Legislature(2015 - 2016)HOUSE FINANCE 519

04/01/2016 01:30 PM FINANCE

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Audio Topic
02:00:25 PM Start
02:03:09 PM HB247
02:06:01 PM Industry Testimony: Alaska Oil & Gas Association (aoga), Conocophillips, Exxon, Bp, Hilcorp, Caelus Energy Alaska
05:05:41 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 2:00 p.m. Today --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
Industry Testimony:
- Alaska Oil & Gas Association (AOGA)
- ConocoPhillips
- Exxon
- BP
- Hilcorp
- Caelus Energy Alaska
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 247                                                                                                            
                                                                                                                                
     "An  Act relating  to  confidential information  status                                                                    
     and  public   record  status  of  information   in  the                                                                    
     possession of  the Department  of Revenue;  relating to                                                                    
     interest  applicable  to  delinquent tax;  relating  to                                                                    
     disclosure  of  oil  and   gas  production  tax  credit                                                                    
     information; relating  to refunds  for the  gas storage                                                                    
     facility tax credit, the  liquefied natural gas storage                                                                    
     facility  tax credit,  and the  qualified in-state  oil                                                                    
     refinery   infrastructure   expenditures  tax   credit;                                                                    
     relating to  the minimum  tax for  certain oil  and gas                                                                    
     production;  relating to  the  minimum tax  calculation                                                                    
     for  monthly  installment  payments of  estimated  tax;                                                                    
     relating  to interest  on monthly  installment payments                                                                    
     of  estimated  tax;  relating to  limitations  for  the                                                                    
     application  of tax  credits; relating  to oil  and gas                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures;     relating    to     limitations    for                                                                    
     nontransferable  oil  and  gas production  tax  credits                                                                    
     based on oil production  and the alternative tax credit                                                                    
     for oil  and gas  exploration; relating to  purchase of                                                                    
     tax  credit  certificates  from the  oil  and  gas  tax                                                                    
     credit fund; relating  to a minimum for  gross value at                                                                    
     the   point   of    production;   relating   to   lease                                                                    
     expenditures  and tax  credits for  municipal entities;                                                                    
     adding    a   definition    for   "qualified    capital                                                                    
     expenditure";  adding  a  definition  for  "outstanding                                                                    
     liability  to   the  state";  repealing  oil   and  gas                                                                    
     exploration    incentive    credits;   repealing    the                                                                    
     limitation on  the application  of credits  against tax                                                                    
     liability  for   lease  expenditures   incurred  before                                                                    
     January 1,  2011; repealing  provisions related  to the                                                                    
     monthly installment payments for  estimated tax for oil                                                                    
     and gas produced before January  1, 2014; repealing the                                                                    
     oil  and  gas  production   tax  credit  for  qualified                                                                    
     capital  expenditures  and certain  well  expenditures;                                                                    
     repealing   the    calculation   for    certain   lease                                                                    
     expenditures applicable before  January 1, 2011; making                                                                    
     conforming amendments;  and providing for  an effective                                                                    
     date."                                                                                                                     
                                                                                                                                
^Industry Testimony:  Alaska Oil  & Gas  Association (AOGA),                                                                  
ConocoPhillips, Exxon, BP, Hilcorp, Caelus Energy Alaska                                                                      
                                                                                                                                
Representative Wilson  asked if testimony would  be based on                                                                    
the House  Resources version of  the bill or  the governor's                                                                    
bill.                                                                                                                           
                                                                                                                                
Co-Chair Thompson  thought there  might be a  combination of                                                                    
both.  He  directed  industry to  provide  clarification  in                                                                    
their testimony.                                                                                                                
                                                                                                                                
KARA  MORIARTY,  PRESIDENT   AND  CHIEF  EXECUTIVE  OFFICER,                                                                    
ALASKA OIL AND GAS  ASSOCIATION, indicated that the majority                                                                    
of her comments were based  on the committee substitute from                                                                    
the House  Resources committee. She  relayed that  she would                                                                    
be  referencing  the  governor's  bill  version  in  certain                                                                    
places  in   her  testimony.  She   read  from   a  prepared                                                                    
statement:                                                                                                                      
                                                                                                                                
     "Good  Afternoon, Co-Chairs  Thompson  and Neuman,  and                                                                    
     members of  the Committee. For  the record, my  name is                                                                    
     Kara Moriarty  and I'm the President/CEO  of the Alaska                                                                    
     Oil  and  Gas  Association,  commonly  referred  to  as                                                                    
     "AOGA".                                                                                                                    
                                                                                                                                
     AOGA is a professional  trade association whose mission                                                                    
     is to  foster the  long-term viability  of the  oil and                                                                    
     gas  industry   in  Alaska  for  the   benefit  of  all                                                                    
     Alaskans.  Thank you  for  the  opportunity to  testify                                                                    
     today on Committee Substitute (CS)  for House Bill 247,                                                                    
     Governor Walker's oil and gas tax proposal.                                                                                
                                                                                                                                
     Although I  am here on  behalf of a varied  and diverse                                                                    
     group of  companies, my testimony today  represents the                                                                    
     thoughts and  sentiments of each  and every  member. On                                                                    
     matters  related   to  tax,  AOGA   requires  unanimous                                                                    
     consent on testimony.                                                                                                      
                                                                                                                                
     There  is no  denying it  - as  legislators you  have a                                                                    
     tremendous  challenge  in  these  economic  times.  And                                                                    
     whether you want to believe  it or not, the reality is,                                                                    
     the oil and gas  industry is facing similar challenges.                                                                    
     Loss of revenue. Cutting budgets. Laying people off.                                                                       
                                                                                                                                
     Even  in  the  face   of  these  low  prices,  industry                                                                    
     recognizes the  value of investment and  jobs to Alaska                                                                    
     and we  are doing our  part to  sustain what we  can in                                                                    
     this  tough  environment  -   weather  the  storms  and                                                                    
     continue operating at a loss  in the interest of longer                                                                    
     term sustainability.  Do not make  it harder for  us to                                                                    
     sustain Alaska's economy and  jobs by adding additional                                                                    
     costs and more economic hardship."                                                                                         
                                                                                                                                
Ms. Moriarty turned to slide 2: "Oil & Gas Drives Alaska's                                                                      
Economy." She read from her prepared statement:                                                                                 
                                                                                                                                
     "Alaska's  oil  and  gas  industry  fuels  our  state's                                                                    
     economy. No other industry comes even close.                                                                               
     ·  1/3 of all jobs in Alaska are  attributed to the oil                                                                    
        and gas industry. Over 110,000 jobs.                                                                                    
     ·  For  every  direct  job  created  by  the  companies                                                                    
        exploring, producing, transporting, and refining oil                                                                    
        and gas  in  Alaska -  20  more  private and  public                                                                    
        sector jobs are created.                                                                                                
     ·  For every  dollar in  wage created  by industry,  $8                                                                    
        additional dollars in wages are created.                                                                                
     ·  And, even though oil and gas  revenue constitute 66%                                                                    
        of the  state's  unrestricted  revenue  due  to  low                                                                    
        prices, for FY2017, 2/3 of the  state's revenue will                                                                    
        be from one industry.                                                                                                   
     ·  In  addition  to  state  revenue,   last  year,  the                                                                    
        industry paid  $447  million  in property  taxes  to                                                                    
        local governments.                                                                                                      
     ·  What  other  industry  or  individual  Alaskans  are                                                                    
        currently contributing  2/3 or  have contributed  so                                                                    
        much to  the state's  budget and  local governments?                                                                    
        None. No  one comes  close. Our  detractors may  not                                                                    
        like it, but the  fact is, the oil  and gas industry                                                                    
        has been  part  of  the  solution and  is  currently                                                                    
        contributing a  significant  share  to  the  state's                                                                    
        budget."                                                                                                                
                                                                                                                                
2:06:01 PM                                                                                                                    
                                                                                                                                
Ms. Moriarty advanced to slide 3: "Questions to ask when                                                                        
considering policy change." She continued to read from a                                                                        
prepared statement:                                                                                                             
                                                                                                                                
     "The  industry  and the  state  have  a long  standing,                                                                    
     mutually beneficial partnership,  but we are businesses                                                                    
     who  respond  to the  policies  you  make. So,  as  you                                                                    
     deliberate  changing  oil   taxes,  again,  please  ask                                                                    
     yourself these four questions:                                                                                             
     1) Will  this policy  change create more  production in                                                                    
        Alaska?                                                                                                                 
     2) Will  this policy  change make  Alaska more  or less                                                                    
        competitive on a global scale?                                                                                          
     3) Will  this policy provide stability to  the state of                                                                    
        Alaska and to the industry?                                                                                             
     4) Will this policy provide predictability?"                                                                               
                                                                                                                                
Ms. Moriarty continued her statement on slide 4: "Alaska                                                                        
Oil and Gas Tax Policy Changed 5 times in a decade":                                                                            
                                                                                                                                
     "The  House Resources  Committee  spent  over 40  hours                                                                    
     hearing testimony from  the Administration, legislative                                                                    
     expert  consultants,  and  industry on  the  Governor's                                                                    
     proposal.   As  a   result,  the   Resources  Committee                                                                    
     realized  the  detrimental  effects   of  many  of  the                                                                    
     original  provisions  of  HB  247,  including  the  $25                                                                    
     million cap  on refundable credits, the  zeroing out of                                                                    
     tax credits  in the  Cook Inlet  and middle  earth, and                                                                    
     the  increase and  hardening of  the floor  for minimum                                                                    
     tax. While  this improved the  CS, the  CS nevertheless                                                                    
     is  concerning  to  industry,  in  part,  as  it  would                                                                    
     represent  the 6th  major change  in tax  policy in  11                                                                    
     years.                                                                                                                     
                                                                                                                                
     Two  weeks   ago,  I  was   on  the  phone   with  Jamy                                                                    
     Rosenfield,  the  Senior  Vice  President of  IHS  -  a                                                                    
     global  consulting firm  and  co-founder  of CERA  with                                                                    
     world  renowned  and  best-selling author,  Dr.  Daniel                                                                    
     Yergin. We were discussing  the global downturn and the                                                                    
     economic  challenges facing  the oil  and gas  industry                                                                    
     across the  globe. When  I told him  that the  state of                                                                    
     Alaska was  considering a tax increase  and elimination                                                                    
     of  key   incentives,  his   response  was   shock  and                                                                    
     disbelief. He was shocked that  a state so dependent on                                                                    
     the industry  would actually consider  increasing taxes                                                                    
     in this price environment.                                                                                                 
                                                                                                                                
     As  your  legislative  consultant has  said,  and  will                                                                    
     likely testify to  later today, he is not  aware of any                                                                    
     other region  that has considered  so many  tax changes                                                                    
     in the past decade."                                                                                                       
                                                                                                                                
Ms. Moriarty discussed slide 5: "If DOR forecasts hold for                                                                      
FY 2016, production will increase for the first time since                                                                      
2002." She provided her statement:                                                                                              
                                                                                                                                
     "Objectives  like stability  and predictability  can be                                                                    
     subjective, I  understand that. However,  production is                                                                    
     production. We  either have  it or  we don't.  It won't                                                                    
     matter if prices  go back up to $60 or  $80 or $100 per                                                                    
     barrel if production goes back  to the decline rates of                                                                    
     the past.                                                                                                                  
                                                                                                                                
     So -  what has  happened to  production in  the current                                                                    
     fiscal system?  If the state's  forecast holds  for the                                                                    
     next three months, FY16 will  see the first increase in                                                                    
     production since  2002. But -  you cannot just  look at                                                                    
     production today.  It's also important to  look forward                                                                    
     and  consider what  the impact  of today's  investments                                                                    
     will  have  on future  production.  The  black line  is                                                                    
     historical production  in Alaska  for the  last decade,                                                                    
     the red line is the  forecast from December 2013, after                                                                    
     we  started the  current  fiscal regime,  and the  blue                                                                    
     line is the forecast from just last week.                                                                                  
                                                                                                                                
     If you  look at  the chart  to the  right, to  the year                                                                    
     2020, and compare this year's  forecast to the forecast                                                                    
     released  in the  fall  of 2013  you  will notice  that                                                                    
     after just  over two years  in our current  system, the                                                                    
     Department  of  Revenue   is  forecasting  over  50,000                                                                    
     barrels per  day more than  what they  were forecasting                                                                    
     in 2013.  To provide further context,  the spring price                                                                    
     forecast is  $50/barrel less  for 2020  than it  was in                                                                    
     the  2013 forecast.  Think about  that:  Even with  the                                                                    
     much lower  price forecast, the production  forecast is                                                                    
     still over 50,000 barrels per  day more four years from                                                                    
     now.                                                                                                                       
                                                                                                                                
     There has  been a lot  of conversation about  "new oil"                                                                    
     or oil that qualifies for  the gross value reduction or                                                                    
     "GVR". The  very purpose  of the GVR  was to  lower the                                                                    
     effective tax rate  on new oil as a  way to incentivize                                                                    
     more production.  It was  designed for  the new  oil to                                                                    
     pay  a  bit less  in  tax  as  an incentive,  and  it's                                                                    
     working,  but   it's  important   to  point   out  that                                                                    
     according to  DOR's own estimates, the  lion's share of                                                                    
     our future  production will continue  to come  from the                                                                    
     legacy fields  that do not qualify  for this additional                                                                    
     incentive. Industry  will be  paying current  tax rates                                                                    
     on 91-92%  of the  future production  for at  least the                                                                    
     next 15 years."                                                                                                            
                                                                                                                                
2:09:59 PM                                                                                                                    
                                                                                                                                
Ms. Moriarty scrolled to slide 6: "Unprecedented Low Oil                                                                        
Price":                                                                                                                         
                                                                                                                                
     "The  industry,  just  like the  State  of  Alaska,  is                                                                    
     experiencing  the  repercussions  of  an  unprecedented                                                                    
     drop in oil  prices. Prices today are  the lowest we've                                                                    
     seen in  more than  a decade. In  less than  two years,                                                                    
     the industry has experienced a  70% drop in oil prices.                                                                    
     You are  well aware of the  impact this has had  on the                                                                    
     State of Alaska's revenues.  The State has historically                                                                    
     received   85-90%  of   its   revenue   from  oil.   As                                                                    
     significant  as that  is, it's  important to  recognize                                                                    
     that the  industry receives 100%  of its  revenue based                                                                    
     on  the  market prices  for  what  it produces.  As  my                                                                    
     friends  in  other industries  will  tell  you, we  are                                                                    
     price takers, we are not price makers."                                                                                    
                                                                                                                                
Ms. Moriarty continued to slide 7: "Companies Have Negative                                                                     
Cash Flow." She continued with her prepared presentation:                                                                       
                                                                                                                                
     "Invariably,  companies are  forced to  operate despite                                                                    
     the  current oil  price environment,  and in  doing so,                                                                    
     the  oil  and  gas  industry  is  currently  cash  flow                                                                    
     negative,  meaning,   we  are  not   collecting  enough                                                                    
     revenue each  day (represented by the  green line which                                                                    
     represents oil price) to pay  our bills (represented by                                                                    
     the blue line).                                                                                                            
                                                                                                                                
     When businesses  do not  have enough  cash flow  to pay                                                                    
     their expenses,  it results in  cut backs. The  oil and                                                                    
     gas industry is  no different. We have  seen a dramatic                                                                    
     increase in  project delays, deferrals, and  rigs going                                                                    
     idle. Most painfully, Alaskans have  lost jobs, and not                                                                    
     just 40  or 50 of  them. Individual companies  can give                                                                    
     you  their specific  job loss  numbers,  but from  June                                                                    
     2015  to June  2016,  there will  be  over 1,000  fewer                                                                    
     direct  employees of  the oil  and  gas industry.  This                                                                    
     number does not include the multiplier effect."                                                                            
                                                                                                                                
Ms. Moriarty turned to slide 8: "At current prices,                                                                             
industry has negative cash flow before tax":                                                                                    
                                                                                                                                
     "To  add   insult  to  injury,  Alaska   has  been  and                                                                    
     continues to  be, a high  cost environment.  High costs                                                                    
     make  it even  more difficult  to navigate  during this                                                                    
     unprecedented low  price environment. According  to the                                                                    
     Department of  Revenue's Spring Sources Book,  (page 10                                                                    
     specifically), the estimated  average cost of producing                                                                    
     a barrel  of oil on the  North Slope and getting  it to                                                                    
     market - before a company pays  even one penny of tax -                                                                    
     is $50/barrel.                                                                                                             
                                                                                                                                
     Yet  despite  this,  here   we  are,  testifying  about                                                                    
     legislation to add costs for industry.                                                                                     
                                                                                                                                
