information provided in the  presentation (slide 4) depicted                                                                    
flat capital expenditures.                                                                                                      
2:26:46 PM                                                                                                                    
Mr. Bilbao stated  that Econ One used slide  4 to illustrate                                                                    
a  comparison   between  Alaska  and   other  jurisdictions,                                                                    
providing an  index of spend  rather than an  absolute. With                                                                    
the comparison provided, Alaska  remained flat whereas other                                                                    
areas had increased.                                                                                                            
Representative  Gara asked  if  the bulk  of the  investment                                                                    
increase was related to  fracking technology and investment.                                                                    
Mr.   Bilbao  answered   that  the   technological  progress                                                                    
regarding shale  and fracking led to  a significant increase                                                                    
in  investment. He  noted that  conventional sources  of oil                                                                    
had   also   benefitted   from  increased   investment   and                                                                    
Representative Gara  asked if  the bulk  of the  increase in                                                                    
spending in  the Lower  48 was  due to  fracking investment.                                                                    
Mr. Bilbao deferred the question to Econ One.                                                                                   
Representative  Gara  pointed  out the  elimination  of  the                                                                    
progressivity  element  of  the  bill.  The  industry  would                                                                    
increase earnings with the  elimination of progressivity and                                                                    
he wondered about reinvestment in Alaska and out of state.                                                                      
Mr.  Bilbao   stated  that   as  new   opportunities  became                                                                    
apparent, new  investment would come  to Alaska. He  noted a                                                                    
general  consensus  that   progressivity  was  not  working.                                                                    
Progressivity  limited  the   opportunities  for  Alaska  to                                                                    
compete  for investment.  Investment would  flow toward  the                                                                    
best opportunities.                                                                                                             
2:31:01 PM                                                                                                                    
Representative  Gara asked  if  it was  realistic to  assume                                                                    
that  most  of  what  the   company  would  receive  due  to                                                                    
progressivity's elimination  would be  spent in  other areas                                                                    
globally. Mr. Bilbao responded that  if the fiscal policy in                                                                    
Alaska became  more attractive  for investment,  the company                                                                    
would spend more in the state.                                                                                                  
Representative Gara  referred to  a statement by  Mr. Bilbao                                                                    
on March  14 in  the Senate  Finance Committee.  He wondered                                                                    
why   the   testimony    was   different   today   regarding                                                                    
progressivity.  He quoted  Mr.  Bilbao as  saying "we  don't                                                                    
feel  that  it  goes  far  enough to  attract  the  type  of                                                                    
meaningful investment  that is  required to make  the future                                                                    
look  different  from the  last  six  or seven  years."  Mr.                                                                    
Bilbao  replied that  HCS CSSB  21(RES)  showed a  different                                                                    
combination of base  rates and credits than  the bill before                                                                    
the  Senate Finance  Committee. He  stated that  the process                                                                    
through the various  committees led to HCS  CSSB 21(RES) and                                                                    
the  new balance  of base  rates and  credits was  viewed as                                                                    
attractive by BP.                                                                                                               
Mr.  Bilbao  recalled  that  the  Senate  Finance  Committee                                                                    
version  on the  bill  discussed  on March  14th  was a  "35                                                                    
percent and 5 fixed credit." Representative Gara concurred.                                                                     
Mr. Bilbao  pointed to a  better balance of credits  seen in                                                                    
HCS  CSSB  21(RES). He  furthered  that  the base  rate  was                                                                    
higher than  it was under  ACES, but BP had  the opportunity                                                                    
to offset the base rate,  otherwise the balance was lost and                                                                    
the  bill   would  not  provide   the  same   incentive  for                                                                    
Representative  Wilson wondered  how  many  years the  state                                                                    
would  wait  to determine  whether  the  bill would  benefit                                                                    
production.   Mr.  Bilbao   replied  that   producers  would                                                                    
initially  drill  more  with a  more  attractive  investment                                                                    
climate.  Sizable  capital  investments, such  as  new  pads                                                                    
would follow  and allow  companies to  drill more.  He noted                                                                    
that if the legislature was  not satisfied, the policy would                                                                    
be adjusted appropriately.                                                                                                      
2:35:42 PM                                                                                                                    
Representative Wilson asked how many  years until a shift in                                                                    
activity would  occur under the  bill. Mr.  Bilbao responded                                                                    
that a shift should be seen in one to two years.                                                                                
Representative  Wilson asked  about  the  credit shift.  She                                                                    
didn't  understand why  BP would  spend money  that did  not                                                                    
lead  to production.  She wondered  how the  current credits                                                                    
differed from those in HCS CSSB 21(RES).                                                                                        
Mr. Bilbao replied  that "you get what  you incentivize." He                                                                    
relayed that ACES provided a  credit for spent. He mentioned                                                                    
a  long list  of projects  that were  planned for  the North                                                                    
Slope.  Many of  the projects  allowed for  a 30  year plan,                                                                    
which would be extended for  another 30. The money spent did                                                                    
not ensure new production, but  instead ensured that the oil                                                                    
produced  was  done  so safely  and  efficiently.  The  plan                                                                    
consumed  billions of  dollars of  investment. He  mentioned                                                                    
that  if BP  did  not invest  in new  drilling  and rigs,  a                                                                    
decline of 20  percent would be expected in  contrast to the                                                                    
current  6-8 percent  decline. He  noted that  BP ran  10-11                                                                    
rigs annually, prior to ACES, and 6 rigs with ACES.                                                                             
Representative   Wilson   was   interested  to   know   what                                                                    
investment would occur with the  new credits proposed in HCS                                                                    
CSSB  21(RES).  Mr.  Bilbao replied  that  shifting  to  the                                                                    
sliding   scale  of   credits   focused   the  analysis   of                                                                    
incremental production.                                                                                                         
Co-Chair Austerman  asked about the $8  sliding scale versus                                                                    
the $5  fixed scale. He  wondered if one was  preferred. Mr.                                                                    
Bilbao replied  that the sliding  scale existed  because the                                                                    
higher base rate claimed additional  business below $100 per                                                                    
barrel. Below $100  per barrel, a fixed $5  did not outweigh                                                                    