     Let me  be very clear:  if additional taxes  are levied                                                                    
     on the industry,  either in the form  of increasing the                                                                    
     minimum  tax,  hardening  the   minimum  tax  floor  or                                                                    
     eliminating  tax  credits,  there   will  be  less  oil                                                                    
     production and fewer jobs.                                                                                                 
     It is  really quite simple. Industry  is cash negative.                                                                    
     They don't  have any more  money to give  for increased                                                                    
     costs from  government. Some  companies may  already be                                                                    
     burning through savings to pay  for operations, and the                                                                    
     reserves are not unlimited."                                                                                               
                                                                                                                                
2:13:23 PM                                                                                                                    
                                                                                                                                
Ms. Moriarty explained slide 9: "Administration Goal is to                                                                      
Raise Money." She continued with her statement:                                                                                 
                                                                                                                                
     "As I mentioned  earlier, the Administration's proposal                                                                    
     represents the  sixth major tax  change in the  last 11                                                                    
     years. Prior  changes came from unprecedented  high oil                                                                    
     prices,  or aimed  to  incentivize  development in  the                                                                    
     state and make Alaska more competitive.                                                                                    
                                                                                                                                
     However,  the motivation  behind this  current proposal                                                                    
     is  not  to  increase   production,  make  Alaska  more                                                                    
     competitive  or  create  stability  or  predictability.                                                                    
     Rather, it is  purely driven by the  state's desire for                                                                    
     more money, now.                                                                                                           
                                                                                                                                
     Raising taxes when prices go  up, and then raising them                                                                    
     again  when prices  go  down,  undercuts stability  and                                                                    
     predictability.  The  Administration  acknowledges  the                                                                    
     industry is  suffering tough  economic times;  in fact,                                                                    
     according to their testimony,  if prices average around                                                                    
     $40/barrel  for 2016,  the  industry  will suffer  just                                                                    
     over an  $800 million  "loss" in  the state  of Alaska.                                                                    
     That  is  a  staggering number.  It's  remarkable  that                                                                    
     serious  considerations  are  being  made  to  increase                                                                    
     taxes on  the state's  largest private  sector economic                                                                    
     driver  when  that  industry  is  facing  a  staggering                                                                    
     downturn."                                                                                                                 
                                                                                                                                
Ms. Moriarty discussed slide 10: "Specific Concerns with                                                                        
CSHB 247." She relayed her statement:                                                                                           
                                                                                                                                
     As  I  also  mentioned  earlier,  the  House  Resources                                                                    
     Committee Substitute  does not  have the same  level of                                                                    
     impact  as the  Governor's  original  proposal. But  it                                                                    
     still causes industry concern.                                                                                             
                                                                                                                                
     AOGA supports the current law  with simple interest for                                                                    
     overpaid and/or  underpaid taxes. It is  appropriate in                                                                    
     light  of  the  lengthy statute  of  limitations  which                                                                    
     gives the  Department of Revenue  six years to  audit a                                                                    
     company's  production  tax.  Compounding  the  interest                                                                    
     over a 6  year period, even at the  current rate, would                                                                    
     add  more than  25% of  the  bill before  the audit  is                                                                    
     done.                                                                                                                      
                                                                                                                                
     Today is April  1, 15 days to tax day.  Can you imagine                                                                    
     filing your  taxes, utilizing your  best interpretation                                                                    
     of the  tax code,  and 1  - 2 -  3 -  4 -  5 -  6 years                                                                    
     later, the IRS comes back  and says, I'm sorry, we have                                                                    
     finally finished  auditing your taxes, and  not only do                                                                    
     you  have  to  pay  the  tax  bill,  you  have  to  pay                                                                    
     compounded interest  on top it.  This is  the situation                                                                    
     industry  currently  faces  with this  proposal.  There                                                                    
     could be  likely scenarios  where the  interest payment                                                                    
     is more than the actual tax bill.                                                                                          
                                                                                                                                
     Another   major   concern   relates  to   a   so-called                                                                    
     "loophole" in  calculating a  net operating  loss (NOL)                                                                    
     tax credit.                                                                                                                
                                                                                                                                
     NOL tax  credits are utilized  both on the  North Slope                                                                    
     and Cook  Inlet and  were established  in part  to help                                                                    
     level  the playing  field for  new companies  trying to                                                                    
     get a foothold  in Alaska. The NOLs  arise before these                                                                    
     companies have enough production  to cover their costs,                                                                    
     and the  credit allows them  to realize a  benefit from                                                                    
     their   lease   expenditures  by   getting   tax-credit                                                                    
     certificates for them.                                                                                                     
                                                                                                                                
     For  companies   who  qualify   for  the   gross  value                                                                    
     reduction,  being   able  to  use  that   reduction  in                                                                    
     determining their NOL is a  significant factor in their                                                                    
     project economics.  Losing the  ability to use  it will                                                                    
     result in  a tax increase  for the very  companies that                                                                    
     policy makers wanted to attract to Alaska.                                                                                 
                                                                                                                                
     Yet another  disincentive for future investment  is the                                                                    
     setting of  arbitrary limits on  credits of  any dollar                                                                    
     amount   per   company,   especially  when   even   the                                                                    
     "smallest" of projects  range in the $500  million - $1                                                                    
     billion   range.  Eliminating   or  discouraging   cash                                                                    
     rebates for companies that may  not yet have production                                                                    
     or profits, would disadvantage  new companies that have                                                                    
     invested here in good faith  based on the tax policy in                                                                    
     place when the investments were committed.                                                                                 
                                                                                                                                
     Phasing out  and eliminating two important  credits for                                                                    
     Cook Inlet  and "middle earth" is  also dangerous. Some                                                                    
     argue those  credits are no longer  necessary, but they                                                                    
     have attracted  new companies here, and  production has                                                                    
     increased.  Some companies  have  already entered  into                                                                    
     contracts  and  made  large financial  commitments  for                                                                    
     spending  over   at  least  the  next   year.  Abruptly                                                                    
     terminating or  changing those  credits after  the fact                                                                    
     will  not attract  these types  of  investments in  the                                                                    
     future.                                                                                                                    
                                                                                                                                
     The House Resources CS also  creates a working group to                                                                    
     specifically  focus  on  Cook  Inlet.  This  group,  in                                                                    
     addition to  the Oil and Gas  Competitive Review Board,                                                                    
     signals to industry that even  if changes are made this                                                                    
     session,  that  additional  changes  are  coming.  Once                                                                    
     again, the State will be  looking at making a change to                                                                    
     the  fiscal  system  signaling to  investors  that  the                                                                    
     state fiscal regime is not be stable or predictable.                                                                       
                                                                                                                                
     The  proposed  revisions  in Section  17  of  CSHB  247                                                                    
     define "outstanding liability to  the state" broadly as                                                                    
     "an  amount of  tax,  interest,  penalty, fee,  rental,                                                                    
     royalty,  or  other  charge for  which  the  state  has                                                                    
     issued  a demand  for payment  that has  not been  paid                                                                    
     when  due  and,  if  contested, has  not  been  finally                                                                    
     resolved  against the  state."  Even  though the  House                                                                    
     Resources CS  does try to  minimize the impact  of this                                                                    
     "outstanding  liability"  section,   it  still  creates                                                                    
     uncertainty  for  companies  when trying  to  determine                                                                    
     economics of a project.                                                                                                    
                                                                                                                                
     Finally,   retroactively    applying   regulations   is                                                                    
     concerning   and    will   again,    cause   additional                                                                    
     instability."                                                                                                              
                                                                                                                                
2:19:43 PM                                                                                                                    
                                                                                                                                
Ms. Moriarty moved to slide 11: "Any change will have a                                                                         
negative impact on industry." She finished reading her                                                                          
prepared statement:                                                                                                             
                                                                                                                                
     "Whether or not  the production tax is  raised, the oil                                                                    
     and  gas  industry will  still  be  the largest  annual                                                                    
     contributor to state government by far.                                                                                    
                                                                                                                                
     The  oil and  gas  industry will  contribute 7.5  times                                                                    
     more than the Governor's  proposed income tax, 50 times                                                                    
     more  than the  proposed  revenue from  mining, and  37                                                                    
     times more than from commercial fishing.                                                                                   
                                                                                                                                
     In this environment some  companies may find themselves                                                                    
     in the  position of  borrowing money  just to  keep the                                                                    
     doors  open for  business. We  cannot emphasize  enough                                                                    
     any  increase  in cost  will  have  a serious  negative                                                                    
     impact on industry and Alaska.                                                                                             
                                                                                                                                
     The industry  is not  before you  today asking  for tax                                                                    
     relief  while we  struggle  though extraordinarily  low                                                                    
     prices. We  do ask, however,  at this trying  time, you                                                                    
     do no harm."                                                                                                               
                                                                                                                                
Ms. Moriarty concluded her presentation and made herself                                                                        
available for questions.                                                                                                        
                                                                                                                                
Representative Wilson asked why other states did not offer                                                                      
refundable tax credits. It was her understanding that                                                                           
Alaska was the only state to offer cash.                                                                                        
                                                                                                                                
Ms. Moriarty  recommended that Representative  Wilson direct                                                                    
her question  to the  legislature's consultant.  She thought                                                                    
he had better  knowledge of different systems  than she did.                                                                    
She believed  Alaska was one  of the  few states that  had a                                                                    
net tax system - credits were inherent of a net tax system.                                                                     
                                                                                                                                
2:21:17 PM                                                                                                                    
                                                                                                                                
Representative Gara  mentioned that  when he heard  from his                                                                    
constituents  they  recognized  the   fiscal  gap  and  most                                                                    
thought  that everyone  needed to  step and  contribute what                                                                    
they could.  He mentioned  two sets of  fields on  the North                                                                    
Slope: those  that paid a  lower tax (Gross  value reduction                                                                    
fields  - fields  after  2002 and  all  future fields),  and                                                                    
those fields  before 2002. He  stated that according  to the                                                                    
Department of  Revenue over  the long  term the  gross value                                                                    
reduction fields (GVR) fields paid  no production tax at all                                                                    
- a  net zero production  tax until the prices  reached over                                                                    
$73 per barrel of oil. They  were not subject to the minimum                                                                    
tax floor and  paid no production taxes.  However, the state                                                                    
was providing credits  and the industry was  asking that the                                                                    
credits  be maintained.  He wondered  if,  from the  state's                                                                    
perspective of  wanting more revenue  at higher  prices, the                                                                    
industry should step  up to the plate  reconsidering the net                                                                    
zero production tax rate.                                                                                                       
                                                                                                                                
Ms. Moriarty relayed  that the state set the  policy and the                                                                    
industry responded. The  policy was set for  the GVR because                                                                    
the  state   wanted  additional  new  oil   production.  The                                                                    
industry  responded and  more production  could  be seen  in                                                                    
smaller  fields.  She  believed   that  in  looking  at  the                                                                    
forecast,  91  percent  of the  state's  production  in  the                                                                    
following 15  years would come  from the legacy  fields (the                                                                    
fields that  did not  receive the GVR).  For Alaska  Oil and                                                                    
Gas Association  (AOGA) it  was a matter  of policy.  If the                                                                    
state  wanted incentives  to get  new  oil, the  association                                                                    
would respond  to the state's  policy. If the  state decided                                                                    
to  roll it  back, the  companies would  respond. She  added                                                                    
that in looking  at the entire system,  rather than focusing                                                                    
in on one component, the  state was collecting revenues from                                                                    
8 to  9 percent of  production from the GVR  fields. Royalty                                                                    
went up  as prices went  up. Income tax  would theoretically                                                                    
go up  because of  a higher  income tax  as prices  went up.                                                                    
Property  taxes  would  also climb.  The  association  would                                                                    
respond to policy if the legislature decided to change it.                                                                      
                                                                                                                                
2:24:13 PM                                                                                                                    
                                                                                                                                
Representative Gara understood the  current policy. He asked                                                                    
if she thought it was fair for  the state to have a net zero                                                                    
production tax  up to  $73 per  barrel of  oil for  the post                                                                    
2002 and new fields.                                                                                                            
                                                                                                                                
Ms. Moriarty  asserted that the state  determined its policy                                                                    
and AOGA  only responded to  it. If the  legislature thought                                                                    
the policy  was unfair  then the  legislature would  need to                                                                    
change it.  She added that if  the state wanted to  have GVR                                                                    
oil  to account  for  the 8  to 9  percent,  there would  be                                                                    
companies testifying  in the current meeting  that were part                                                                    
of  the  GVR  oil  that   could  talk  more  directly  about                                                                    
fairness.  Speaking  for   the  industry  collectively,  she                                                                    
responded that if  the legislature did not  think the policy                                                                    
was  fair it  should  change it.  She  reiterated that  AOGA                                                                    
would just respond  to the policy rather  than commenting on                                                                    
whether it was equitable.                                                                                                       
                                                                                                                                
Representative  Gara understood  that raising  taxes on  oil                                                                    
field  companies  was  not  very sensible  at  a  time  when                                                                    
companies were  losing money  with the price  of oil  at $20                                                                    
per barrel. The  minimum tax of 4 percent  (an emergency tax                                                                    
of  sorts) for  the  larger  fields applied  up  to $76  per                                                                    
barrel.  At  the Prudhoe  Bay,  Kuparuk,  and Alpine  fields                                                                    
companies would only be paying  a minimum oil production tax                                                                    
of 4  percent. He  wondered if Ms.  Moriarty thought  it was                                                                    
fair  for  the legislature  to  revisit  the taxes  for  the                                                                    
larger fields.                                                                                                                  
                                                                                                                                
Ms. Moriarty  answered that the  State of Alaska  decided to                                                                    
adopt  a  net  tax  system.  The state  was  taxing  on  the                                                                    
economics  of  the  applicable fields.  She  explained  that                                                                    
costs were  very high in  those fields. Producers  were cash                                                                    
negative with  the current price  of oil and  would continue                                                                    
to be so  for a while. She furthered that  the floor was put                                                                    
in place  to protect  the state when  oil prices  went down.                                                                    
Without the  floor in place  today the state  would actually                                                                    
be  collecting even  less revenue.  She emphasized  that the                                                                    
companies that AOGA represented  were cash negative. The net                                                                    
tax  was designed  to tax  on  the economics  and, the  fact                                                                    
remained that presently the producers were losing money.                                                                        
                                                                                                                                
Representative Gara did  not mean the current  day. He meant                                                                    
when prices adjusted to the $50  or $60 per barrel level and                                                                    
above  when companies  were making  money. He  asked if  she                                                                    
thought it was fair for the  state to keep the 4 percent tax                                                                    
in place up to $76 per barrel for the larger fields.                                                                            
                                                                                                                                
Ms. Moriarty responded that she  was not going to comment on                                                                    
whether the state's  policies were fair. Alaska  Oil and Gas                                                                    
Association  was responding  to  the  state's policies.  The                                                                    
state had  a net tax in  place. It took the  specified price                                                                    
to  make  a  profit   (if  that  was  Representative  Gara's                                                                    
assumption at $70 or $76 price  per barrel).  The law stated                                                                    
that producers  had to  pay "the  greater of"  amount versus                                                                    
the price  of oil  minus the  cost of  transportation, minus                                                                    
deductible expenses (producers  had additional expenses that                                                                    
were  not  deductible).  Once a  calculation  was  done  the                                                                    
producers were required to pay the higher number.                                                                               
                                                                                                                                
2:28:00 PM                                                                                                                    
                                                                                                                                
Representative Gara mentioned that  she had gone through her                                                                    
predictions of  production anticipating it to  be down below                                                                    
400,000 barrels  in a  few years  under the  existing system                                                                    
and  the forecast.  He  was aware  that  fields were  coming                                                                    
online since  the law was  changed. He noted the  CD5 field,                                                                    
but the announcement of the  field coming online came before                                                                    
the law  was changed. Point  Thompson was coming  online but                                                                    
was based on a settlement achieved  in 2012 prior to the law                                                                    
changing. There were other fields,  Moose's Tooth and Bear's                                                                    
Tooth,  which  were  being  invested   in  before  2013.  He                                                                    
wondered if there  were any fields where  investment had not                                                                    
started prior to the tax law changing.                                                                                          
                                                                                                                                
Ms.  Moriarty  relayed  that  about  91  to  92  percent  of                                                                    
production was  coming from  the legacy  fields. All  of the                                                                    
fields were in  place and investments were  made in previous                                                                    
tax  fiscal systems  such as  Alaska's  Clear and  Equitable                                                                    
Share (ACES),  Alaska Petroleum Profits  Tax (PPT),  or More                                                                    
Alaska Production  Act (MAPA) -  the current  tax structure.                                                                    
Prior investments  were impacting production,  which without                                                                    
them  the  state  would  be  currently  in  a  more  serious                                                                    
financial strait than if the state  was at the historic 6 to                                                                    
8  percent   decline.  She  explained   that  in   terms  of                                                                    
production  it was  necessary to  look at  investments being                                                                    
made currently and  how they might impact  production in the                                                                    
future. Since  the passage of  SB 21 [legislation  passed in                                                                    
2013 relating  to oil and  gas production tax]  the industry                                                                    
had invested  almost $5  billion above  and beyond  what had                                                                    
been  invested  in prior  years.  The  impact of  investment                                                                    
might not be  realized yet. However, if the  state wanted to                                                                    
raise  taxes  on  an  industry that  was  losing  money  she                                                                    
guaranteed   that  the   investments   would  decrease   and                                                                    
production and jobs would be negatively impacted.                                                                               
                                                                                                                                