the  impact of  raising  the base  rate.  The sliding  scale                                                                    
would allow a  credit to offset the impact of  the base rate                                                                    
below  $100  per-barrel. As  prices  of  oil increased,  the                                                                    
credit per-barrel decreased and made up the difference.                                                                         
2:40:59 PM                                                                                                                    
Co-Chair  Austerman discussed  heavy oil.  He wondered  if a                                                                    
change  in  the  tax  changed  the  technological  issue  of                                                                    
drilling  for  heavy  oil. Mr.  Bilbao  responded  that  the                                                                    
change in tax structure would  not alter the technology, but                                                                    
would instead  change BP's  ability to  hire people  to work                                                                    
the  technology required  to drill  for heavy  oil and  also                                                                    
allow  enough  light-oil  to  mix with  the  heavy  oil  for                                                                    
Co-Chair Austerman asked  if BP did not  have the technology                                                                    
available to drill  for the heavy oil.  Mr. Bilbao responded                                                                    
that  the  technology  was  not  available  to  produce  and                                                                    
transport the  heavy oil  down the  pipeline in  an economic                                                                    
Co-Chair Austerman asked  if it was possible  to extract the                                                                    
oil.  Mr. Bilbao  replied  that BP  had  a successful  pilot                                                                    
program to  produce heavy  oil, but  the scale  required for                                                                    
commercial quantities was unavailable.                                                                                          
2:43:16 PM                                                                                                                    
Representative Costello pointed to the  life of a field. She                                                                    
asked for an  expansion on the remark that it  was up to the                                                                    
legislature  to  determine  the speed  of  development.  Mr.                                                                    
Bilbao  replied  that  additional  wells  would  efficiently                                                                    
extract oil  from the ground.  He noted that 100  well bores                                                                    
would only produce so much oil.                                                                                                 
Representative   Costello   asked   if   the   company   was                                                                    
determining its decline rate.  She understood that companies                                                                    
would intentionally  buy-down their  tax rate.  She wondered                                                                    
about BP's focus on qualified  capital expenditures with the                                                                    
goal of achieving the desired tax rate.                                                                                         
Mr. Bilbao replied  that the decline rate was  not chosen by                                                                    
BP. He  stated that opportunities that  were deemed economic                                                                    
were  pursued  and  the  decline  rate  was  secondary.  The                                                                    
typical decline rate was 6-8 percent.                                                                                           
2:46:27 PM                                                                                                                    
Representative Costello pointed  to the presentation placing                                                                    
Alaska last in line. She  asked where HCS CSSB 21(RES) would                                                                    
place Alaska. Mr. Bilbao responded  that the bill would move                                                                    
the  state  somewhere  in  the   middle  of  the  chart.  He                                                                    
explained   that   Alaska's    operating   costs   presented                                                                    
challenges with ACES, but HCS  CSSB 21(RES) placed Alaska in                                                                    
the middle for that category as well.                                                                                           
Representative  Edgmon  mentioned  government-take  and  its                                                                    
importance  in investment  making  decisions.  He knew  that                                                                    
government-take was not the only  variable. He imagined that                                                                    
other  constraints would  potentially  undercut the  linkage                                                                    
between   government-take   and    investment.   He   listed                                                                    
constraints  such  as  other  global  investments,  pipeline                                                                    
limitations and refiner capacity  issues. Mr. Bilbao replied                                                                    
that there  was not an  unlimited amount of  money available                                                                    
for global  investment. He agreed that  physical constraints                                                                    
existed regarding equipment, crew and projects.                                                                                 
2:50:22 PM                                                                                                                    
Representative Edgmon asked about  rumors that BP planned to                                                                    
sell  their Alaskan  projects after  the Deep  Water Horizon                                                                    
accident.  Mr. Bilbao  answered  that BP  met its  financial                                                                    
obligations  related  to  the Deep  Water  Horizon  accident                                                                    
without an impact to its operating budget.                                                                                      
Representative  Gara asked  about the  base rate.  He stated                                                                    
that the bill contained two base  rates, one for new oil and                                                                    
one for  existing oil. He  asked about the 33  percent rate,                                                                    
which was  the maximum  rate at  $150 per-barrel,  while the                                                                    
base  rate   was  25  percent.  Mr.   Bilbao  disagreed.  He                                                                    
understood  that the  base rate  was 33  percent, which  was                                                                    
then offset with a credit-per-barrel  for the legacy fields,                                                                    
which was  on a  sliding scale  and linked  to the  price of                                                                    
Representative  Gara stated  that  33 percent  would not  be                                                                    
achieved below  $150 per-barrel of oil.  Mr. Bilbao answered                                                                    
that  Representative Gara  was referencing  the credit  per-                                                                    
barrel on  the effective  tax rate.  He understood  that the                                                                    
base  rate was  33 percent  with  the credit  linked to  the                                                                    
amount of  production. The  legislature had  the opportunity                                                                    
to position Alaska appropriately.                                                                                               
Representative Gara  clarified that  the effective  tax rate                                                                    
increased first  to 25 percent  and then to 33  percent. Mr.                                                                    
Bilbao answered that he could  only read what the CS stated,                                                                    
which was a base rate of 33 percent.                                                                                            
2:54:44 PM                                                                                                                    
AT EASE                                                                                                                         
3:03:28 PM                                                                                                                    
SCOTT    JEPSEN,   VICE    PRESIDENT,   EXTERNAL    AFFAIRS,                                                                    
CONOCOPHILLIPS   ALASKA,   introduced    himself   and   his                                                                    
colleague. He  outlined items he would  address. He provided                                                                    
a  PowerPoint presentation  titled "House  Finance Committee                                                                    
HCS SB  21" (copy on file).  He began with slide  2: "Alaska                                                                    
Decline Continues While Lower  48 Continues to Increase." He                                                                    
explained the  graph and  noted that the  black line  on top                                                                    
depicted  Lower  48  production vs.  time.  The  productions                                                                    
corresponded to  the Y  axis on  the left  hand side  of the                                                                    
chart.  The colored  lines represented  Texas, Alaska  North                                                                    
Slope, and North Dakota and  they corresponded to the Y axis                                                                    
on the right side of the graph.                                                                                                 
Co-Chair  Stoltze  asked  if  the  graphs  in  Mr.  Jepsen's                                                                    
presentation were  a product  of ConocoPhillips.  Mr. Jepsen                                                                    
replied that  the source of  the graphs was the  U.S. energy                                                                    
Information Administration.                                                                                                     
Representative  Kawasaki  asked  if  the chart  on  slide  2                                                                    
depicted ConocoPhillips' production.  Mr. Jepsen replied no,                                                                    
the graph depicted  all oil production for  the entire North                                                                    
Slope, Texas, North Dakota and the entire Lower 48.                                                                             
Mr. Jepsen  stated that production had  increased throughout                                                                    
the U.S. significantly  over the last five or  six years and                                                                    
was  driven  by  technological   advances.  He  pointed  out                                                                    
Alaska's downward trend. He commented  on the rich resources                                                                    
in  the  Lower  48  with  the  technology  to  produce  both                                                                    
conventional  and  unconventional opportunities.  With  good                                                                    
oil  prices investment  was attractive.  He  noted that  the                                                                    
Lower 48 had a favorable tax environment.                                                                                       
Mr.  Jepsen   credited  Alaska   for  its   rich  resources.                                                                    
Technology was a  key component to investment  in Alaska. He                                                                    
stated that  investment was hampered  on the North  Slope by                                                                    
the ACES tax environment.                                                                                                       
Mr. Jepsen  moved to  slide 3:  "Alaska Legacy  Fields Still                                                                    
Provide Significant  Opportunity." The  data source  was the                                                                    
Department  of  Revenue  2009 production  forecast  for  the                                                                    
years  2010  through  2050.  The  older  forecast  was  used                                                                    
because  the department  did  not offer  a  similar type  of                                                                    
production forecast. He noted that  the vast majority of the                                                                    
remaining resource resided in the legacy fields.                                                                                
3:09:16 PM                                                                                                                    
Mr.  Jepsen turned  to slide  4:  "Easy Oil"  In the  Legacy                                                                    
Fields is Gone:"                                                                                                                
     Challenged oil remains                                                                                                     
        · Complex, high cost wells                                                                                              
        · Smaller reserve targets                                                                                               
        · Isolated fault blocks, flank oil                                                                                      
        · Satellites and viscous oil                                                                                            
        · Most new wells produce oil and water                                                                                  
        · Facilities handling ~three times as much water as                                                                     
    A billion dollars does not go as far as it used to…                                                                         
        · 2000 alpine development: ~80,000 BOPD                                                                                 
        · 2012 CD-5 Drillsite: ~18,000 BOPD                                                                                     
Mr. Jepsen  explained that  coil tubing  drilling technology                                                                    
was  progressing. The  technology provided  a cost-effective                                                                    
way to recover oil from  isolated fault blocks. He explained                                                                    
that existing  well bores were utilized  to drill horizontal                                                                    
wells in an  attempt to reach additional pockets  of oil. He                                                                    
mentioned  the drilling  of an  octolateral well,  which had                                                                    
eight separate  horizontal legs. The wells  were complicated                                                                    
and expensive.                                                                                                                  
Mr.  Jepsen  mentioned  the  development  of  satellites  in                                                                    
Kuparuk   and  Prudhoe   Bay,   which   required  vast   new                                                                    
infrastructure. He noted that  development of oil around the                                                                    
flanks  of the  field was  another technological  goal. Some                                                                    
circumstances required  new pads. He noted  the extension of                                                                    
the  Kuparuk   reservoir  and   the  potential   to  further                                                                    
development  of the  field. The  particular development  was                                                                    
projected to take three years.                                                                                                  
Mr.   Jepsen  mentioned   that  viscous   oil  was   another                                                                    
opportunity  for  ConocoPhillips  on  the  North  Slope.  He                                                                    
mentioned that  multiple wells were  producing both  oil and                                                                    
water as  a function  of the  recovery techniques  used. The                                                                    
challenge  of extracting  both oil  and water  added to  the                                                                    
Mr. Jepsen  informed the committee  about cycle  time. Cycle                                                                    
time  included the  amount  of time  required  to drill  and                                                                    
extract oil from a virgin  site. He mentioned the CD-5 drill                                                                    
site for Alpine.                                                                                                                
3:15:52 PM                                                                                                                    
Mr.  Jepsen spoke  to  costs (slide  4).  He mentioned  $1.4                                                                    
billion  spent on  the initial  Alpine development  shown in                                                                    
the upper  right hand picture  of the slide,  which produced                                                                    
approximately  80 thousand  barrels per  day. He  pointed to                                                                    
costs  related  to CD-5  that  would  cost approximately  $1                                                                    
billion to  develop and yield  18 thousand barrels  per day.                                                                    
He stressed that the environment was cost challenged.                                                                           
BOB   HEINRICH,  VICE   PRESIDENT  FINANCE,   CONOCOPHILLIPS                                                                    
ALASKA, addressed slide  5 related to the impact  of ACES on                                                                    
the  company's  investment. The  bottom  axis  of the  chart                                                                    
related to  the ANS West  Coast oil prices and  the vertical                                                                    
axis  pertained   to  the  industry's  marginal   share.  He                                                                    
discussed the  reason the state's  share increased  as price                                                                    
increased  (represented  by  the   black  line)  because  of                                                                    
effective progressivity.  He communicated that less  than 20                                                                    
percent  of ConocoPhillips'  earnings were  retained by  the                                                                    
business.  He noted  that marginal  share  had the  ultimate                                                                    
impact on decisions made.                                                                                                       
Mr. Heinrich moved to slide  6 titled "Earnings Per Barrel -                                                                    
ConocoPhillips  Alaska  and  State of  Alaska."  During  the                                                                    
period shown,  earnings fluctuated  between $21 and  $25 per                                                                    
barrel of oil. Oil prices had  moved from $70 to about $110.                                                                    
The  company did  not make  much more  as prices  increased;                                                                    
however  the   state's  share  increased   approximately  90                                                                    
percent. He stated  that if the share between  the state and                                                                    
the industry was  more evenly split, Alaska  would be viewed                                                                    