Representative Gara  clarified that he was  asking questions                                                                    
about taxes when companies were making profits.                                                                                 
                                                                                                                                
Vice-Chair Saddler  asked if  the state  was paying  the oil                                                                    
industry to take oil out of the state.                                                                                          
                                                                                                                                
Ms. Moriarty responded  in the negative. She  added that the                                                                    
producers had  to make investments  before they  could apply                                                                    
for any  credits. She provided  an analogous  situation. The                                                                    
state was  not paying producers. Producers  were leasing the                                                                    
property from  the state, producing  oil and gas  from those                                                                    
properties, and  after they made investments  they were able                                                                    
to apply  for some level of  credit based on the  system the                                                                    
state had in place.                                                                                                             
                                                                                                                                
2:31:22 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  asked if  the state  was paying  the oil                                                                    
industry to give away Alaska's oil.                                                                                             
                                                                                                                                
Ms.  Moriarty  responded  in the  negative.  The  state  was                                                                    
paying  the   industry  credit  that  producers   earned  by                                                                    
investing  money, then  applying  for  credits according  to                                                                    
statute.                                                                                                                        
                                                                                                                                
Vice-Chair Saddler  asked Ms.  Moriarty about  other sources                                                                    
of income  to the state  that accrue from oil  production in                                                                    
addition to production tax.                                                                                                     
                                                                                                                                
Ms. Moriarty relayed that the  oil and gas industry paid the                                                                    
state  four different  revenue  streams including  royalties                                                                    
(the state's share  as the land owner),  production taxes (a                                                                    
net  tax based  on the  economics), corporate  income taxes,                                                                    
and property taxes.                                                                                                             
                                                                                                                                
Vice-Chair Saddler  asked Ms. Moriarty to  provide Alaskan's                                                                    
with  assurances  that leaving  the  current  tax system  in                                                                    
place was to their benefit.                                                                                                     
                                                                                                                                
Ms.  Moriarty  recognized that  it  could  be a  challenging                                                                    
argument  to make  when the  state was  faced with  a severe                                                                    
budget crisis.  She posed the  question as to how  the state                                                                    
could afford to  pay oil tax credits. Her  response was that                                                                    
she was  not sure if the  state could afford not  to pay the                                                                    
credits.  The credits  were assuring  that the  industry was                                                                    
investing  in the  future of  Alaska. She  wondered about  a                                                                    
growth plan  for the state,  about how Alaska's  economy was                                                                    
going  to grow.  She mentioned  the mining  bill and  opined                                                                    
that the  miners would  tell legislators  that one  new mine                                                                    
could  produce more  revenue than  the proposed  increase in                                                                    
the mining  tax. She supposed  the oil and gas  industry was                                                                    
really  no different.  The oil  tax  credits were  a way  to                                                                    
incentivize  behavior  to  make additional  investments  and                                                                    
produce more  oil. If  production were  to continue  to hold                                                                    
steady and  slightly increase over  the following  couple of                                                                    
years and  prices went up it  would be a positive  thing for                                                                    
the state.  However, if prices  went up but  production went                                                                    
down, there  may not be  a net  benefit for the  state. Even                                                                    
though there might  be an increase in price  there might not                                                                    
be a  net benefit  if production decreased.  It was  key for                                                                    
producers but production  went down a net  benefit might not                                                                    
occur. For  producers keeping the  current fiscal  system in                                                                    
place was key to keeping production steady.                                                                                     
                                                                                                                                
Vice-Chair  Saddler  asked  if  losses by  the  industry  in                                                                    
Alaska  were  being  balanced  out  by  business  operations                                                                    
elsewhere in the world.                                                                                                         
                                                                                                                                
Ms.  Moriarty   responded  that  his  questions   should  be                                                                    
addressed  to specific  individual companies.  She commented                                                                    
that the  price of oil was  low everywhere. It was  not just                                                                    
low in  Alaska. Companies were  cash negative in  Alaska and                                                                    
were generating less  revenue in other regions.  It was also                                                                    
forcing  regions to  be more  competitive because  there was                                                                    
less  investment  dollars  available to  invest  in  current                                                                    
development as well as future development.                                                                                      
                                                                                                                                
2:35:00 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  commented  on the  DOR  revised  Spring                                                                    
Revenue Forecast.  The forecast  indicated that by  2026 the                                                                    
state would  have 217,000  or 277,000 barrels  a day  in the                                                                    
pipeline. He  wondered if it  was a fair  decline prediction                                                                    
assuming there  were no other  capital investments  made. He                                                                    
asked if  the industry  would continue to  produce oil  in a                                                                    
declining   production   environment   without   significant                                                                    
additional capital expense.                                                                                                     
                                                                                                                                
Ms.  Moriarty  responded  that   it  obviously  became  more                                                                    
expensive to  produce as  production declined.  She believed                                                                    
all  Alaskans  should  be   concerned  that  producers  were                                                                    
currently  operating the  pipeline at  less production  than                                                                    
the original start-up in June  1977. She explained that when                                                                    
Alyeska Pipeline  started production it was  producing about                                                                    
700,000 barrels per day. Admiral  Barrett could confirm that                                                                    
there were  operational challenges  and costs at  present at                                                                    
500,000 barrels  per day. For  engineers it was  an exciting                                                                    
project. As modifications arise they came at a cost.                                                                            
                                                                                                                                
Vice-Chair Saddler  noted that the models  seemed to predict                                                                    
the   effect  of   the   tax   credits  infinitely   without                                                                    
accommodating practical considerations.                                                                                         
                                                                                                                                
Representative Pruitt asked if she  had any knowledge of any                                                                    
other existing  tax regime  for which  one of  AOGA's member                                                                    
companies operated  that was looking at  increasing taxes in                                                                    
the current environment.                                                                                                        
                                                                                                                                
Ms. Moriarty thought his questions  would be better answered                                                                    
by  the  legislature's  consultant.  She  also  mentioned  a                                                                    
recent article in  the "Economist" on the  same issue. There                                                                    
were a  few regions  looking at  increasing their  tax rates                                                                    
whether having to  do with production or  royalties. She was                                                                    
aware that  some of her  member companies were  operating in                                                                    
those areas such as in  Russia and Nigeria. However, she was                                                                    
not aware of  any state in the United States  or province in                                                                    
Canada planning to increase their tax rates.                                                                                    
                                                                                                                                
2:38:05 PM                                                                                                                    
                                                                                                                                
Representative Pruitt asked Ms.  Moriarty if companies would                                                                    
be  able  to  maintain  the same  level  of  investment  and                                                                    
production with increasing taxes.                                                                                               
                                                                                                                                
Ms. Moriarty  did not believe AOGA's  member companies would                                                                    
be able  to maintain the  same level of investment  if taxes                                                                    
were increased or credits were eliminated.                                                                                      
                                                                                                                                
Representative  Pruitt asked  if Ms.  Moriarty thought  that                                                                    
the current  tax policy  was focused  more on  production or                                                                    
general  fund  monies. Based  on  her  answer to  his  first                                                                    
question  he  wondered if  the  change  the legislature  was                                                                    
contemplating  adjusted  the  focus  of the  policy  of  the                                                                    
state.                                                                                                                          
                                                                                                                                
Ms. Moriarty stated  that the current policy  was focused on                                                                    
getting more oil  in the pipeline. It was  focused on making                                                                    
Alaska a competitive environment  while allowing a return to                                                                    
the state and its citizens. If  prices were to return to the                                                                    
same levels  as when  SB 21 was  passed the  government take                                                                    
would be around 62-63 percent.  She referred to Governor Jay                                                                    
Hammond's  philosophy  of  one-third,  one-third,  and  one-                                                                    
third:  one third  to the  federal government,  one-third to                                                                    
state  government,  and  one-third  to  industry.  At  those                                                                    
prices, SB  21 achieved  that ratio.  At current  prices the                                                                    
government take was  almost 100 percent and  for some fields                                                                    
it  was 100  percent.  The Alaska  Oil  and Gas  Association                                                                    
noticed   the  state   looking  at   tax  policy   from  the                                                                    
perspective  of how  to  achieve  more production,  maintain                                                                    
competitiveness,  make the  policy  simpler,  and one  other                                                                    
component.   The  administration   stated  that   if  prices                                                                    
returned  to the  $80-$100 range  it might  not be  having a                                                                    
conversation  about changing  the  current  tax policy.  The                                                                    
administration's focus has been on  how to get more money in                                                                    
the  current  low  price environment  recognizing  that  the                                                                    
industry was losing  money. She opined that a  change in tax                                                                    
policy  was more  about state  finances rather  than getting                                                                    
more oil in the pipeline.                                                                                                       
                                                                                                                                
2:41:04 PM                                                                                                                    
                                                                                                                                
Representative   Pruitt   asked  whether   investments   and                                                                    
production would  increase if  prices were  to go  up again,                                                                    
based  on her  answers regarding  the potential  decrease in                                                                    
investments.                                                                                                                    
                                                                                                                                
She could not guarantee what  companies would do when prices                                                                    
increased.  However,  it  would be  extremely  difficult  to                                                                    
attract capital  back to  Alaska if  the state  raised taxes                                                                    
when prices went up and  raised taxes when prices went down.                                                                    
Most companies would have to plead  their case to a board of                                                                    
directors  although  for some  only  one  person would  need                                                                    
convincing. The  first question from board  members would be                                                                    
whether  a company  made  money in  Alaska  in the  previous                                                                    
year. The response might be that  at $40 oil the company did                                                                    
not make  money, but  if prices  were to go  up it  might be                                                                    
possible to  make money. Questions  about taxes  might ensue                                                                    
making  it  more difficult  to  argue  in favor  of  further                                                                    
investment in  Alaska. She noted that  the legislature would                                                                    
be hearing from Cook Inlet  producers in the following week.                                                                    
She  relayed that  it would  be  very difficult  to get  the                                                                    
jack-up rig  back to Alaska in  the following 5 years  or at                                                                    
all if it were to leave the inlet.                                                                                              
                                                                                                                                
2:43:46 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  emphasized that Alaska  owned the                                                                    
resources although  he thought  that some  people attributed                                                                    
revenue  to  the  oil  industry. He  pointed  out  that  the                                                                    
industry  obtained leases  for  the  state's resources.  The                                                                    
state and  industry prospered  together, rising  and falling                                                                    
together.  Alaska  had  always been  a  resource  extraction                                                                    
state.  Alaska had  several  different resources  including,                                                                    
furs, fish, timber, coal, gold,  and copper. He thought that                                                                    
Ms. Moriarty  viewed the  framework based  on taxes.  He saw                                                                    
credits as  the means of  driving behavior. He asked  her to                                                                    
speak to  direct production resulting  from tax  credits. He                                                                    
commented  that  he wanted  to  see  production continue  in                                                                    
Prudhoe Bay. He wondered if  she could identify credits that                                                                    
produced  more   oil.  He  mentioned   consistently  hearing                                                                    
producers  talk about  being in  Alaska  for the  long-term.                                                                    
The credits  were designed to  change behavior.  He wondered                                                                    
if  she could  expound on  when production  would stop  as a                                                                    
result of tax credits halting.                                                                                                  
                                                                                                                                
Ms. Moriarty  responded that the committee  would be hearing                                                                    
from  industry  participants  who would  report  that  their                                                                    
production  was a  direct result  of the  credits. She  used                                                                    
Cook Inlet as  an example. The production was  down to about                                                                    
8,000 barrels  per day.  Some of the  legacy rigs  were only                                                                    
producing 600 barrels per day.  Legislation that was passed,                                                                    
often referred  to as the  Cook Inlet Recovery  Act, enticed                                                                    
companies to  Alaska. Some Cook Inlet  producers would claim                                                                    
that  the credits  were  the reason  for  coming to  Alaska.                                                                    
There had  been a  100 percent  production increase  in Cook                                                                    
Inlet. There were companies  like Hilcorp, BlueCrest Energy,                                                                    
and  Furie Operating  Alaska who  were  either producing  or                                                                    
close  to production.  In  the past  there  have been  other                                                                    
North   Slope  producers   that  have   invested  and   have                                                                    
experienced  an  increase  in  production  due  to  the  tax                                                                    
credits. She could not provide  each company's percentage of                                                                    
production because  of confidentiality issues.  However, she                                                                    
suggested  looking  at  the  fields and  the  names  of  the                                                                    
companies on the Department of  Natural Resources (DNR) area                                                                    
wide leasing  map and those  companies had testified  in the                                                                    
past that  there had been  a direct correlation  between the                                                                    
credits and production.                                                                                                         
                                                                                                                                
2:49:07 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  commented  that Cook  Inlet  was                                                                    
very different from the North  Slope and both were different                                                                    
from Middle Earth.  He thought that how  the credits applied                                                                    
to Middle  Earth were very  important because not  only were                                                                    
they important  for companies doing exploration  but thought                                                                    
it  was  a game  changer  for  the  state  in terms  of  the                                                                    
diversification of supply. He thought  it was key to driving                                                                    
the cost  of energy down  throughout the state.  He believed                                                                    
there were many benefits in  Cook Inlet and in Middle Earth.                                                                    
He opined  that what  Doyon Ltd. and  Ahtna Inc.  were doing                                                                    
was  very  important as  well.  He  had  a very  tough  time                                                                    
hearing   that  the   administration   could  only   provide                                                                    
aggregated  numbers.  Legislators  had been  told  that  the                                                                    
state  was   paying  85  percent  of   operating  costs.  He                                                                    
commented that  anyone would  be investing  in Alaska  if 85                                                                    
percent  of  their  costs  were being  paid.  He  wanted  to                                                                    
understand the  economics of each of  the industry companies                                                                    
but he was not able to without more information.                                                                                
                                                                                                                                
Representative Guttenberg  told of  receiving an  email from                                                                    
Alyeska  Pipeline  that  reported  daily  production  to  be                                                                    
547,000 barrels per  day. He understood that  the number was                                                                    
not a yearly average but a daily high.                                                                                          
                                                                                                                                
Co-Chair Thompson  thanked Ms.  Moriarty and  invited Conoco                                                                    
Phillips to the table.                                                                                                          
                                                                                                                                
2:52:02 PM                                                                                                                    
                                                                                                                                
SCOTT    JEPSEN,   VICE    PRESIDENT,   EXTERNAL    AFFAIRS,                                                                    
CONOCOPHILLIPS, appreciated  the opportunity to  provide its                                                                    
perspective on the various tax  changes being considered. He                                                                    
addressed  a PowerPoint  presentation titled  "House Finance                                                                    
Committee: CSBH247" dated  April 1, 2016 (copy  on file). He                                                                    
began with his  agenda on Slide 2. He relayed  that he would                                                                    
be presenting  some of the  company's key concerns  with the                                                                    
original bill, in part, because  there had been a great deal                                                                    
of  testimony on  the original  bill in  front of  the House                                                                    
Finance Committee.                                                                                                              
                                                                                                                                
Mr. Jepsen turned  to slide 3: "Activities  Since Tax reform                                                                    
(MAPA) Passed." Since More Alaska  Production Act (MAPA) was                                                                    
passed in 2013 ConocoPhillips had  added 2 rigs to its drill                                                                    
fleet. There  was another  order in  place for  2 additional                                                                    
rigs of  which one  had already  been delivered.  The second                                                                    
rig would  be delivered  later in  the current  year. Conoco                                                                    
had  already proved  and constructed  a new  drill sight  at                                                                    
Kuparuk, Drill Site 2S (DS 2S),  the first new drill site at                                                                    
Kuparuk in  about 13 years. Once  it was fully on  stream it                                                                    
would add  about 8,000  barrels per  day to  production from                                                                    
the field. The  cost was about $500 million  to construct it                                                                    
and it added about 250  construction jobs while it was being                                                                    
built.                                                                                                                          
                                                                                                                                
Mr. Jepson  continued to explain  slide 3. He  reported that                                                                    
ConocoPhillips was currently also  involved in expanding its                                                                    
viscous oil operation.  It had approved a  project called 1H                                                                    
News - 1H stood for the  drill site being developed and News                                                                    
stood for Northeast  West Sack. Once the site  was on stream                                                                    
it  would  add  about  8,000 barrels  per  day,  similar  in                                                                    
magnitude  of DS  2S. However,  due to  the downturn  in oil                                                                    
price CP differed its drilling  on the new well. The modules                                                                    
were built  and transported  to the North  Slope. Currently,                                                                    
the company had  had to respond to what it  saw in the world                                                                    
economic environment.  Conoco Phillips decided to  defer the                                                                    
drilling until  the following year and  estimated having oil                                                                    
at the site in 2017.                                                                                                            
                                                                                                                                