as  more   attractive.  He  made  remarks   related  to  the                                                                    
company's earnings and  discussed the taxes it  had paid. He                                                                    
stated that for  every dollar it earned over $2  was paid in                                                                    
3:20:49 PM                                                                                                                    
Mr.  Heinrich turned  to  slide  7, "ConocoPhillips  Capital                                                                    
Allocation"  and  discussed  how   the  taxes  impacted  the                                                                    
company's   investment  in   the  state.   He  shared   that                                                                    
ConocoPhillips  had seen  a flat  budget over  the past  few                                                                    
years  in  Alaska,  while  the Lower  48  saw  a  three-fold                                                                    
increase in  capital spending. He stated  that the company's                                                                    
dollars were following investment  opportunities in oil rich                                                                    
areas with attractive fiscal structures.                                                                                        
3:21:50 PM                                                                                                                    
Mr.   Jepsen   looked   at   slide   8:   "Government   Take                                                                    
Competiveness." The  slide had been presented  by Mr. Bilbao                                                                    
earlier in the  meeting and was generated by  PFC Energy. He                                                                    
discussed  government take  competitiveness. He  stated that                                                                    
the bill  before the committee  would result in  change, but                                                                    
more competitiveness would make a larger shift.                                                                                 
Mr. Jepsen directed attention to  slide 9 titled "Changes to                                                                    
ACES  to Improve  Alaska's  Investment  Climate." He  stated                                                                    
that  the elimination  of progressivity  was the  bill's key                                                                    
objective.   The    company's   objectives    included   the                                                                    
elimination of progressivity, the  creation of a flatter tax                                                                    
rate over a  broad range of prices and  the establishment of                                                                    
a tax  structure creating an attractive  investment climate.                                                                    
He  stated that  the  bill had  a  slightly progressive  tax                                                                    
structure, but was a significant  improvement over ACES. The                                                                    
bill  addressed tax  increases at  lower prices  relative to                                                                    
ACES and a hard minimum  tax provided more revenue to Alaska                                                                    
at low prices.  The 33 percent base rate  was an improvement                                                                    
and  the bill  increased the  likelihood that  participating                                                                    
area  (PA)   expansions  would   receive  the   Gross  Value                                                                    
Reduction (GVR).                                                                                                                
Mr.  Jepsen stated  that  ConocoPhillips  believed that  HCS                                                                    
CSSB  21(RES)  created an  environment  that  would lead  to                                                                    
increased  investment and  additional  production. He  added                                                                    
that ConocoPhillips  reviewed HCS CSSB 21(RES)  and believed                                                                    
that investment decision making would  change as a result of                                                                    
the bill, but until the  final legislation was available, he                                                                    
could not commit to individual projects.                                                                                        
3:27:13 PM                                                                                                                    
Co-Chair Stoltze asked if Mr.  Jepsen planned to communicate                                                                    
the  changes  in Alaska's  tax  structure  to the  company's                                                                    
board  members. He  asked how  the  legislation would  wedge                                                                    
more  capital.  He  asked  about  the  company's  hopes  and                                                                    
Mr. Jepsen relayed that  geologists and engineers identified                                                                    
initial  project  opportunities.   The  next  step  included                                                                    
feedback  from  project  engineers who  would  estimate  the                                                                    
project   cost.  A   multi-year  analysis   would  then   be                                                                    
conducted, analysts would  look at cash flow  and net income                                                                    
to analyze the cost, and  depending on the cost the decision                                                                    
could  either be  made  locally or  at  the highest  company                                                                    
level (board of directors).                                                                                                     
Mr. Heinrich expounded that the  company redefined its focus                                                                    
on  growing   production  and  redefining  margins   at  the                                                                    
corporate  level. He  elaborated  that the  margin would  be                                                                    
increased  through  production   growth  and  investment  in                                                                    
liquid rich  oil plays  around the  world. He  stressed that                                                                    
Alaska   was    competitive   for   those    higher   margin                                                                    
Co-Chair Stoltze  asked if the bill  represented a battering                                                                    
ram  or  an  Allen  wrench.  He  wanted  to  understand  the                                                                    
significance of the legislation to ConocoPhillips.                                                                              
3:31:45 PM                                                                                                                    
Mr. Jepsen  replied that the bill  represented a significant                                                                    
change to  the investment  environment. He stated  that ACES                                                                    
provided  a  large  barrier  to  investment  in  Alaska.  He                                                                    
pointed  to  slide  6  and  noted  that  the  data  provided                                                                    
summarized the difficulties presented by Alaska.                                                                                
Co-Chair  Stoltze  surmised  that   geology  alone  did  not                                                                    
provide  adequate  incentive  for industry  investment.  Mr.                                                                    
Jepsen affirmed.                                                                                                                
Representative    Gara   discussed    public   reports    of                                                                    
ConocoPhillips'  profits in  in Alaska  for multiple  years.                                                                    
The reports  depicted increases  in profits  that correlated                                                                    
with the price of oil. He  asked how Mr. Jepsen could defend                                                                    
his  statement  that  ConocoPhillips did  not  benefit  from                                                                    
higher  prices of  oil in  Alaska. Mr.  Jepsen replied  that                                                                    
while profit  increased, the state share  also increased. He                                                                    
opined that the  ratio between state and  industry share was                                                                    
Representative Gara  asked about  the CD-5 unit  and whether                                                                    
it was an Alpine satellite.  Mr. Jepsen replied that the CD-                                                                    
5 unit was considered an Alpine drill site.                                                                                     
Representative  Gara understood  that the  CD-5 project  was                                                                    
initiated during the ACES regime.                                                                                               
3:34:54 PM                                                                                                                    
Mr.  Jepsen replied  that the  decision  regarding the  CD-5                                                                    
development   was   made   prior   to   the   ACES   regime.                                                                    
ConocoPhillips remained optimistic that  they would see ACES                                                                    
Representative   Gara   pointed  out   that   ConocoPhillips                                                                    
proceeded with the CD-5 project  despite the unknown fate of                                                                    
the ACES regime. Mr. Jepsen replied in the affirmative.                                                                         
Representative  Gara pointed  to slide  2. He  discussed the                                                                    
shale play  in the Lower 48  and its place in  the increases                                                                    
shown in the  graph. He understood that  conventional oil in                                                                    
North  Dakota  and in  Texas  remained  relatively flat.  He                                                                    
surmised  that   shale  oil  was  the   primary  reason  for                                                                    
increased  investment in  the Lower  48. Mr.  Jepsen replied                                                                    
that maintenance  of a flat  production in  conventional oil                                                                    
was  an accomplishment.  He agreed  that the  increases were                                                                    
largely  seen in  the conventional  oil categories,  but the                                                                    
investment   made  in   conventional   oil   could  not   be                                                                    
Representative  Gara referred  to  an  article published  in                                                                    
Petroleum  News  that paraphrased  executive  vice-president                                                                    
Matthew  Fox stating  that ConocoPhillips  was committed  to                                                                    
spending $2.5  billion in Alaska  over the next 5  years. He                                                                    
asked about the accuracy of the statement.                                                                                      
Mr. Jepsen  replied that  in the  context the  statement was                                                                    
accurate. He  furthered that  it was  a continuation  of the                                                                    
company's existing  level of activity. He  stated that there                                                                    
was a  fairly long disclaimer that  the company's investment                                                                    
plan   could  change   if   the   environment  changed.   He                                                                    
appreciated the  positive press for  Alaska, but  noted that                                                                    
the situation  could be even  better if the  tax environment                                                                    
was altered.                                                                                                                    
3:39:31 PM                                                                                                                    
Representative  Gara referenced  a  quote  from an  investor                                                                    
conference from Senior Vice-President,  Greg Garland in 2011                                                                    
stating that Alaska  had strong cash margins  and good rates                                                                    
of return. He wondered if  the statements were accurate. Mr.                                                                    
Heinrich responded  that it was  a matter of  describing the                                                                    
portfolio.  With  a  portfolio that  was  predominately  gas                                                                    
production, the  95 percent  revenues and  margins generated                                                                    
in Alaska did represent strong  margins relative to a larger                                                                    
portfolio. He  added that  the Lower 48  saw 70  percent gas                                                                    
production, so  the comparison with Alaska  was not entirely                                                                    
accurate.  He  agreed that  the  earnings  in 2011  were  in                                                                    
excess of the corporate average.                                                                                                
Representative Gara spoke to  the possibility of eliminating                                                                    
progressivity and  the potential  for the  state to  face an                                                                    
$800 million  loss as a  result. He asked  if ConocoPhillips                                                                    
would  enter a  contract costing  $500 million  with another                                                                    
company  that could  not guarantee  a  response. Mr.  Jepsen                                                                    
replied that his  company would still pay  a significant tax                                                                    
rate  in Alaska.  He clarified  that his  company could  not                                                                    
guarantee production  in specific  projects. He  did believe                                                                    
that  the passage  of HCS  CSSB 21(RES)  would lead  to more                                                                    
Representative Gara  asked how  much investment.  Mr. Jepsen                                                                    
replied that  the investment decisions  were outside  of his                                                                    
Representative   Gara   provided   a   scenario   in   which                                                                    
ConocoPhillips handed  over $500 million to  another company                                                                    
without commitment. He wondered  if contracts of that nature                                                                    
were common in the oil industry.                                                                                                
3:43:48 PM                                                                                                                    
Mr. Jepsen believed the issue  was related to public and tax                                                                    
policy.  The   right  tax   environment  would   yield  more                                                                    
Representative Gara spoke to the  CD-5 deadlock. He wondered                                                                    
if exploration would  occur in additional units  if the bill                                                                    
passed.  Mr.   Jepsen  responded  that   ConocoPhillips  was                                                                    
drilling  an exploration-well  in an  attempt to  maintain a                                                                    
lease. He stated that ConocoPhillips  was an active explorer                                                                    
in Alaska. He mentioned federal  land issues with the Alaska                                                                    
National Wildlife  Refuge (ANWR) and the  National Petroleum                                                                    
Reserve Alaska.                                                                                                                 
3:45:47 PM                                                                                                                    
Representative  Costello   noted  that  the   company  spent                                                                    
millions of dollars with no  commitment from mother earth to                                                                    
yield  oil. She  wondered  if the  company  could provide  a                                                                    
sense  of  the  top  criteria used  when  making  investment                                                                    
Mr.  Heinrich replied  that there  were multiple  layers and                                                                    
parameters involved. He  pointed to a timeline  and spoke to                                                                    
a time  when the  company had spent  capital dollars  on gas                                                                    
acquisitions. The  world had changed  for oil  producers due                                                                    
to the unconventional plays. The  company was now focused on                                                                    
oil production, which  was valued greatly by  the market. He                                                                    
mentioned very  high level  strategies that  companies would                                                                    
focus on.  He discussed an  array of opportunities  of NPVs,                                                                    
Internal Rate  of Return  (IRR) and  long-term cash  flow as                                                                    
applied  to  Organization   for  Economic  Co-operation  and                                                                    
Development  (OECD) countries.  The  type  of activities  in                                                                    
Alaska fit well with the current strategies.                                                                                    
Representative  Costello  asked  about  the  cost  of  doing                                                                    
business in Alaska.                                                                                                             
3:50:04 PM                                                                                                                    
Mr. Jepsen  answered that costs were  significant in Alaska.                                                                    
He pointed  to a  slide from PFC  Energy related  to average                                                                    
costs  of  investment in  Alaska  versus  the Lower  48.  He                                                                    
pointed to other environmental  factors that made investment                                                                    
challenging in the state.                                                                                                       
Mr.  Heinrich  added  that costs  and  timelines  ultimately                                                                    
comprised the  metrics used.  The types  of items  listed by                                                                    
Mr. Jepsen factored into the decision.                                                                                          
Mr. Jepsen expounded  that cash flow also played  a part. He                                                                    
noted  that cash  flow  was  compromised considerably  under                                                                    
Representative  Costello  asked  if  the  company  would  be                                                                    
motivated  to   change  its   investment  behavior   if  the                                                                    
legislation passed. Mr. Jepsen  replied that the company did                                                                    