Mr.  Jepsen  reported  pursuing   new  developments  in  the                                                                    
National Petroleum  Reserve Alaska  (NPRA). The  company was                                                                    
pursuing a development of Greater  Moose's Tooth 1 (GMT1), a                                                                    
project in  which the investment  decision was made  late in                                                                    
the prior  year. The project  would cost about  $900 million                                                                    
to   construct   and   would   add   approximately   600-700                                                                    
construction jobs and would add  about 30,000 barrels of oil                                                                    
per  day  once   it  was  on  stream.  The   first  oil  was                                                                    
anticipated in 2018.                                                                                                            
                                                                                                                                
Mr.  Jepson furthered  that with  GMT1 underway  the company                                                                    
was doing the engineering  and ordering long lead materials.                                                                    
It was  also permitting another new  development referred to                                                                    
as GMT 2.  Greater Moose's Tooth 2 (GMT2) was  about 9 miles                                                                    
Southwest  of GMT1.  It was  not as  far along  as GMT  1 in                                                                    
terms of engineering and cost  estimating. However, the cost                                                                    
would be  in excess of  $1 billion and slightly  larger than                                                                    
GMT1.  There  would  likely  be   600-700  jobs  during  the                                                                    
construction phase.                                                                                                             
                                                                                                                                
Mr.  Jepson  reported  that  ConocoPhillips  had  also  been                                                                    
active  in exploration.  The company  drilled 2  exploration                                                                    
wells in  NPRA in  2014, acquired seismic  data for  GMT1 in                                                                    
2015,  and 3  exploration wells  would be  drill in  2016 in                                                                    
NPRA. Two  of the  three wells  were about  9 miles  West of                                                                    
GMT2 and  the third was being  drilled off of the  CD5 drill                                                                    
site.  He noted  that one  major project  underway that  was                                                                    
coming  on  stream  at  present was  CD5.  The  company  had                                                                    
decided to pursue CD5 before SB  21 was passed in large part                                                                    
because it  had spent  about 10 years  trying to  obtain the                                                                    
permits. Everything  was in place  and a decision had  to be                                                                    
made  whether to  pursue it.  ConocoPhillips  elected to  go                                                                    
ahead  with  the  project  because   of  all  of  the  other                                                                    
investments that had been made  in trying to get the permits                                                                    
in  place. Also  the  company  had hoped  there  would be  a                                                                    
change in oil  taxes away from Alaska's  Clear and Equitable                                                                    
Share  (ACES)  to something  more  reasonable  based on  the                                                                    
recent discussions that had been in play.                                                                                       
                                                                                                                                
2:56:23 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen continued  to address slide 3. He  pointed to the                                                                    
activities ConocoPhillips currently had  going on in Kuparuk                                                                    
- it  had 5 rigs  running. Before the  passage of SB  21 the                                                                    
company  only had  3  rigs running.  Under  the current  low                                                                    
price   environment  in   ConocoPhillips'  entire   Lower-48                                                                    
operation it had  4 rigs running and anticipated  going to 3                                                                    
rigs in  the following month  compared to 5 rigs  in Alaska.                                                                    
Alaska  had been  differential in  terms  of its  investment                                                                    
philosophy. He  also mentioned that  there had  been several                                                                    
comments  made about  all the  new fields  coming on  stream                                                                    
since   2002   or  2003   and   qualifying   for  the   GVR.                                                                    
ConocoPhillips added  new production  at drill sites  2S, 1H                                                                    
News, and CD5  and had not filed  for the GVR on  any of the                                                                    
related production. At drill site  2S and CD5 there was some                                                                    
production that  could potentially  qualify for the  GVR but                                                                    
when it  took a  look at  the requirements  for measurement,                                                                    
the  cost, and  compounding it  out with  the difficulty  in                                                                    
trying to  determine how much  oil came from an  existing pa                                                                    
and a new pa, the company  decided not to pursue the GVR for                                                                    
CD5 or DS 2S.                                                                                                                   
                                                                                                                                
Mr.  Jepsen  continued that  regarding  1H  News, there  was                                                                    
testimony on  behalf of the  state that it thought  that the                                                                    
site would qualify  for the GVR but the  way the regulations                                                                    
were written  the site did  not qualify. He  emphasized that                                                                    
there   was   no  GVR   production   coming   from  any   of                                                                    
ConocoPhillips'  existing  fields  and   there  was  no  GVR                                                                    
production  in NPRA.  However, GMT1  would  qualify, and  it                                                                    
would be much easier to  isolate the production and prove to                                                                    
the state  where it came  from and that  it came from  a new                                                                    
participating area.                                                                                                             
                                                                                                                                
2:58:06 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen addressed slide 4:  "Capital Spending Trends." He                                                                    
wanted  to discuss  the  present  economic environment  that                                                                    
ConocoPhillips was in and compare it  to what it had been in                                                                    
the past.  He pointed to  the plot  on the bottom  left hand                                                                    
side  of the  graph representing  the steep  decline in  oil                                                                    
prices. He  suggested comparing the  graph to the  bar chart                                                                    
right  above  it  which tracked  the  corporation's  capital                                                                    
spending  during the  same  period. He  noted  that in  2014                                                                    
ConocoPhillips peaked at about  $17 billion of capital spend                                                                    
and as  oil prices dropped  the capital spend declined  to a                                                                    
current estimate of about $6.4 billion  for 2016 - a drop of                                                                    
about 63 percent since 2014.                                                                                                    
                                                                                                                                
Mr.  Jepsen  moved  to  the  right  portion  of  the  slide.                                                                    
Statistics  were provided  describing what  the company  has                                                                    
been  doing in  Alaska.  He  pointed to  the  top bar  chart                                                                    
depicting  what the  company has  been  spending on  capital                                                                    
since  2012. The  last year  of  ACES was  2012. During  the                                                                    
entire  time of  ACES, from  2007 to  2012, the  company was                                                                    
spending  about   $800  million  per  year   in  Alaska.  In                                                                    
testimony  over that  period of  time the  company indicated                                                                    
that   if   there   was    a   better   investment   climate                                                                    
ConocoPhillips  would  make  more   of  an  investment.  The                                                                    
company stepped up  its investment in 2013,  2014, and 2015.                                                                    
Some of  the spending in  2014 was from  CD5 but much  of it                                                                    
was from  the drill rigs  in place and from  new investments                                                                    
such  as DS  2S and  1H  News. Originally,  the company  had                                                                    
announced the  capital budget  for Alaska  in 2016  of about                                                                    
$1.3  billion. However,  due to  a steep  price drop  and in                                                                    
recognition of being  in a negative cash  flow position, the                                                                    
company  reduced its  costs. The  company reduced  its Capex                                                                    
(capital  expenditures) in  Alaska to  about $1  billion for                                                                    
2016. He  remarked that the investment  remained healthy and                                                                    
more than what the company  was spending during the years of                                                                    
ACES  and more  rigs were  running. In  terms of  discussing                                                                    
capital, a measure  of how many jobs were  being created and                                                                    
how much was being invested  in new resources, adding oil to                                                                    
the field really had to do  with how many rigs were running.                                                                    
ConocoPhillips had managed to keep its rig count high.                                                                          
                                                                                                                                
Mr. Jepsen moved to the  bottom right hand plot which showed                                                                    
the percentage  of ConocoPhillips  capital spent  in Alaska.                                                                    
Spending had  steadily ramped  up to the  point of  where in                                                                    
2016  the  company  was  at   about  16  percentage  of  the                                                                    
corporation's total  Capex. He commented that  the trend was                                                                    
significantly  different in  other  regions.  The change  in                                                                    
capital seen in Alaska was  down about 23 percent from where                                                                    
the company had anticipated being  at the start of the year.                                                                    
In many  other regions of  the corporation it was  down much                                                                    
more  than that.  He  reemphasized  that ConocoPhillips  was                                                                    
still investing  differentially in Alaska and  in Alaska the                                                                    
corporation  was in  excess of  $100  million negative  cash                                                                    
flow in  the previous year.  He remarked  that it was  not a                                                                    
long-term  business plan  for the  company but  it hoped  to                                                                    
manage through it and hopefully see a return in oil prices.                                                                     
                                                                                                                                
Mr.  Jepsen  advanced to  slide  5:  "North Slope  Investors                                                                    
Negative  at   Current  Pricing."   He  thought   the  slide                                                                    
summarized what  the industry was currently  facing and what                                                                    
the state  was facing. In  the range of prices  currently at                                                                    
hand  industry was  in  a negative  cash  flow position.  He                                                                    
noted that the  left hand side of the  plot represented cash                                                                    
flow and that the "X" axis  showed ANS West Coast price. The                                                                    
data used  to construct the  plot came from the  Spring 2016                                                                    
Revenue  Sources Book.  The  orange  blocks estimated  state                                                                    
cash  flow, the  green  represented federal  taxes, and  the                                                                    
blue  showed  the producers  cash  flow.  The plot  did  not                                                                    
include  any reimbursable  tax credits  the state  might pay                                                                    
back  to  other  producers  who were  in  a  non-tax  paying                                                                    
position. The plot represented the  free cash flow the state                                                                    
received  and also  represented the  cash flow  position the                                                                    
industry was  in. He reemphasized what  Ms. Moriarty stated.                                                                    
The conversation currently  was about potentially increasing                                                                    
taxes  on  the  oil  and  gas industry,  an  industry  in  a                                                                    
negative tax flow position. If  the state taxed the industry                                                                    
it  meant that  there would  be less  money for  investment.                                                                    
Companies would respond rationally like any company would.                                                                      
                                                                                                                                
3:02:52 PM                                                                                                                    
                                                                                                                                
Mr.  Jepsen turned  the presentation  over to  his colleague                                                                    
who  would discuss  ConocoPhillips' key  concerns about  the                                                                    
original  bill. He  mentioned  that they  were  going to  go                                                                    
through the issues  because there had been a  fair amount of                                                                    
testimony in front of the  committee on provisions that were                                                                    
not included in the  committee substitute that were included                                                                    
in   the    original   bill.   They   wanted    to   provide                                                                    
ConocoPhillips'   perspective  as   to  why   some  of   the                                                                    
provisions would not have been very helpful.                                                                                    
                                                                                                                                
PAUL   RUSCH,  VICE   PRESIDENT,  FINANCE,   CONOCOPHILLIPS,                                                                    
addressed slide  6 "Key Concerns  with Original HB  247". He                                                                    
relayed  that  there were  several  points  the company  had                                                                    
raised  in the  previous  testimony to  the House  Resources                                                                    
Committee identifying  the major  concerns that  the company                                                                    
had with the original bill.  He wanted to walk through those                                                                    
concerns. He stated  that the first item  was increasing the                                                                    
minimum tax  from 4 percent  to 5 percent. The  industry was                                                                    
clearly in  a position where  it was losing money.  If taxes                                                                    
were increased  it would come  out of somewhere  else within                                                                    
the  industry. The  second  item was  the  hard minimum  tax                                                                    
floor. He explained that within  HB 247 there was a proposal                                                                    
that was  particularly concerning  that impacted the  use of                                                                    
net  operating  losses  to  go   below  the  floor.  In  the                                                                    
company's view the net operating  losses were very customary                                                                    
in  federal income  taxes and  in a  number of  other fiscal                                                                    
regimes. By removing the ability  to utilize those losses to                                                                    
go below  the floor  during periods  where the  industry was                                                                    
losing money was a true increase in taxes.                                                                                      
                                                                                                                                
Mr. Rusch  pointed to  the third bullet  point on  the slide                                                                    
surrounding the  increase in interest rates  that applied to                                                                    
taxes that  were either due  to or from the  state depending                                                                    
on  the  audit  position.  There was  a  6-year  statute  of                                                                    
limitations  that applied.  He  relayed that  ConocoPhillips                                                                    
just  recently closed  out its  2006  production tax  audit,                                                                    
over 9 years  from the end of that tax  year. Interest would                                                                    
apply to that entire period. It  would be more than 6 years.                                                                    
He also  mentioned that  the company  had just  received its                                                                    
2009   production  tax   audit,   within   the  statute   of                                                                    
limitations,  but to  the date.  The system  had a  built-in                                                                    
delay on when the audits would be settled.                                                                                      
                                                                                                                                
3:06:02 PM                                                                                                                    
                                                                                                                                
Representative Gattis  referred to the audits.  She wondered                                                                    
about  the interest  charges that  accrued and  whether they                                                                    
were due to  the company falling behind. She  also asked who                                                                    
performed the audits.                                                                                                           
                                                                                                                                
Mr. Rusch explained that the  6-year period was a statute of                                                                    
limitations within the  current tax law and  governed by the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr. Jepsen added  that the company received  its first audit                                                                    
under the state's control at the time Mr. Rusch mentioned.                                                                      
                                                                                                                                
Co-Chair Thompson  clarified that  it was the  Department of                                                                    
Natural Resources' audit.                                                                                                       
                                                                                                                                
Mr. Rusch confirmed that it was a DNR audit.                                                                                    
                                                                                                                                
Representative Gattis understood that  the state was looking                                                                    
for money  and it was  taking the  state 6 years  to perform                                                                    
audits.  It seemed  that if  the  audit was  performed in  a                                                                    
quicker timeframe, especially in  the state's current budget                                                                    
crunch,  the state  would receive  its money  in a  timelier                                                                    
manner. She  would call  on the  administration to  find out                                                                    
why audits  took so long.  She wanted to clarify  whether it                                                                    
was the company's problem or the state's problem.                                                                               
                                                                                                                                
Representative  Gara   remarked  that  in  past   years  the                                                                    
administration  has  asked for  more  auditors  in order  to                                                                    
avoid missing  the statute of limitations.  He reported that                                                                    
the legislature had not always responded to the requests.                                                                       
                                                                                                                                
Mr. Jepsen  commented that ConocoPhillips  tried to  pay its                                                                    
taxes  as accurately  as possible.  However,  the system  in                                                                    
place  was highly  subjective and  not crystal  clear. There                                                                    
would always  be differences of  opinion. In  some instances                                                                    
the  state could  owe ConocoPhillips  money.  He thought  it                                                                    
worked better for all parties  if the time period for audits                                                                    
was shortened considerably.                                                                                                     
                                                                                                                                
Mr. Rusch continued  with slide 6. He pointed  to the bullet                                                                    
point concerning  per barrel credits. He  explained that, in                                                                    
the original  bill version, there  was a restriction  on the                                                                    
use  of per  barrel  credits  in the  month  earned. In  the                                                                    
company's view it meant the  state was moving more towards a                                                                    
minimum tax.  The production tax  was clearly a  yearly tax.                                                                    
In the current process  the company made monthly installment                                                                    
tax payments. It was based on  an estimated tax for the full                                                                    
year. He  added that  as part of  that estimate  the company                                                                    
took  the  per  barrel  credits that  it  was  entitled  to,                                                                    
divided the number by 12, and  applied it to the monthly tax                                                                    
installments. It  was a fairly  complicated process.  At the                                                                    
end  of the  year the  full  allotment of  credits would  be                                                                    
applied to the  final tax calculation. The way  in which the                                                                    
company was  addressing installment payments and  the yearly                                                                    
true  up   was  based  on   statute  and  the   state's  tax                                                                    
regulations.                                                                                                                    
                                                                                                                                
3:09:42 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler asked  about the  impact of  the monthly                                                                    
tax limitation combined with the  impact of not allowing the                                                                    
gross value at the point of  production to go below zero. He                                                                    
understood that there was a combined effect.                                                                                    
                                                                                                                                
Mr. Rusch  answered that the  restriction on the  per barrel                                                                    
credits was  strictly an  issue around  monthly fluctuations                                                                    
in price. He noted  that at the end of the  2014 or 2015 tax                                                                    
year  there  was significant  volatility  in  the oil  price                                                                    
which impacted the  number of per barrel  credits that could                                                                    
have been used  if the monthly restriction  had been applied                                                                    
as opposed to the full year entitlement.                                                                                        
                                                                                                                                
Representative  Munoz asked  Mr.  Rusch to  explain how  the                                                                    
loss credit functioned and whether  the losses were specific                                                                    
to ConocoPhillips' investments in Alaska.                                                                                       
                                                                                                                                
Mr.  Rusch asked  if Representative  Munoz was  referring to                                                                    
the NOL's.                                                                                                                      
                                                                                                                                
Representative  Munoz responded  that she  was referring  to                                                                    
the 35  percent loss  credit, how  it worked  in conjunction                                                                    
with  the 4  percent minimum,  and whether  the losses  were                                                                    
specific to Alaska.                                                                                                             
                                                                                                                                