not "game" systems.                                                                                                             
Representative  Munoz  asked  about projects  that  had  not                                                                    
occurred  after  ACES  had   been  implemented.  Mr.  Jepsen                                                                    
pointed  to a  viscous oil  project in  North East  West Sak                                                                    
that would  have required 100-plus wells.  He mentioned that                                                                    
BP also had  a project that had not gone  forward after ACES                                                                    
was implemented.                                                                                                                
Representative Munoz  asked if the bill  provided sufficient                                                                    
incentive  to  increase  investment. Mr.  Heinrich  answered                                                                    
that  the comments  had been  made when  the tax  was at  35                                                                    
percent compared to  the current 33 percent  proposed in HCS                                                                    
CSSB 21(RES).                                                                                                                   
Representative Kawasaki asked about  the North East West Sak                                                                    
project. He  wondered if  a change in  ACES might  allow the                                                                    
project  to  proceed.  Mr.  Jepsen  replied  that  technical                                                                    
problems existed in the project  and would be prioritized by                                                                    
ConocoPhillips. He  believed that a change  in tax structure                                                                    
would position  the project to compete  more favorably, than                                                                    
if the change had not been made.                                                                                                
Representative   Kawasaki   asked    about   the   company's                                                                    
international  investment. Mr.  Jepsen did  not believe  the                                                                    
company  was invested  in Sakhalin  Russia, but  he believed                                                                    
the company was invested in the other areas worldwide.                                                                          
Representative  Kawasaki asked  about  investment in  Libya.                                                                    
Mr.  Jepsen   verified  the  company's  investment   in  the                                                                    
Representative   Kawasaki   asked    about   the   company's                                                                    
involvement   in  extreme   fiscal  regimes.   He  expressed                                                                    
curiosity  about the  company's  decision to  work in  those                                                                    
areas. Mr. Jepsen  replied that there were  many reasons the                                                                    
country invested  in those countries  and many times  it was                                                                    
related  to investment  potential. Mr.  Heinrich added  that                                                                    
ConocoPhillips  was prevented  for  a number  of years  from                                                                    
managing  their  assets  in Libya,  but  had  recently  been                                                                    
allowed to  seek developing opportunities. Mr.  Jepsen added                                                                    
that Malaysia provided a high cash margin for the company.                                                                      
3:58:44 PM                                                                                                                    
Representative  Kawasaki  pointed  to  slide  7  related  to                                                                    
Conoco's capital allocation. He  referenced a recent article                                                                    
related to investment  and shale. He pointed  to a different                                                                    
article  where  the  company's   CEO  wanted  to  invest  in                                                                    
opportunities  in  the  Lower  48. He  stated  that  it  was                                                                    
important for  the legislators to  see revenue come  back to                                                                    
the  state in  the form  of production.  He asked  about the                                                                    
company's strategy.  Mr. Heinrich  replied that  cash margin                                                                    
returns  were  significant  in  the  Lower  48.  The  fiscal                                                                    
environment  for ConocoPhillips  improved with  those higher                                                                    
cash margins.                                                                                                                   
Representative Kawasaki clarified that  the cash flow earned                                                                    
by  ConocoPhillips in  the Lower  48  was $40  to $50  while                                                                    
Alaska  offered $30.  He  asked if  HCS  CSSB 21(RES)  would                                                                    
bring Alaska to similar cash  flows. Mr. Jepsen replied that                                                                    
HCS  CSSB 21(RES)  would not  provide Alaska  the same  cash                                                                    
flow  as other  states.  He pointed  to  various items  that                                                                    
impacted  a company's  investment decision.  He stated  that                                                                    
the  North Slope  had  not  been built  with  money made  in                                                                    
Alaska. He believed  there would be economic  chaos if money                                                                    
had to be constrained in the place it was made.                                                                                 
4:02:51 PM                                                                                                                    
Representative  Wilson  asked  what would  happen  if  North                                                                    
Dakota chose to  raise their taxes. Mr.  Jepsen replied that                                                                    
it would have a negative  impact on additional investment in                                                                    
North Dakota.                                                                                                                   
Representative  Wilson asked  how the  company could  ensure                                                                    
the state  that Alaskan's would  be put to work.  Mr. Jepsen                                                                    
replied that the company's statistics  pointed to 88 percent                                                                    
of  Alaska workforce,  and 70  percent of  operators on  the                                                                    
North Slope resided in Alaska.  He believed the numbers were                                                                    
good in comparison to other  industries in the state. One of                                                                    
the company's key objectives was to hire Alaskan workers.                                                                       
Representative Wilson asked  if a mandate was  not needed to                                                                    
ensure Alaska hire  in HCS CSSB 21(RES). Mr.  Jepsen did not                                                                    
believe a mandate was necessary.                                                                                                
4:05:19 PM                                                                                                                    
Representative  Wilson asked  about  slide  8. She  wondered                                                                    
which   arrows  on   the  slide   addressed  ConocoPhillips,                                                                    
ExxonMobil  and BP.  He pointed  to various  arrows and  how                                                                    
they pertained to the data.                                                                                                     
Representative  Wilson asked  if the  company would  move to                                                                    
another  arrow if  classified  as a  new  field. Mr.  Jepsen                                                                    
answered in the affirmative.                                                                                                    
Representative Wilson  asked if  the state was  giving money                                                                    
to  ConocoPhillips  or taking  less  from  them. Mr.  Jepsen                                                                    
responded that the  change in tax structure  took less money                                                                    
from the company's earnings.                                                                                                    
Representative  Wilson encouraged  the  company to  remember                                                                    
gas production and its importance in Alaska.                                                                                    
Co-Chair Stoltze made a remark about local hire.                                                                                
Representative Gara pointed  to slide 8. He  noted that many                                                                    
other  countries  charged  higher  taxes  than  Alaska.  Mr.                                                                    
Jepsen  replied that  there were  not very  many, but  there                                                                    
were a handful.                                                                                                                 
Representative Gara  asked about a premium  the state should                                                                    
receive for its safe  geopolitical environment. Mr. Heinrich                                                                    
replied  that  the political  risk  issue  was difficult  to                                                                    
quantify.  He discussed  investment  in  Venezuela during  a                                                                    
period following  nationalization in  the country.  He noted                                                                    
that ConocoPhillips interest was  in new heavy oil projects.                                                                    
He explained  that Venezuela  had offered  favorable royalty                                                                    
relief  and   favorable  income   tax  rates   that  created                                                                    
attractive opportunities.                                                                                                       
4:10:23 PM                                                                                                                    
Mr. Jepsen added that reserve  replacement was a key element                                                                    
of  the   business.  The   company  required   large  global                                                                    
opportunities  to  retain the  key  element.  The issue  was                                                                    
whether the company could increase investment in Alaska.                                                                        
Representative  Gara noted  that  Venezuela did  not have  a                                                                    
history of  being a  stable country.  He stated  that Alaska                                                                    
had a royalty  relief statute, which states that  if the tax                                                                    
rate  prevented a  new development,  an application  process                                                                    
was available to allow a company  to prove that the tax rate                                                                    
deterred the development. He asked  why the relief valve was                                                                    
not  utilized  by  ConocoPhillips.  Mr.  Jepsen  noted  that                                                                    
royalty relief was not necessary  to the company to increase                                                                    
investment. The  company's agenda  was to  reposition Alaska                                                                    
to compete for capital.                                                                                                         
Representative   Gara    appreciated   that   ConocoPhillips                                                                    
reported their Alaska profits.                                                                                                  
4:13:28 PM                                                                                                                    
AT EASE                                                                                                                         
4:33:21 PM                                                                                                                    
DAN   SECKERS,  TAX   COUNSEL,  EXXONMOBIL,   discussed  the                                                                    
"Testimony of  ExxonMobil on Alaska's Investment  Climate to                                                                    
the Alaska  House Finance Committee  on April  8, 2013"(copy                                                                    
on file).                                                                                                                       
4:35:23 PM                                                                                                                    
Mr.  Seckers  believed  that HCS  CSSB  21(RES)  would  make                                                                    
Alaska  more competitive,  which would  result in  more work                                                                    
for  Alaska.  He believed  that  the  bill showed  a  strong                                                                    
improvement over  the ACES structure.  He believed  that HCS                                                                    
CSSB  21(RES) improved  Alaska's global  investment climate.                                                                    
He anticipated  that industry would reexamine  the inventory                                                                    
of all  North Slope  investment opportunities once  ACES was                                                                    
reformed.  He  discussed  the attractiveness  of  Alaska  in                                                                    
comparison  to  other  opportunities. He  expressed  concern                                                                    
regarding  the  connection of  the  sliding  scale to  price                                                                    
aspect of HCS  CSSB 21(RES). He believed that  the base rate                                                                    
in HCS CSSB 21(RES) was too high.                                                                                               
Mr. Seckers  informed the committee  that Alaska  remained a                                                                    
critical   component   to  ExxonMobil's   worldwide   global                                                                    
portfolio.  He was  committed to  working with  the governor                                                                    
and the legislature  to help Alaska reach its  goal for more                                                                    
production. The  need for Alaska  to develop  a competitive,                                                                    
attractive and  stable fiscal regime was  an important state                                                                    
issue.  He noted  that  HCS CSSB  21(RES)  was a  tremendous                                                                    
improvement   over  ACES.   He   stressed   the  belief   of                                                                    
ConocoPhillips   that  if   the  legislation   was  enacted,                                                                    
investment and activity would increase in the state.                                                                            
4:38:43 PM                                                                                                                    
Co-Chair   Stoltze  recalled   different  tax   regimes.  He                                                                    
understood that a company's bottom  line was primary for the                                                                    
company.  He  asked   about  ExxonMobil's  unwillingness  to                                                                    
pinpoint a rate.                                                                                                                
4:39:55 PM                                                                                                                    
Co-Chair Stoltze  noted that  he wished  to work  toward tax                                                                    
reform.  Mr.  Seckers  stressed that  the  rate  established                                                                    
would not be  perfect for everyone. He  recommended that the                                                                    
committee rely  on information from consultants  who provide                                                                    
an independent and impartial view  to the discussion. He was                                                                    
encouraged  by  HCS  CSSB  21(RES)   and  believed  that  it                                                                    
provided a significant improvement over ACES.                                                                                   
4:40:55 PM                                                                                                                    
Representative  Wilson asked  about a  lower base  rate. She                                                                    
expressed curiosity  about how far  the state might  need to                                                                    
drop to  reach the  level of  a new  oil field.  Mr. Seckers                                                                    
replied that  PFC energy  and Econ One  were the  experts on                                                                    
the issue and he deferred the question to them.                                                                                 
Representative  Wilson   wished  to  know   the  presenter's                                                                    
opinion.  She stressed  the importance  of Alaskan  hire and                                                                    
asked how the  company would address the  issue. Mr. Seckers                                                                    
replied that  ExxonMobil strived  to hire locally.  He noted                                                                    
that  the Pt.  Thompson  activities required  local hire  as                                                                    
part of the corporate policy.                                                                                                   
4:43:17 PM                                                                                                                    
Representative Gara  asked about ExxonMobil's  investment in                                                                    
shale  plays  in  North Dakota.  Mr.  Seckers  replied  that                                                                    
ExxonMobil had  a subsidiary  known as  XTO Energy  that was                                                                    
active in the unconventional Lower 48 plays.                                                                                    
Representative Gara sensed that the  tax rate could never be                                                                    
low  enough. He  pointed  out that  North  Dakota was  often                                                                    
portrayed as an ideal tax  environment. He recalled a recent                                                                    
effort  in  North Dakota  to  lower  taxes because  the  oil                                                                    
companies  had  deemed  them   uncompetitive.  He  asked  if                                                                    
ExxonMobil supported the tax reduction  in North Dakota. Mr.                                                                    
Seckers replied that he did not know.                                                                                           
Representative  Gara understood  that the  company's profits                                                                    
would not be shared with  the committee. Mr. Seckers replied                                                                    