Mr. Rusch  answered that the  35 percent net  operating loss                                                                    
was specific to Alaska based  on the Alaska's production tax                                                                    
regime.  It was  completely separate  from any  state income                                                                    
tax. He  explained that in a  year where a company  was in a                                                                    
net  operating position  from a  production tax  standpoint,                                                                    
the  company would  be paying  minimum  tax. However,  there                                                                    
would also  be a calculated  net operating loss.  Within the                                                                    
current  tax law  a  company  was allowed  to  apply the  35                                                                    
percent net  operating loss  to its  taxes in  the following                                                                    
year or years.                                                                                                                  
                                                                                                                                
3:11:56 PM                                                                                                                    
                                                                                                                                
Representative  Munoz asked  if  there was  a  limit on  the                                                                    
number of years which the credits could be applied.                                                                             
                                                                                                                                
Mr. Rusch did  not believe there was a limit  but within the                                                                    
proposed bill there was a 10 year limit.                                                                                        
                                                                                                                                
Mr.  Jepsen  thought  the  provision  was  in  the  original                                                                    
version of the bill.                                                                                                            
                                                                                                                                
Mr. Rusch concurred.                                                                                                            
                                                                                                                                
Mr.  Rusch drew  attention to  the last  bullet on  slide 6.                                                                    
There  was a  question about  confidentiality. He  was aware                                                                    
through various  discussions a concern was  raised about the                                                                    
lack  of transparency  mostly  around  the reimbursable  tax                                                                    
credits. He  understood the  challenges the  legislature had                                                                    
around confidentiality.  In the  original version of  HB 247                                                                    
the  confidentiality   issue  was  addressed   very  broadly                                                                    
potentially opening up the tax  payer's entire tax return to                                                                    
public disclosure or  disclosure governed by confidentiality                                                                    
agreements.  In ConocoPhillips'  view  it would  potentially                                                                    
open up a number of  issues. The company's major concern was                                                                    
in making  sure that, if  the legislature had an  issue, the                                                                    
wording  was very  specific to  the particular  issue rather                                                                    
than including broad language.                                                                                                  
                                                                                                                                
Mr.   Jepsen   moved   to  the   final   slide,   slide   7:                                                                    
"Observations."  He  relayed  that when  ConocoPhillips  saw                                                                    
significant  changes  in the  tax  law  that occurred  every                                                                    
other year or 18 months  it caused the company great concern                                                                    
about the state's ability to  implement a stable oil and gas                                                                    
fiscal policy.   It had only  been about 19 months  since SB                                                                    
21  was  ratified  by the  voters  and  already  significant                                                                    
changes in the  state's oil tax were  being discussed. Long-                                                                    
term  investment   required  a  durable,   predictable,  and                                                                    
reasonable fiscal framework. He  relayed that the investment                                                                    
time horizon in  Alaska was much longer than  in other parts                                                                    
of  the United  States.  He opined  that  with the  proposed                                                                    
changes in the original  bill ConocoPhillips thought it sent                                                                    
a very clear  message to the company's  corporate folks that                                                                    
Alaska was not  a place that it could depend  upon. He noted                                                                    
that the tax  changes since the passage of  SB 21 positively                                                                    
influenced  the  investments  the corporation  has  made  in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Mr. Jepsen discussed the last point  on slide 7. In terms of                                                                    
the committee  substitute, the corporation thought  it was a                                                                    
significant  improvement over  the original  version of  the                                                                    
bill. He  mentioned that it  did have some items  that could                                                                    
potentially  represent a  cost increase.  ConocoPhillips did                                                                    
not  qualify  for  reimbursable tax  credits.  Many  of  the                                                                    
things  that  impact  the small  producers  or  the  non-tax                                                                    
payers  did  not affect  the  corporation.  The things  that                                                                    
impacted ConocoPhillips were  relatively minor. He concluded                                                                    
that although  the company favored  keeping the  status quo,                                                                    
the  committee substitute  was an  improvement. He  asked if                                                                    
there were questions from members.                                                                                              
                                                                                                                                
3:15:17 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler commented that  ConocoPhillips was one of                                                                    
"The  Majors" still  aggressively  exploring  in Alaska.  He                                                                    
wondered how  the proposed oil tax  credits changes affected                                                                    
the company versus its friendly competitors.                                                                                    
                                                                                                                                
Mr.  Jepsen   ConocoPhillips  did   not  explore   based  on                                                                    
exploration credits. The company  was exploring prior to the                                                                    
credits existing,  it was exploring currently,  and it would                                                                    
be exploring after  the credits expired. The  credits were a                                                                    
help but  not a deciding  factor in whether the  company was                                                                    
going to drill  a well in NPRA. The  ultimate investment the                                                                    
company was going  to make was much larger than  any sort of                                                                    
help it might get with the initial investment credit.                                                                           
                                                                                                                                
Vice-Chair  Saddler mentioned  hearing  a  discussion as  to                                                                    
whether  CD5 was  influenced by  the tax  credit issues.  He                                                                    
wanted to provide Mr. Jepsen  with the opportunity to answer                                                                    
the  following question.  He wondered  if the  provisions of                                                                    
the  bill have  any  potential to  affect  CD5's current  or                                                                    
future economics.                                                                                                               
                                                                                                                                
Mr.  Jepsen  responded  that  in   terms  of  the  committee                                                                    
substitute he did not see any impacts.                                                                                          
                                                                                                                                
Representative Pruitt  asked if  there was any  other regime                                                                    
with  which the  corporation  was operating  under that  was                                                                    
currently  looking  at  increasing  a tax  on  oil  and  gas                                                                    
production.                                                                                                                     
                                                                                                                                
Mr. Jepsen responded in the negative.                                                                                           
                                                                                                                                
Representative Pruitt asked that  if the legislature were to                                                                    
move forward with  the initial version of the  bill would it                                                                    
have an  influence on  ConocoPhillips' investment  in Alaska                                                                    
and, if so, he wondered what it would look like.                                                                                
                                                                                                                                
Mr.  Jepsen answered  that it  would have  an impact  on the                                                                    
company's investment particularly at  low oil prices. If the                                                                    
cost of doing  business increased it would have  to come out                                                                    
of somewhere.  It would likely  come out of  the investments                                                                    
the company was currently making.  The company would have to                                                                    
take a look at everything it  was doing in Alaska and decide                                                                    
what it  would do less  of. In  the long-term he  thought it                                                                    
sent a chilling  message to all investors that  Alaska was a                                                                    
place that when oil prices  declined it would increase taxes                                                                    
and  when oil  prices  rose the  state  would also  increase                                                                    
taxes. He did  not believe it was the  message Alaska wanted                                                                    
to send to investors.                                                                                                           
                                                                                                                                
3:17:51 PM                                                                                                                    
                                                                                                                                
Representative Pruitt wondered how  difficult it would be to                                                                    
return to  the current  production level of  500,000 barrels                                                                    
per day if  the state went forward with  the legislation and                                                                    
the state witnessed decreased production.                                                                                       
                                                                                                                                
Mr. Jepsen answered,  "It depends really how far  you let it                                                                    
go."  He elaborated  that it  was difficult  to predict  the                                                                    
future.  He reported  that there  were  high tax  frameworks                                                                    
particularly  when  there were  increases  in  taxes at  low                                                                    
prices.  Activity  would drop  off  and  rigs would  be  put                                                                    
aside. It  would be difficult  to bring those rigs  back. It                                                                    
would be a function of  price, whether the state changed its                                                                    
fiscal framework  again, and what  the framework  would look                                                                    
like  if it  was changed.  Representative Pruitt's  question                                                                    
was a  very subjective  question which  he could  not answer                                                                    
with confidence. He  remarked that it would  place Alaska in                                                                    
a  hole  and the  state  would  be  risking  the loss  of  a                                                                    
significant amount of infrastructure.                                                                                           
                                                                                                                                
Representative Guttenberg referred to  slide 3. He asked who                                                                    
ConocoPhillips acquired GMT1 from.                                                                                              
                                                                                                                                
Mr. Jepsen responded  that when he stated  acquired he meant                                                                    
that  ConocoPhillips   shot  it   -  the  company   hired  a                                                                    
contractor to  go out  and shoot  it -  referred to  as data                                                                    
acquisition.                                                                                                                    
                                                                                                                                
Representative Guttenberg  mentioned that  typically acquire                                                                    
meant getting something from someplace else.                                                                                    
                                                                                                                                
Mr. Jepsen understood.                                                                                                          
                                                                                                                                
Representative Guttenberg  relayed that the  legislature had                                                                    
been  complaining for  years  about audits.  It  had been  a                                                                    
long-term problem for  the legislature as well  as for those                                                                    
being audited. He sympathized.                                                                                                  
                                                                                                                                
3:20:09 PM                                                                                                                    
                                                                                                                                
Representative  Gara  conveyed  that he  had  bristled  when                                                                    
hearing that  Alaska taxed  high at low  prices and  high at                                                                    
high  prices.  He did  not  agree.  He remarked,  "Certainly                                                                    
nobody in state  government or in the oil  industry is doing                                                                    
very well  at current prices.  Everybody is losing  money at                                                                    
$30 and $35 per barrel  and prices around there." He thought                                                                    
the  state  needed  to  be careful  with  whatever  it  did.                                                                    
However,  in looking  at ConocoPhillips  annual reports  and                                                                    
because of  SEC [Securities  and Exchange  Commission] rules                                                                    
he believed  it was  the only oil  company that  produces in                                                                    
Alaska that reported its Alaska  profits. In prior years the                                                                    
company's  Alaska's profits  were  in the  $2 billion  range                                                                    
while  last  year the  company  was  down  to zero  to  $400                                                                    
million  in  profits without  writing  off  its Chukchi  Sea                                                                    
leases.  He asked if he was correct.                                                                                            
                                                                                                                                
Mr. Jepsen  responded that it reflected  ConocoPhillips' net                                                                    
income but did not represent the company's cash flow.                                                                           
                                                                                                                                
Representative Gara asked him to explain his point.                                                                             
                                                                                                                                
Mr. Jepsen  indicated that he  brought a handout  that might                                                                    
help  in  providing  a response  for  Representative  Gara's                                                                    
question.                                                                                                                       
                                                                                                                                
Representative  Gara   asserted  that  no  one   was  saying                                                                    
ConocoPhillips had  earned much money the  previous year. He                                                                    
went on the  say that net income was either  $400 million or                                                                    
zero if  it wrote off the  Chukchi Sea leases.   He asked if                                                                    
he was correct.                                                                                                                 
                                                                                                                                
Mr. Jepsen responded affirmatively.                                                                                             
                                                                                                                                
Representative Gara's  mentioned that  Alaska had  been told                                                                    
to tax  similar to North Dakota.  He had read in  the annual                                                                    
report that  the company  had lost $1  billion in  the Lower                                                                    
48. He wondered if he was accurate.                                                                                             
                                                                                                                                
Mr. Jepsen  did not  have the  numbers in  front of  him but                                                                    
would  agree  with  the report  if  the  representative  was                                                                    
looking at it correctly.                                                                                                        
                                                                                                                                
Representative  Gara understood  that  in  North Dakota  the                                                                    
company paid a  private royalty - private  land owners owned                                                                    
the land unlike  in Alaska - and a state  tax. He added that                                                                    
the numbers  were on the  gross, a percentage of  the value,                                                                    
rather  than of  profits. He  asked if  Mr. Jepsen  knew the                                                                    
average  private  royalty that  the  company  paid in  North                                                                    
Dakota.                                                                                                                         
                                                                                                                                
Mr.  Jepsen responded  that  the information  Representative                                                                    
Gara was  asking about  was confidential.  He made  it clear                                                                    
that ConocoPhillips was not drilling in North Dakota.                                                                           
                                                                                                                                
Representative  Gara  remarked  that the  call  that  Alaska                                                                    
would be  more like North Dakota  from a few years  ago [Mr.                                                                    
Jepsen interrupted Representative Gara with a response].                                                                        
                                                                                                                                
Mr.  Jepsen clarified  that  the  previous conversation  was                                                                    
held when  ACES was  being discussed. At  the time  ACES was                                                                    
considerably  higher  than  North Dakota.  The  company  was                                                                    
putting itself in a comparison  perspective in terms of what                                                                    
the tax framework  looked like around the  United States and                                                                    
other places  around the world. He  furthered that currently                                                                    
in  terms  of comparative  places  to  invest Alaska  was  a                                                                    
pretty good  place. However, when  prices go up  the company                                                                    
would be  paying more than  in other places. The  good thing                                                                    
about  being in  a good  place from  a competitive  point of                                                                    
view  was  that the  company  was  seeing more  activity  in                                                                    
Alaska than other regions around  the world or the Lower 48.                                                                    
He thought it was due to  the current tax policy and because                                                                    
of  some  other  issues  around doing  business  in  Alaska.                                                                    
Things could change if the state changed its tax policy.                                                                        
                                                                                                                                
3:23:59 PM                                                                                                                    
                                                                                                                                
Representative  Gara  wanted  to  clarify  that  at  current                                                                    
prices the state  received a 4 percent gross  minimum tax on                                                                    
the  older  field   and  a  12.5  percent   royalty  on  the                                                                    
percentage  of the  value of  the  oil. He  wondered if  the                                                                    
private royalty  and tax  the company  paid in  North Dakota                                                                    
was substantially higher.                                                                                                       
                                                                                                                                
Mr.  Jepsen  believed the  current  severance  tax in  North                                                                    
Dakota was  5 or 6  percent. Royalty payments were  based on                                                                    
what had been negotiated. It  could range anywhere from 12.5                                                                    
percent to  something higher. It  was very  company specific                                                                    
and lease specific. The drilling  location was a function of                                                                    
what kind of royalty and taxes were being paid.                                                                                 
                                                                                                                                
Representative Gara indicated he  had another question about                                                                    
North Dakota.                                                                                                                   
                                                                                                                                
Co-Chair   Thompson   reminded  Representative   Gara   that                                                                    
ConocoPhillips was not in North Dakota.                                                                                         
                                                                                                                                
Representative  Gara remarked  that  North  Dakota was  very                                                                    
relevant when they wanted to  lower their taxes. He asked if                                                                    
Mr. Jepsen would concede that  the gross private royalty and                                                                    
the tax  that the  company paid in  North Dakota  was higher                                                                    
than in Alaska.                                                                                                                 
                                                                                                                                
Mr.  Jepsen  responded  that  it  probably  was  at  preset.                                                                    
He reiterated  that the company's  activity in  North Dakota                                                                    
was  about nil.  ConocoPhillips was  drilling in  Alaska. If                                                                    
the  legislature wanted  to  see the  kind  of actives  that                                                                    
Representative Gara  was seeing in other  places where there                                                                    
was a  higher tax framework  and a  tax policy could  be set                                                                    
that would drive those results.                                                                                                 
                                                                                                                                
Representative  Gara  asked if  Mr.  Jepsen  would have  any                                                                    
problem with  the state moving  the 4 percent  minimum floor                                                                    
modestly higher when prices were  in the profitability range                                                                    
again.                                                                                                                          
                                                                                                                                
Mr. Jepsen referred back to  slide 5 and emphasized that the                                                                    
state was always making more  money than ConocoPhillips even                                                                    
under the  current bill. The  company was not there  to talk                                                                    
about what was  fair and unfair or whether it  had a problem                                                                    
with the  state increasing its  taxes. He was there  to tell                                                                    
legislators  that  if the  state  took  certain actions  the                                                                    
industry would take certain actions.  If the state made it a                                                                    
more hostile  environment, a  difficult place,  or increased                                                                    
taxes  the  company  would  reevaluate  its  investments  in                                                                    
Alaska.  It was  a  hypothetical question.  The state  would                                                                    
need to  determine what kind  of tax policy it  wanted which                                                                    
would drive investments.                                                                                                        
                                                                                                                                
Mr. Jepsen tried  to put things in perspective.  At the time                                                                    
discussions ensued about changing  ACES $73 was considered a                                                                    
very low price.  Currently it was being discussed  as a high                                                                    
price. He  reiterated that he  thought the state  was better                                                                    
off under SB  21. He encouraged members to go  back and look                                                                    
at  the data.  As  the price  curve had  gone  down the  tax                                                                    
policy had been  beneficial. If the state  wanted to discuss                                                                    
trying  to increase  taxes again  as the  prices went  up it                                                                    
would have a  direct impact on the  company's short-term and                                                                    
long-term investments.                                                                                                          
                                                                                                                                
3:27:12 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  mentioned a provision that  had not been                                                                    
discussed  much  which was  the  condition  of some  of  the                                                                    
credits  on  Alaska  hire  percentages.  He  asked  for  Mr.                                                                    
Jepsen's thoughts  on the  issue and  wanted him  to provide                                                                    
ConocoPhillips' Alaska hire percentage.                                                                                         
                                                                                                                                
Mr.  Jepsen answered  that  the  provision regarding  Alaska                                                                    
hire did  not apply to  the company because the  company did                                                                    
not receive the reimbursable  tax credits relating to Alaska                                                                    
Hire  percentages. He  told of  ConocoPhillips of  having an                                                                    
overall  percentage  of  Alaska   hire  of  70  percent.  In                                                                    
Anchorage the  company was up  to 85  to 90 percent.  On the                                                                    
North  Slope  the percentage  tended  to  be lower  in  part                                                                    
because people had the option  to live outside of Alaska and                                                                    
in  part  because  the  company  had  to  hire  people  with                                                                    
specialized  skills that  do not  live in  Alaska. He  added                                                                    
that  the  company   asked  the  question  of   all  of  its                                                                    
contractors  and  looked  at  it   each  time  it  issued  a                                                                    
contract.  The company  tried to  make a  conscious decision                                                                    
that it had a bias towards Alaska hire and buying.                                                                              
                                                                                                                                
Representative   Gattis  asked   what   motivated  the   oil                                                                    
companies to do business and  what motivated companies to do                                                                    
business in  Alaska. She did  not distinguish  oil companies                                                                    
from any other business. She  thought it was more about what                                                                    
motivated businesses.  As a small business  owner she looked                                                                    
at various aspects  trying to plan ahead to  avoid knee jerk                                                                    
reactions.  She   did  not  see  oil   companies  being  any                                                                    
different than any  business that might be  sitting in front                                                                    
of the  committee being asked  the same questions.  She also                                                                    
did  not think  it mattered  whether  it was  a business  in                                                                    
North Dakota or Alaska: businesses react the same way.                                                                          
                                                                                                                                
Co-Chair    Thompson    thanked    the    presenters    from                                                                    
ConocoPhillips. He invited the  presenter from ExxonMobil to                                                                    
the table.                                                                                                                      
                                                                                                                                
3:30:12 PM                                                                                                                    
                                                                                                                                
DAN SECKERS, TAX COUNSEL,  EXXONMOBIL, thanked the committee                                                                    
for  the  opportunity to  come  before  the committee.    He                                                                    
stated that  the committee substitute  before members  was a                                                                    
very  concerning  piece   of  legislation.  He  reemphasized                                                                    
something he had  stated many times in the  past. He thought                                                                    
it was worth repeating  in the current economic environment,                                                                    
which was that ExxonMobil was  committed to Alaska and would                                                                    
continue   to   actively    pursue   attractive   investment                                                                    
opportunities. The company has had  a presence in Alaska for                                                                    
over 90 years  and invested over $20  billon to-date. Alaska                                                                    
remained an  important component of the  company's worldwide                                                                    
investment  portfolio  and it  looked  forward  to being  in                                                                    
Alaska for many years.                                                                                                          
                                                                                                                                
Mr.  Seckers  continued  that  the  company  recognized  the                                                                    
difficulty  the  legislature  faced   as  policy  makers  in                                                                    
tackling the  state's current budget issues  while trying to                                                                    
protect  the  current revenue  streams  and  trying to  make                                                                    
certain  that  Alaska remained  a  competitive  place to  do                                                                    
business. ExxonMobil appreciated how  difficult and how hard                                                                    
the  legislature's  task  was.   The  tax  policy  decisions                                                                    
fundamentally impacted  the economic health of  the state in                                                                    
all  the industries  that did  business in  the state.  From                                                                    
ExxonMobil's  view  tax  policy decisions  that  would  move                                                                    
Alaska either toward or away  from its vision for the future                                                                    
- its vision  of promoting oil and gas  development - should                                                                    
not  be taken  lightly. The  need for  Alaska to  maintain a                                                                    
competitive  and  fiscal  regime,  one  that  attracted  and                                                                    
encouraged  ongoing   investments  and   future  investments                                                                    
especially in the current low  price environment, was one of                                                                    
the  most  important issues  the  state  faced. While  Exxon                                                                    
Mobil appreciated the need to  close the state's fiscal gap,                                                                    
it believed  that any  tax policy  change should  be weighed                                                                    
against the potential negative impacts  on the state's long-                                                                    
term  investment climate.  From  the company's  perspective,                                                                    
the  question  that was  before  the  committee was  whether                                                                    
raising taxes  on the oil  and gas  industry at a  time when                                                                    
the Department of Revenue had  confirmed that companies were                                                                    
reporting  significant losses  was consistent  with Alaska's                                                                    
future and the legislature's  belief that such actions would                                                                    
help Alaskans weather the economic  downturn or make matters                                                                    
worse.                                                                                                                          
                                                                                                                                
Mr.  Seckers  pointed  to the  committee  substitute  before                                                                    
House  Finance  members.  He   started  by  confirming  that                                                                    
ExxonMobil supported  the testimony presented by  the Alaska                                                                    
Oil and  Gas Association (AOGA)  and by ConocoPhillips.   He                                                                    
relayed that  while the  committee substitute  represented a                                                                    
substantial  improvement over  the original  bill introduced                                                                    
by the  administration it remained  a very  concerning piece                                                                    
of legislation.  Despite the improvements made  by the House                                                                    
Resources Committee, the  committee substitute was troubling                                                                    
because  it would  represent another  significant change  in                                                                    
Alaska's oil  and gas  policy within the  past 11  years. It                                                                    
would raise the interest rate  on over and under payments of                                                                    
taxes while  not addressing  the core  issue raised  by AOGA                                                                    
and ConocoPhillips which  was the length of  time on audits.                                                                    
It would  not improve  Alaska's overall  investment climate.                                                                    
It  would   not  lead   to  more   industry  jobs   or  more                                                                    
opportunities  in  the state.  It  would  not lead  to  more                                                                    
production, or  long-term sustainable oil and  gas revenues.                                                                    
In  fact,  Exxon  Mobil believed  the  committee  substitute                                                                    
would  do  the  exact  opposite.  For  the  reasons  he  has                                                                    
presented  ExxonMobil  opposed   the  committee  substitute.                                                                    
While he  mentioned that the company  believed the committee                                                                    
substitute as a  whole was troubling he  wanted to highlight                                                                    
two provisions  that gave him, as  ExxonMobil's tax counsel,                                                                    
concern.  The  first was  that  for  any  tax policy  to  be                                                                    
successful  and  to  meet  the  state's  long-term  goal  of                                                                    
sustainable  oil and  gas production  and revenues  such tax                                                                    
policy  needed  to  be   stable,  predictable,  and  provide                                                                    
confidence to  tax payers and investors  that the underlying                                                                    
rules  of  the  game  would not  be  changed  repeatedly  to                                                                    
adversely affect  the economic investments already  made and                                                                    
those  being considered  for the  future. Like  any business                                                                    
large  or   small  ExxonMobil  valued  a   very  predictable                                                                    
environment  in which  to  make  long-term investments.  The                                                                    
company's investments  were very capital intensive  and span                                                                    
many years.  He relayed that  any change in the  regime that                                                                    
went   forward  would   affect   the   viability  of   those                                                                    
investments  and the  company's  view  of investments  going                                                                    
forward.                                                                                                                        
                                                                                                                                
Mr.  Secker  highlighted  another significant  change  being                                                                    
proposed:  The raising  of the  interest rates.  He reported                                                                    
that  in the  previous  day,  like ConocoPhillips  reported,                                                                    
Exxon Mobil received  its 2009 assessment 6  years after the                                                                    
company filed its return. He  could not reveal the amount of                                                                    
interest because  it was confidential but  he confirmed that                                                                    
the amount was staggering.  ExxonMobil thought it was wrong.                                                                    
The legislature  was proposing to adjust  the interest rate,                                                                    
but  the underlying  problem was  not  being addressed.  The                                                                    
effect was lessening the incentive  of the state to expedite                                                                    
audits. The  company felt the  state was going in  the wrong                                                                    
direction. ExxonMobil thought the current rate worked.                                                                          
                                                                                                                                
Mr.  Seckers  reemphasized  that  the  committee  substitute                                                                    
represented  a troubling  bill. He  highlighted a  couple of                                                                    
the  provisions that  were in  the original  bill that  were                                                                    
removed  by the  House  Resources Committee  because of  its                                                                    
extensive  examinations  into  those  provisions  and  their                                                                    
damaging  effects.  He  pointed  out the  hardening  of  the                                                                    
minimum   tax  floor.   The  committee   substitute  was   a                                                                    
substantial improvement because it  did not attempt to raise                                                                    
taxes  by  hardening  the   minimum  tax  floor.  Preventing                                                                    
companies  from  realizing  the   true  economics  of  their                                                                    
investments by  preventing critical  tax credits  from being                                                                    
realized to  offset the minimum  tax would  have represented                                                                    
an  immediate and  significant tax  increase. It  would have                                                                    
penalized  companies who  had  made  prior year  investments                                                                    
even  when  they  were  losing money,  it  would  also  have                                                                    
penalized  those companies  who wanted  to continue  to make                                                                    
potential current year investments  despite the low economic                                                                    
environment.  For  those  companies, large  or  small,  that                                                                    
might  have   new  oil  tax  credits,   expiration  drilling                                                                    
credits, and  tax loss credits  from prior  year investments                                                                    
and  that might  be  in  a loss  position  today because  of                                                                    
current prices  and thus  were depending  on the  credits to                                                                    
continue   funding   their   current  investments   -   that                                                                    
provision,  alone, could  have  delayed  or possibly  denied                                                                    
that economic  investment to those  investments at  the very                                                                    
time the companies needed it  the most. In order to maximize                                                                    
investment  opportunity   in  Alaska,  he  thought   it  was                                                                    
critical  to provide  investors the  opportunity to  capture                                                                    
the  economic opportunity  of  those investments  especially                                                                    
given the  long-term outlook and  the risks involved  in the                                                                    
inherent  high-cost   environment  that  was   Alaska.  That                                                                    
provision,  alone, would  have significantly  and negatively                                                                    
impacted Alaska's  investment climate  in the  perception of                                                                    
the investment climate to any  future investor by announcing                                                                    
to the  world that  Alaska was  willing to  adversely affect                                                                    
the  economics of  past and  future  investments solely  for                                                                    
short-term revenue needs.                                                                                                       
                                                                                                                                
3:37:47 PM                                                                                                                    
                                                                                                                                
Mr. Seckers  spoke to  the raising of  the minimum  tax. The                                                                    
change  would  have  resulted  in  a  very  substantial  tax                                                                    
increase and a regressive tax  increase because it was based                                                                    
on gross revenues  rather than net income.  Raising taxes on                                                                    
companies who  were reporting record  losses, losses  on the                                                                    
very activity  the legislature  was trying  to tax  under HB                                                                    
247,  was not  a wise  or feasible  long-term solution  or a                                                                    
wise long-term tax policy.                                                                                                      
                                                                                                                                
Mr. Seckers  moved on to  discuss another of  the provisions                                                                    
that  was   removed  from  the  committee   substitute:  the                                                                    
application in the  termination of the gross  revenue at the                                                                    
point of  production. The provision  would have  also raised                                                                    
taxes on  the industry. He  understood that it did  not seem                                                                    
intuitive for the  gross revenue at the  point of production                                                                    
to go  below negative. However,  currently the price  of oil                                                                    
fluctuated. There  were costs such as  marine transportation                                                                    
and  pipeline  costs which  were  the  only deductions  that                                                                    
could be taken to determine the  gross value at the point of                                                                    
production  which   could  cause  the  gross   value  to  go                                                                    
negative. If the  gross value could not go  below zero, then                                                                    
the  economic  investments   in  marine  transportation  and                                                                    
pipeline costs would potentially  be lost. Companies did not                                                                    
file  a  field-by-field  tax return  but  rather  a  segment                                                                    
return.  He used  the North  Slope  as an  example. For  the                                                                    
North Slope  it included all  of the economics of  the North                                                                    
Slope.  Therefore, a  loss in  one area,  would possibly  be                                                                    
offset by  income in another  to represent the  economics of                                                                    
that segment  for a company.  The bill provision  would have                                                                    
prevented the  gross value at  the point of  production from                                                                    
going below  negative without an  explanation of  what would                                                                    
have happened  to those  investments costs  [deductions]. It                                                                    
would have changed  the substance of the law of  how the tax                                                                    
was  determined,  how  the  gross  value  at  the  point  of                                                                    
production  was applied,  and would  have been  nothing more                                                                    
than a tax increase.                                                                                                            
                                                                                                                                
Mr. Seckers  brought up the  issue of  taxpayer confidential                                                                    
information.  The problem  with the  original bill  was that                                                                    
the  provision  would  have allowed  very  confidential  and                                                                    
taxpayer  sensitive  information  to be  released.  Although                                                                    
ExxonMobil  was  partners  with  BP  and  ConocoPhillips  at                                                                    
Prudhoe  Bay  and other  fields  but  they were  competitors                                                                    
domestically and  internationally. The companies  were bound                                                                    
by federal law  of what they could or could  not disclose or                                                                    
share.   ExxonMobil  could   also   not  share   proprietary                                                                    
sensitive  business   information.  The  provision   in  the                                                                    
original bill would have opened  the door for the disclosure                                                                    
of  very troubling  and possibly  unlimited information.  He                                                                    
concluded  that he  discussed the  original bill  because he                                                                    
wanted to acknowledge the improvements  made to the original                                                                    
bill  by the  House Resources  Committee, but  to discourage                                                                    
the  legislature from  reintroducing  those provisions  into                                                                    
any bill  under consideration. He opined  that reintroducing                                                                    
any of  those provisions would dramatically  reduce Alaska's                                                                    
overall global  competitiveness by  raising taxes  when many                                                                    
companies were  reporting record losses. The  losses were on                                                                    
the very activity  the legislature was trying  to tax, which                                                                    
would  be poor  tax policy.  Reintroducing those  provisions                                                                    
would  force  companies  to reexamine  short  and  long-term                                                                    
investment behavior  and was  inconsistent with  the state's                                                                    
long-term  vision  of  promoting oil  and  gas  development.                                                                    
Previously, the state enacted a  petroleum production tax in                                                                    
ACES  when   prices  were  rising   to  raise   revenue.  He                                                                    
communicated that enacting those  same provisions would send                                                                    
a  clear signal  to the  entire global  investment community                                                                    
that Alaska's  tax policy was  to raise taxes  when industry                                                                    
made money and again when  it lost money just for short-term                                                                    
revenue needs. Alaska needed  to remain globally competitive                                                                    
for   critical  capital   investment.   He  furthered   that                                                                    
increasing  or imposing  a tax  on companies  in a  negative                                                                    
cash  position  would  not  lead   to  more  jobs,  to  more                                                                    
investment, to more production,  or to long-term sustainable                                                                    
state revenues.  Alaska remained a very  important component                                                                    
of ExxonMobil's  worldwide portfolio.  The company  had been                                                                    
in Alaska a  long time and wanted to remain  in Alaska for a                                                                    
long   time  to   come.  However,   as  ConocoPhillips   had                                                                    
indicated, when the  state raised taxes it  raised costs for                                                                    
companies to do business.  Every opportunity that ExxonMobil                                                                    
looked at  in the  future would  become less  attractive and                                                                    
would diminish.                                                                                                                 
                                                                                                                                
Mr. Seckers concluded his testimony.  The need for Alaska to                                                                    
maintain  a  competitive  and   stable  fiscal  regime  that                                                                    
attracted   and    encouraged   ongoing    critical   future                                                                    
investments especially in  the current low-price environment                                                                    
was  one of  the  most important  issues  facing the  state.                                                                    
Policy makers  needed to decide whether  increasing taxes on                                                                    
companies that  were losing money  would lead to  more jobs,                                                                    
more  investments,  more   production,  and  more  long-term                                                                    
revenues  was a  wise state  tax policy.  ExxonMobil believe                                                                    
the answer  was, "No." If the  committee substitute reverted                                                                    
back to the original bill  the answer would be emphatically,                                                                    
"No!" He was happy to answer any questions.                                                                                     
                                                                                                                                
3:43:03 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler asked  if  the changes  in  the oil  tax                                                                    
credit  bill proposed  in the  committee substitute  had any                                                                    
potential  for  affecting the  likelihood  of  getting to  a                                                                    
front  end  engineering  decision (FEED)  decision  for  the                                                                    
AKLNG project.                                                                                                                  
                                                                                                                                
Mr. Seckers  responded that the AKLNG  project was obviously                                                                    
a very  critical project  and a  very expensive  project. He                                                                    
commented that  fiscal stability undercutting the  state oil                                                                    
and gas  regime was important  because a decision  could not                                                                    
be based  on an unstable  oil and gas structure.  Any change                                                                    
in the  structure would  have an  effect. The  company would                                                                    
look at  it very carefully.  It was difficult  for companies                                                                    
to want to  invest $60 billion when the risk  of tax changes                                                                    
was constantly a possibility.                                                                                                   
                                                                                                                                
Vice-Chair  Saddler asked  about the  role that  any of  the                                                                    
various  credits might  have played  in the  construction of                                                                    
the Point Thomson unit.                                                                                                         
                                                                                                                                