that investment information was confidential.                                                                                   
Representative  Gara   requested  profit   information  from                                                                    
ExxonMobil for Alaska. Mr. Seckers  replied that his company                                                                    
provided  information through  DOR regarding  activities and                                                                    
investments in  the state, but the  information was taxpayer                                                                    
Representative   Gara  asked   how  the   legislature  could                                                                    
evaluate  claims  that  ExxonMobil was  not  earning  enough                                                                    
profit  in  Alaska  if   the  information  regarding  profit                                                                    
margins  was  confidential.  Mr. Seckers  replied  that  the                                                                    
consultants   had   demonstrated   that   Alaska   was   not                                                                    
4:46:17 PM                                                                                                                    
Representative   Gara   recalled  testimony   from   another                                                                    
representative  of ExxonMobil  that profits  were comparable                                                                    
to those of ConocoPhillips. He  asked if the information was                                                                    
applicable today. Mr. Seckers replied  that he had no reason                                                                    
to doubt that the information would be applicable today.                                                                        
Representative Gara  asked about the effort  to reduce taxes                                                                    
if the state  wished to see new oil. He  asked if ExxonMobil                                                                    
would embark on new exploration  with new units in Alaska if                                                                    
HCS CSSB 21(RES) was passed.                                                                                                    
4:48:06 PM                                                                                                                    
Mr. Seckers  replied that a lease  sale encouraged activity.                                                                    
He  stated that  ExxonMobil explored  every opportunity  for                                                                    
new  oil extraction  from the  legacy  fields. He  suggested                                                                    
that "wildcatting"  was not  in the  near-term plan,  but an                                                                    
increase of activity was a priority.                                                                                            
Co-Chair Stoltze asked for a  definition of wildcatting. Mr.                                                                    
Seckers replied  that wildcatting referred to  new entrant's                                                                    
exploration in remote areas.                                                                                                    
Representative  Gara requested  commitment  to new  projects                                                                    
that HCS  CSSB 21(RES)  would encourage for  ExxonMobil. Mr.                                                                    
Seckers replied  that Pt. Thompson was  progressing well and                                                                    
the  company would  pursue  all  competitive and  attractive                                                                    
4:50:42 PM                                                                                                                    
Representative   Gara   asked   if  the   investments   were                                                                    
competitive  and  attractive,  would ExxonMobil  invest.  He                                                                    
recalled  Mr. Seckers'  earlier  statement  that the  fiscal                                                                    
regime  was not  attractive  enough as  stated  in HCS  CSSB
Mr. Seckers  clarified that ExxonMobil saw  HCS CSSB 21(RES)                                                                    
as a  tremendous improvement  over ACES  that would  lead to                                                                    
investment increases in Alaska.                                                                                                 
4:51:32 PM                                                                                                                    
Vice-Chair  Neuman  asked  how   industry  viewed  the  risk                                                                    
assessment of the  state. He had been  advised that changing                                                                    
tax  structures   frequently  was  unwise  for   Alaska.  He                                                                    
discussed  the decline  rate  of  approximately 40  thousand                                                                    
barrels  per day  and the  impact  that had  on the  state's                                                                    
budget.  He  noted  that operating  costs  in  Alaska  would                                                                    
continue   to  increase   despite  the   reduction  in   oil                                                                    
4:53:21 PM                                                                                                                    
Mr.  Seckers replied  that ExxonMobil  would view  stability                                                                    
seriously. The  more stable the  environment, the  easier it                                                                    
is to  measure investments  against it.  He agreed  that the                                                                    
decline scenario was a reality  and that ExxonMobil hoped to                                                                    
help arrest.  He stressed that  stability was  critical when                                                                    
making investment decisions.                                                                                                    
Representative Wilson asked about  the credit portion of the                                                                    
bill. She  asked how the  changes in HCS CSSB  21(RES) would                                                                    
change  decisions.  Mr.   Seckers  appreciated  the  balance                                                                    
sought by HCS  CSSB 21(RES). He stated that  tax credits had                                                                    
a  different  economic  impact  on  investments.  ExxonMobil                                                                    
reviewed the  fiscal regime and  other criteria  when making                                                                    
investment  decisions. Investments  would be  measured along                                                                    
with   the  credits   to  determine   how  competitive   and                                                                    
attractive they could be.                                                                                                       
4:55:52 PM                                                                                                                    
Representative Wilson  asked if  the credits were  viewed as                                                                    
positive  or negative  by  ExxonMobil.  Mr. Seckers  replied                                                                    
that HCS CSSB  21(RES) was simpler than ACES  because of the                                                                    
uncertainties and variables.  He expressed concern regarding                                                                    
a  link between  investment  incentives to  price. When  the                                                                    
prices  increased  the  dynamic   of  the  evaluation  would                                                                    
Representative  Wilson asked  how he  would incentivize  the                                                                    
additional production  in Alaska.  Mr. Seckers  replied that                                                                    
the answer  was a  difficult one  because it  was up  to the                                                                    
state  to  determine  their  level  of  competitiveness.  He                                                                    
recommended asking the unbiased state consultants.                                                                              
4:58:19 PM                                                                                                                    
Representative  Wilson stated  that  she wished  to ask  the                                                                    
question  of  the industry.  She  hoped  to have  the  ideal                                                                    
development scenario presented for  debate in the committee.                                                                    
Mr. Seckers  observed that  an adjustment  of the  base rate                                                                    
would aid in the state's competitiveness.                                                                                       
Co-Chair Stoltze appreciated the issue.                                                                                         
CSSB 21(FIN)  am (efd fld)  was HEARD and HELD  in committee                                                                    
for further consideration.                                                                                                      

Document Name Date/Time Subjects
SB 21 EXXON alaska's Investment Climate Under ACES - Testimony Before House Finance - 4-8-2013.pdf HFIN 4/8/2013 1:30:00 PM
SB 21
SB 21 Conoco Phillips House Finance COP Testimony 2013-04-8 v4.pdf HFIN 4/8/2013 1:30:00 PM
SB 21
SB 21 4-08-13 BP- slides for House Finance.pdf HFIN 4/8/2013 1:30:00 PM
SB 21
SB 21 Conoco Phillips House Finance COP Testimony 2013-04-8 v4.pdf HFIN 4/8/2013 1:30:00 PM
SB 21
SB 21 Gara Handout.pdf HFIN 4/8/2013 1:30:00 PM
SB 21
SB 7 - Sponsor Statement H FIN.pdf HFIN 4/8/2013 1:30:00 PM
SB 7
SB 7 - Backup Doc DOR 2012 Annual Report - Figure 1.pdf HFIN 4/8/2013 1:30:00 PM
SB 7
SB 7 - Backup Doc DOR 2012 Annual Report - Figure 1.pdf HFIN 4/8/2013 1:30:00 PM
HFIN 4/9/2013 9:00:00 AM
SB 7
SB 7 - Backup Doc LRS Report Ak Corp Income Tax Revenues.pdf HFIN 4/8/2013 1:30:00 PM
HFIN 4/9/2013 9:00:00 AM
SB 7
SB 7 - Letters of Support H FIN.pdf HFIN 4/8/2013 1:30:00 PM
HFIN 4/9/2013 9:00:00 AM
SB 7