Mr.  Seckers responded  that  Point Thomson  was  part of  a                                                                    
settlement that was ongoing. It  was also an underpinning of                                                                    
the gas project that ExxonMobil  was looking at. In terms of                                                                    
the credits  that Point Thomson  enjoyed but prior to  SB 21                                                                    
there  was  the   Capex  tax  credit  that   was  no  longer                                                                    
available. There were  no other credits in  play because the                                                                    
unit was not  currently up and running. At the  time that it                                                                    
was  running  a  $5  new  oil per  barrel  credit  would  be                                                                    
available to the Point Thomson production.                                                                                      
                                                                                                                                
Vice-Chair Saddler  asked Mr. Secker  for his  assessment of                                                                    
the effect of  not allowing the gross value at  the point of                                                                    
production to  fall below zero  might have with  the monthly                                                                    
tax regime proposed by the governor's original bill.                                                                            
                                                                                                                                
Mr.  Seckers  was uncertain  of  the  context of  Vice-Chair                                                                    
Saddler's question. He  responded that he was  unsure of the                                                                    
effect on  a monthly basis of  the gross value at  the point                                                                    
of production. He  suggested that if the gross  value at the                                                                    
point of  production went negative  on one  particular field                                                                    
the taxpayer,  assuming that they  had more activity  on the                                                                    
Slope,  would consolidate  it when  they made  their monthly                                                                    
payment with their other filings.  The amount of monthly tax                                                                    
would go up  if the deductions were taken  away resulting in                                                                    
a tax increase.                                                                                                                 
                                                                                                                                
Representative Pruitt  asked if  there was any  other regime                                                                    
that  ExxonMobil   was  currently  operating  in   that  was                                                                    
proposing to increase taxes.                                                                                                    
                                                                                                                                
Mr.  Seckers encouraged  him to  ask the  state's consultant                                                                    
that would  be testifying  later in the  same day.  He would                                                                    
likely have more detail. He  responded that to his knowledge                                                                    
the answer was "no."                                                                                                            
                                                                                                                                
3:46:27 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  asked how ExxonMobil's  investment in                                                                    
Alaska would  be influenced if  the state went  forward with                                                                    
the  hardening   of  the  floor   and  some  of   the  other                                                                    
adjustments to the actual tax.                                                                                                  
                                                                                                                                
Mr. Seckers  answered that the  provisions in the  bill were                                                                    
troubling  and would  result in  significant tax  increases.                                                                    
The company  took into  account anytime taxes  went up  or a                                                                    
regime  became  unstable  and  would  affect  the  company's                                                                    
investments going forward. He  reiterated that when the cost                                                                    
of  doing  business  in  the   state  increased  because  of                                                                    
increased taxes there had to  be an offset. Generally, there                                                                    
were  4  levers  that   would  be  evaluated:  efficiencies,                                                                    
scaling  back  of   activity,  discretionary  spending,  and                                                                    
layoffs. ExxonMobil  had not  had to  lay off  its employees                                                                    
yet. An  increase in costs  would negatively impact  these 4                                                                    
areas.                                                                                                                          
                                                                                                                                
Representative  Pruitt recognized  that reducing  investment                                                                    
would impact the  percentage of decline. He  wondered if the                                                                    
state would ever  be able to recover once  it started seeing                                                                    
less investment and a decline in production.                                                                                    
                                                                                                                                
Mr. Seckers  stated that  when costs  and taxes  were raised                                                                    
investment  behavior  changed.   It  also  changed  people's                                                                    
outlook and increased concerns that  investments made in the                                                                    
present  would  be  adversely  affected  going  forward.  If                                                                    
production and  investment declined each company  would have                                                                    
to approach its  board to determine whether  to invest again                                                                    
in Alaska.  He thought it  would be a difficult  argument to                                                                    
make  to a  board  of  directors if  the  state had  already                                                                    
raised  taxes  when  prices were  down  and  companies  were                                                                    
losing   money.  Board   members   would   be  looking   for                                                                    
assurances.  He  concluded  it would  be  difficult  to  get                                                                    
investment and production back.                                                                                                 
                                                                                                                                
3:49:46 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  wanted to  understand how  credits given                                                                    
in  one  year  did  not  return benefits  to  the  state  by                                                                    
investment.  He wondered  about  the time  horizon that  the                                                                    
state should expect  to see returns from  a state investment                                                                    
from foregoing some taxes.                                                                                                      
                                                                                                                                
Mr. Seckers  thought it was  a difficult to answer  from one                                                                    
company alone  because each company's  development scenarios                                                                    
were different.  Credits affected  behavior and  it depended                                                                    
on the  type of credit  and type of investment.  The purpose                                                                    
of credits  was to incentivize an  activity especially given                                                                    
Alaska's tax regime. Under SB  21 Alaska's fiscal regime was                                                                    
rather competitive, whereas, under  ACES it was not. Anytime                                                                    
a tax  regime was changed  it would have an  adverse impact.                                                                    
The  credits  were designed  to  increase  activity. It  was                                                                    
particularly  important given  the fact  that Alaska's  base                                                                    
tax  rate was  35 percent,  almost 3  times higher  than any                                                                    
other state  in the country.  Alaska had a  very complicated                                                                    
system due in  part because it had a high  base tax rate. If                                                                    
Alaska did not have such a high  base tax rate or if did not                                                                    
have the  credits and  deductions he  wondered what  the tax                                                                    
rate  would   be.  Credits  had   a  tremendous   impact  on                                                                    
investment and leveled the field.  The timeframe of recovery                                                                    
depended  on   the  type  of  investment.   He  assured  the                                                                    
committee that  it was an  incentive to  motivate investment                                                                    
and  increase  production which  he  thought  the state  was                                                                    
looking for.                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler wondered  if he  was accurate  in saying                                                                    
that  if the  tax  credits were  designed  to incentivize  a                                                                    
decision to  drill, a  decision was made  to drill,  oil was                                                                    
found,  and   oil  was  produced  the   decision  would  pay                                                                    
dividends throughout the lifetime  of the production through                                                                    
the well rather than for just one year.                                                                                         
                                                                                                                                
Mr. Seckers responded in the  affirmative. He added that the                                                                    
drilling of the well would  give rise to additional property                                                                    
taxes,  additional income  taxes, and  additional royalties.                                                                    
He  suggested that  the focus  be more  on local  government                                                                    
take. At the current price  of oil the local government take                                                                    
in  some  instances   was  over  100  percent.   It  was  an                                                                    
unsustainable business model for  anyone running a business.                                                                    
Increasing it further would not be sound policy.                                                                                
                                                                                                                                
Co-Chair Thompson thanked Mr. Seckers for his testimony.                                                                        
                                                                                                                                
3:53:15 PM                                                                                                                    
                                                                                                                                
JOE REESE,  SENIOR TAX MANAGER,  BP, introduced  himself and                                                                    
read from a prepared statement:                                                                                                 
                                                                                                                                
     Co-Chairs, Members of the Committee:  For the record my                                                                    
     name is Joe Reese and  I am Senior Managing Tax Counsel                                                                    
     for BP  Alaska. I am very  pleased to be here  today to                                                                    
     provide BP's  views on tax  policy and,  in particular,                                                                    
     the  bill  before you.  BP  is  a  member of  AOGA  and                                                                    
     supports the testimony provided by AOGA earlier today.                                                                     
                                                                                                                                
     The  success of  Alaska's  oil and  gas  tax policy  is                                                                    
     critical to BP,  to the AKLNG Project, and  to the many                                                                    
     Alaskans  who benefit,  both  directly and  indirectly,                                                                    
     from  the  successful   exploration,  development,  and                                                                    
     production  of   Alaska's  oil  and  gas.   A  durable,                                                                    
     predictable, and  administrable oil and gas  tax policy                                                                    
     must be in place to unlock those benefits.                                                                                 
                                                                                                                                
     BP  is committed  to maintaining  a safe  and compliant                                                                    
     business in  Alaska that is sustainable.  Over the past                                                                    
     two  years, there  has been  a 70  percent drop  in oil                                                                    
     price.  Under  the   current  market  conditions,  BP's                                                                    
     business  in  Alaska  is spending  more  cash  than  it                                                                    
     brings in,  and this is  not sustainable. As  a result,                                                                    
     BP  is evaluating  the activity  level at  PBU [Prudhoe                                                                    
     Bay Unit]  in order to adjust  expenditures in response                                                                    
     to  the lower  price  environment.  Improving our  cost                                                                    
     base is essential to maintaining  our activity level at                                                                    
     Prudhoe  Bay and  the long-term  viability of  an AKLNG                                                                    
     Project.                                                                                                                   
                                                                                                                                
     BP  is  committed  to  complying with  tax  laws  in  a                                                                    
     responsible manner and to  having open and constructive                                                                    
     relationships with tax policy  makers. One of the major                                                                    
     costs  to BP's  business  in Alaska  is oil  production                                                                    
     tax.                                                                                                                       
                                                                                                                                
     At current  prices, BP receives  no oil  production tax                                                                    
     credits from the State of  Alaska, nor does Prudhoe Bay                                                                    
     production have  any oil  production tax  credits under                                                                    
     the  minimum tax.  While BP  doesn't currently  receive                                                                    
     production tax  credits, we don't support  limiting the                                                                    
     production  tax credits  provided in  SB 21  because it                                                                    
     would negatively impact  the oil and gas  industry as a                                                                    
     whole,  including the  many other  companies that  have                                                                    
     made  investments, created  jobs, and  added production                                                                    
     in Alaska.                                                                                                                 
                                                                                                                                
     Just as the  industry is struggling to  make ends meet,                                                                    
     the State  also faces  severe budget  shortfalls. While                                                                    
     reasonable  people may  disagree about  how to  improve                                                                    
     the  current oil  and gas  tax policy,  now is  not the                                                                    
     right  time  to  make  changes to  increase  taxes  and                                                                    
     further undercut  our ability to maintain  the activity                                                                    
     level at Prudhoe Bay. Near-term  changes to the State's                                                                    
     oil   and  gas   tax  policies   will  have   long-term                                                                    
     consequences for all of us.                                                                                                
                                                                                                                                
     Now, I'd like to provide a few comments specifically                                                                       
     about the bill before you:                                                                                                 
                                                                                                                                
        1. The Minimum Tax: The Resource Committee's CS does                                                                    
          no harm to the 4% minimum tax rate.                                                                                   
        2. Change to the interest  rate calculation  for tax                                                                    
          overpayments  and  underpayments:  Currently,  the                                                                    
          interest  is calculated  at  a rate  that  is 3  %                                                                    
          points  above  the  federal funds  discount  rate,                                                                    
          using simple  interest. The Resource  Committee CS                                                                    
          has interest compound at the  end of each calendar                                                                    
          quarter.  Such a  compound rate  would reward  the                                                                    
          Department of  Revenue  for  being   slow  in  its                                                                    
          audits.   This would  increase the  uncertainty in                                                                    
          Alaska's tax system.                                                                                                  
        3. Net Operating  Loss   Tax  Credit:  The  Resource                                                                    
          Committee's   CS   is   an  improvement   to   the                                                                    
          Administration's proposal because  it continues to                                                                    
          allow the  use of  net operating loss  tax credits                                                                    
          to  reduce  the  minimum   tax.  In  other  words,                                                                    
          companies that  made important investments  in the                                                                    
          prior year, even when they  may have been spending                                                                    
          more cash than they  were bringing in, still would                                                                    
          be  allowed to  recover part  of that  investment.                                                                    
          NOL tax credits  are utilized by a  broad range of                                                                    
          companies  both on  the North  Slope  and in  Cook                                                                    
          Inlet,  and  changing  their   value  would  be  a                                                                    
          disincentive for future investment decisions.                                                                         
        4. Confidentiality:   Current    law   allows    the                                                                    
          Department   of  Revenue   to  publicly   disclose                                                                    
          information about  tax credits on  an "aggregated"                                                                    
          basis for a group of  three or more taxpayers, and                                                                    
          the  Resource   Committee  CS  does  no   harm  to                                                                    
          taxpayer confidentiality.                                                                                             
        5. Retroactivity: The Resource  Committee CS  allows                                                                    
          for  regulations to  be  applied retroactively  to                                                                    
          the effective  date of the  law.  This  is neither                                                                    
          predictable nor administrable  by the taxpayer and                                                                    
          thus is not sound tax policy.                                                                                         
                                                                                                                                
     Again:                                                                                                                     
                                                                                                                                
        · BP  is   committed  to  maintaining  a   safe  and                                                                    
          compliant business in Alaska that is sustainable;                                                                     
        · BP is  committed to complying  with tax laws  in a                                                                    
          responsible   manner  and   to  having   open  and                                                                    
          constructive   relationships   with   tax   policy                                                                    
          makers; and                                                                                                           
        · BP     supports    durable,     predictable    and                                                                    
          administrable oil and gas tax policy.                                                                                 
                                                                                                                                
Mr. Reese  thanked the committee  for hearing  his testimony                                                                    
and offered to answer questions.                                                                                                
                                                                                                                                
3:58:38 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  asked if  BP had experienced  any tax                                                                    
increases in any other regime it operated under.                                                                                
                                                                                                                                
Mr. Reese was not aware of any.                                                                                                 
                                                                                                                                
Representative Pruitt  asked if there were  any regimes that                                                                    
BP operated under that were  offering incentives or lowering                                                                    
their tax.                                                                                                                      
                                                                                                                                
Mr.  Reese  was aware  that  the  2017 UK  [United  Kingdom]                                                                    
budget included  provisions to reduce  the tax in  the North                                                                    
Sea.                                                                                                                            
                                                                                                                                
Representative  Pruitt  stated that  BP  had  been vocal  in                                                                    
terms  of  what to  expect  in  the current  year  regarding                                                                    
employment. He thought the company  anticipated a 17 percent                                                                    
reduction in its  workforce. If the bill passed  he asked if                                                                    
BP  would continue  to decrease  its  workforce and  respond                                                                    
accordingly if the state increased taxes.                                                                                       
Mr. Reese  answered that  the company  was currently  in the                                                                    
process of making  a 17 percent reduction.  BP was exploring                                                                    
all  available  options to  reduce  costs.  The company  had                                                                    
hoped to  maintain the  level of investments  at all  of the                                                                    
locations it participates in Alaska.  He added that it was a                                                                    
very simple equation that if  taxes went up increasing costs                                                                    
it would impact the company's investment decisions.                                                                             
                                                                                                                                
Representative  Pruitt asked  if  Mr. Reese  saw the  Alaska                                                                    
market  recovering  its  current  level  if  investment  was                                                                    
reduced.                                                                                                                        
                                                                                                                                
Mr. Reese  replied that  from a  tax policy  perspective and                                                                    
from  an investment  governance  perspective  BP required  a                                                                    
predictable, durable,  and administrable tax policy.  It was                                                                    
difficult for the individuals in  the organization that make                                                                    
the company's investment decisions  to continue to ramp back                                                                    
up or increase expenditures when  they were uncertain of the                                                                    
rules.                                                                                                                          
                                                                                                                                
4:01:27 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler had seen BP's  statistical outlook on the                                                                    
energy industry for  the past couple of years.  He had heard                                                                    
that the large major  international oil companies looked out                                                                    
decades rather  than a  few years. He  asked if  the company                                                                    
saw the cash  negative net losses in Alaska  as a short-term                                                                    
blip or a  fundamental change in the oil  market that Alaska                                                                    
should take steps to accommodate in its tax policy.                                                                             
                                                                                                                                
Mr. Reese admitted he was  not an economist but offered that                                                                    
the  company  did  not foresee  market  conditions  changing                                                                    
significantly in  the near-term. Therefore,  BP's situation,                                                                    
being  in  a  negative  cash  flow  position,  would  remain                                                                    
constant.                                                                                                                       
                                                                                                                                
Representative   Guttenberg    asked   about   conversations                                                                    
regarding the  minimal level of yearly  production increases                                                                    
needed in  order to maintain  the facilities and  the Trans-                                                                    
Alaska  Pipeline  System  (TAPS).  He  asked  Mr.  Reese  to                                                                    
provide his comments.                                                                                                           
                                                                                                                                
Mr.  Reese was  unaware of  such conversations  as he  dealt                                                                    
mainly   with   taxes   at   BP.    He   would   relay   the                                                                    
representative's question and follow up with a response.                                                                        
                                                                                                                                
Representative Guttenberg wondered  about the liabilities if                                                                    
production  did  not  increase  and  something  happened  to                                                                    
facilities in the line causing it to shut down.                                                                                 
                                                                                                                                
Mr. Reese replied that he would follow up.                                                                                      
                                                                                                                                
4:03:39 PM                                                                                                                    
                                                                                                                                
DAVE  WILKINS, SENIOR  VICE  PRESIDENT  OF ALASKA,  HILCORP,                                                                    
read from a prepared statement:                                                                                                 
                                                                                                                                
     For  the record  my  name  is Dave  Wilkins,  I am  the                                                                    
     Senior Vice President for  Hilcorp Alaska. Mr. Chairman                                                                    
     and  members  of  the  committee   thank  you  for  the                                                                    
     opportunity to  address you  today about  the committee                                                                    
     substitute for  HB 247. I have  previously testified on                                                                    
     HB247 in the House Resources  Committee on March 1st of                                                                    
     this year.                                                                                                                 
                                                                                                                                
     For  those  of  you  who  are  not  familiar  with  our                                                                    
     company, Hilcorp is the  largest privately-held oil and                                                                    
     gas  company in  the  United  States. Headquartered  in                                                                    
     Houston, TX,  Hilcorp has operations in  the Gulf Coast                                                                    
     of Texas  and Louisiana,  the Northeast  United States,                                                                    
     and Alaska's  Cook Inlet and  North Slope.  Hilcorp was                                                                    
     founded  1989   and  has  more  than   1,400  full-time                                                                    
     employees.  Just over  500 of  those employees  support                                                                    
     our operations  here in  Alaska and I  am proud  to say                                                                    
     that nearly 90 percent are Alaskan residents.                                                                              
                                                                                                                                
     Here in  Alaska we  operate approximately  53,000 gross                                                                    
     barrels of  oil per day  and 150 million cubic  feet of                                                                    
     gross  gas per  day  from  approximately 500  producing                                                                    
     wells,  for  a  total  net  production  to  Hilcorp  of                                                                    
     approximately  57,000  barrels  of oil  equivalent  per                                                                    
     day.                                                                                                                       
                                                                                                                                
     Hilcorp's   assets   are    primarily   (although   not                                                                    
     exclusively)  older  fields with  extensive  production                                                                    
     histories,  steady  and  predictable  performance  that                                                                    
     carry incredible  opportunity for getting more  oil and                                                                    
     gas  out of  the  ground safely  and responsibly  while                                                                    
     extending  production   life  through   efficiency  and                                                                    
     thousands  of  smaller  scale projects.  We  think  the                                                                    
     State needs  to attract more companies  like Hilcorp as                                                                    
     fields and infrastructure continue to age.                                                                                 
                                                                                                                                
     That  brings me  to why  Visit before  you here  today.                                                                    
     Hilcorp's     production    in     Alaska    represents                                                                    
     approximately 40  percent of  what we  produce company-                                                                    
     wide,  so our  success here  in Alaska  is critical  to                                                                    
     Hilcorp's overall success.                                                                                                 
                                                                                                                                
     I can  say from  Hilcorp's perspective, the  credits in                                                                    
     question  have resulted  in  more  investments here  in                                                                    
     Alaska,  both on  the North  Slope and  the Cook  Inlet                                                                    
     basins.  Starting with  the Cook  Inlet  area, it's  no                                                                    
     secret that  Hilcorp has  been a  big part  in reviving                                                                    
     energy security in Southcentral Alaska.                                                                                    
                                                                                                                                
     During  the past  4  years, we  have  invested over  $1                                                                    
     billion in projects  and have drilled over  50 wells in                                                                    
     the Cook  Inlet Area.  As a  result of  this investment                                                                    
     and the  increased production, we are  sending more oil                                                                    
     to be  refined and used  in Alaska. On the  natural gas                                                                    
     side, due  to our significant investment  over the past                                                                    
     four years,  we are  now making gas  supply commitments                                                                    
     with local  utilities into the  year 2023. We  stand by                                                                    
     our commitment  to serve  Alaskan's energy  needs first                                                                    
     and  are working  to ensure  a reliable  and affordable                                                                    
    energy source for Alaska's largest population hub.                                                                          
                                                                                                                                
     As you  are well aware,  prior to Hilcorp's  entry into                                                                    
     Alaska,  there was  widespread  concern of  "brownouts"                                                                    
     and that utilities would need  to import natural gas to                                                                    
     meet demand.  I have spoken  to many who  made electric                                                                    
     generator purchases during  this time expecting service                                                                    
     interruptions.                                                                                                             
                                                                                                                                
     Hilcorp's  success  certainly   did  not  come  without                                                                    
     challenges. Developing oil and  natural gas in the Cook                                                                    
     Inlet  basin carries  a very  high  cost of  production                                                                    
     coupled  with  decline  rates   that  vary  from  15-50                                                                    
     percent  annually depending  on the  field. The  simple                                                                    
     fact is that  if we are not spending  money on projects                                                                    
     that  bring  on new  production  we  cannot curb  these                                                                    
     declines.  So  we  believe  it  is  in  both  our  best                                                                    
     interest  and   the  state's  best  interest   that  we                                                                    
     continue  to spend  dollars on  trying to  produce more                                                                    
     oil and gas.                                                                                                               
                                                                                                                                
     It's  also no  secret that  Alaska's tax  credit system                                                                    
     and the  Cook Inlet  Recovery act  were key  drivers in                                                                    
     bringing Hilcorp  to Alaska and  in our  investments to                                                                    
     date.  Since  2012,"  Hilcorp has  spent  approximately                                                                    
     $3.2 Billion  dollars in capital and  acquisition costs                                                                    
     here in the State of Alaska.  Those   investments  were                                                                    
     aimed  at  one primary  goal  -  increasing oil  &  gas                                                                    
     production.  Since  2012,  we  have  increased  overall                                                                    
     production  by  approximately  40  percent.  A  lot  of                                                                    
     people like to  ask us how we do it,  and the answer is                                                                    
     simple.  We  have  and  continue  to  make  significant                                                                    
     investments;  investments that  were encouraged  by the                                                                    
     State's  tax credit  program  and  investment that  did                                                                    
     just  what  the  credits  were meant  to  do,  increase                                                                    
     energy supply for Alaskans.                                                                                                
                                                                                                                                
     I would argue  that our success has  been meaningful to                                                                    
     many, including the  State. Increased production levels                                                                    
     of  oil and  natural gas  in the  Cook Inlet  basin has                                                                    
     resulted  in increased  royalty rates,  property taxes,                                                                    
     jobs and  more. One example  of this is looking  at our                                                                    
     Monopod  offshore  platform.  In  January  2012,  right                                                                    
     after Hilcorp  took over  operations, the  realized oil                                                                    
     price was approximately $95  per barrel. Production was                                                                    
     approximately 600  barrels of  oil per day;  a marginal                                                                    
     rate  for   an  offshore  platform  that   has  a  high                                                                    
     operating cost.  Because of this marginal  rate and low                                                                    
     profitability,  the   Monopod  qualified   for  royalty                                                                    
     relief under HB 185 passed in 2003.                                                                                        
                                                                                                                                
     The  royalty   rate  was   reduced  to   help  maintain                                                                    
     profitability  for  the platform  so  it  would not  be                                                                    
     shut-in  and/or permanently  abandoned. As  the royalty                                                                    
     owner, the state's  take from the Monopod  at that time                                                                    
     was  approximately $90,000  per month  again, when  oil                                                                    
     was  about  $95 per  barrel.  Over  the past  4  years,                                                                    
     Hilcorp  has done  over 150  projects  on the  Monopod,                                                                    
     most of which were smaller  in scope, and has increased                                                                    
     production  to a  current rate  of approximately  3,000                                                                    
     barrels of oil per day.                                                                                                    
                                                                                                                                
     Because  of the  increase  in  production, the  state's                                                                    
     royalty share is  back up to the  standard 12.5 percent                                                                    
     and  even  with  oil  prices at  $35  per  barrel,  the                                                                    
     state's royalty take from the  Monopod has increased to                                                                    
     approximately  a  half  a million  dollars  per  month.                                                                    
     That's over a 5 times  more in royalty dollars going to                                                                    
     the state,  despite oil prices  declining more  than 60                                                                    
     percent. Furthermore, and  probably more important, our                                                                    
     success  at   the  Monopod  has  added   20+  years  of                                                                    
     production  life and  8 million  barrels of  future oil                                                                    
     production.                                                                                                                
                                                                                                                                
4:10:40 PM                                                                                                                    
                                                                                                                                
     The  Monopod   is  not   an  isolated   anomaly.  Since                                                                    
     Hilcorp's entry into  the Cook Inlet area  in 2012, oil                                                                    
     production  has   doubled,  which  has   increased  oil                                                                    
     royalty to the state  of over $70 million. Furthermore,                                                                    
     even though  oil prices are lower  this year, estimated                                                                    
     oil royalties  will be  approximately $10  million more                                                                    
     this year  than what  they were right  before Hilcorp's                                                                    
     entry when  oil prices were high.  Hilcorp's success in                                                                    
     increasing oil  production over the  last 4  years also                                                                    
     has increased future estimated  oil production by 20-30                                                                    
     million  barrels,  meaning increased  future  royalties                                                                    
     for the state.                                                                                                             
                                                                                                                                
     I would  offer, we  need more  results like  this: more                                                                    
     production. I  will also offer  that the state  needs a                                                                    
     system  in  place  that   is  stable,  predictable  and                                                                    
     incentivizes,  not jeopardizes,  continued investments.                                                                    
     Hilcorp's Cook  Inlet success is a  really good example                                                                    
     of  the State  putting good  policy in  place aimed  at                                                                    
     achieving a positive result and getting one.                                                                               
                                                                                                                                
     I can  tell you today  that the credits  Hilcorp earned                                                                    
     were  absolutely   reinvested  in  the   resource.  Our                                                                    
     current production  rates prove it. We  have managed to                                                                    
     work  our  way  above  the 50K  Barrel  threshold  both                                                                    
     through acquisition  and a lot  of hard  work. Breaking                                                                    
     the 50K  per day mark  means we  can no longer  cash in                                                                    
     the  very credits  that  this  legislation proposes  to                                                                    
     take  away.  But  other   budding  companies  can,  and                                                                    
     Hilcorp is  a company that always  welcomes competition                                                                    
     in  the  market. We  want  to  help promote  a  healthy                                                                    
     industry  throughout  the  state.  An  active  industry                                                                    
     means  additional service  companies will  be attracted                                                                    
     to  Alaska  which  creates competition  and  will  help                                                                    
     drive down costs.                                                                                                          
                                                                                                                                
     A lot of the discussion  regarding credits has involved                                                                    
     the Cook Inlet basin,  primarily because of the notable                                                                    
     increase in  production and activity that  the existing                                                                    
     tax   structure  intended   to   generate  was   wildly                                                                    
     successful. Our  success in Cook  Inlet is  what fueled                                                                    
     Hilcorp's interest  in expanding  to the North,  and we                                                                    
     did just  that in  November of  2014 when  we purchased                                                                    
     three of BP's  assets on the North  Slope: Milne Point,                                                                    
     Endicott  and  Northstar  fields.  When  we  took  over                                                                    
     operations,  we  were  producing  approximately  36,000                                                                    
     gross barrels  of oil per  day from these  three fields                                                                    
     and now  we produce approximately 37,000  gross barrels                                                                    
     of oil per day.                                                                                                            
                                                                                                                                
     After  a year  of working  with these  assets, I  am so                                                                    
     excited about  the amount of  opportunity up  there. We                                                                    
     have a comprehensive list of  projects we can invest in                                                                    
     projects that  will put  more oil  in the  pipeline and                                                                    
     support literally  hundreds, if not thousands,  of jobs                                                                    
     for  Alaskans.  We  currently  have  one  drilling  rig                                                                    
     running  on the  slope  and  would like  to  pick up  a                                                                    
     second rig by the end of the year                                                                                          
                                                                                                                                
     But, in  today's price environment  and in the  face of                                                                    
     an  uncertain  state  fiscal structure,  it  is  to  be                                                                    
     determined  what projects  move  forward  and when.  We                                                                    
     have to be  very thoughtful with every  penny we spend.                                                                    
     Investment  budgets  are  shrinking  and  compete  with                                                                    
     other  oil  and  gas  producing  areas  throughout  the                                                                    
     world. I  want Hilcorp's investment dollars  to come to                                                                    
     Alaska.  We have  to  continue to  work  hard to  build                                                                    
     efficiencies  and cut  costs, while  ensuring we  do it                                                                    
     safely  and without  causing harm  to the  environment.                                                                    
     Cutting costs,  not corners,  is the  only way  we will                                                                    
     survive the current downturn.                                                                                              
                                                                                                                                
4:17:48 PM                                                                                                                    
                                                                                                                                
     I  know  that we  are  not  the  only ones  faced  with                                                                    
     difficult   decisions   and   realities   during   this                                                                    
     challenging time. I also recognize  the members of this                                                                    
     committee  and the  legislature have  much to  consider                                                                    
     about what is best for the  state and our future. I ask                                                                    
     you   today   to    recognize   that   change   creates                                                                    
     uncertainty,  and  uncertainty  deters  investment  and                                                                    
     affects  jobs. Investment,  whether for  exploration or                                                                    
     development,  is the  only way  to increase  production                                                                    
     and increased  production is the  only way we  can help                                                                    
     get out of this situation.                                                                                                 
                                                                                                                                
     Over the past 30 years,  I have worked in several other                                                                    
     basins  throughout the  United  States, and  I can  say                                                                    
     with confidence Alaska has changed  its tax policy more                                                                    
     in  the  last  few  years  than  other  areas  have  in                                                                    
     decades. I  want to  keep Alaskans  working, I  want to                                                                    
     increase  production  but  the company  simply  is  not                                                                    
     going  to continue  to invest  hundreds of  millions of                                                                    
     dollars   in   Alaska,   especially   in   this   price                                                                    
     environment,  when  the  fiscal  structure  continually                                                                    
     changes.                                                                                                                   
                                                                                                                                
     So, in closing I would just  like to say again that the                                                                    
     uncertainty  we  are  currently  facing  threatens  our                                                                    
     ability to plan our  investments and that the decisions                                                                    
     you  make  today  will  impact  the  economics  of  the                                                                    
     opportunities  to increase  tomorrow's production  both                                                                    
     in Cook Inlet and on the North Slope.                                                                                      
                                                                                                                                
Mr. Wilkins thanked the committee.                                                                                              
                                                                                                                                
Vice-Chair Saddler  stated that  the other co-chairs  had to                                                                    
leave the  current meeting and  that he was given  the gavel                                                                    
to continue with the meeting.                                                                                                   
                                                                                                                                
Representative   Pruitt   understood   from   Mr.   Wilkins'                                                                    
testimony  that   approximately  40  percent   of  Hilcorp's                                                                    
investment was in  Alaska. He wondered if  there was another                                                                    
tax regime in  which the company operated  that was imposing                                                                    
additional  tax increases  at the  current time  and in  the                                                                    
current price environment.                                                                                                      
                                                                                                                                
Mr. Wilkins responded in the negative.                                                                                          
                                                                                                                                
Representative  Pruitt   felt  that  Hilcorp   was  slightly                                                                    
different than  the three major  oil companies and  would be                                                                    
adjusting  his  questions.  Yesterday  the  legislature  had                                                                    
heard from the administration  that Hilcorp was heralded for                                                                    
turning around investment which  Mr. Wilkins had highlighted                                                                    
in his testimony  in the Cook Inlet and on  the North Slope.                                                                    
He  first  asked about  how  Hilcorp  was able  to  increase                                                                    
production. He  also asked about  the impact the  bill might                                                                    
have in Hilcorp's ability to maintain similar increases.                                                                        
                                                                                                                                
Mr. Wilkins responded to his  first question about "how." He                                                                    
stressed  that it  was  a  lot of  hard  work  by some  very                                                                    
dedicated employees.  Many of  the employees  were acquired,                                                                    
through Hilcorp's acquisition of  Chevron, Marathon, and BP.                                                                    
They were very highly  trained, highly dedicated, and highly                                                                    
motivated employees.  He emphasized  that all of  the credit                                                                    
went  to  the employees  who  paid  attention to  the  small                                                                    
details. He spoke again about  the monopod and the fact that                                                                    
150 projects were  completed. The key with  the older assets                                                                    
was to work them hard and to understand them.                                                                                   
                                                                                                                                
4:22:20 PM                                                                                                                    
                                                                                                                                
Representative  Pruitt  asked   how  the  legislation  would                                                                    
impact  increasing production.  He  reiterated that  Hilcorp                                                                    
was different than other companies  that had been discussed.                                                                    
Mr.  Wilkens  had been  talking  about  increases while  the                                                                    
discussion  had been  about stemming  decline. He  wanted to                                                                    
better  understand how  he saw  the legislation  potentially                                                                    
impacting Mr. Wilkins' ability to increase.                                                                                     
                                                                                                                                
Mr. Wilkins relayed that Hilcorp  would live within its cash                                                                    
flow. His boss would not let him  take a loan out to pay the                                                                    
company light  bill or tax  bill. Currently the  company had                                                                    
two drill rigs  operating, one in Cook Inlet and  one on the                                                                    
North  Slope.  The  company  would  like  to  operate  more.                                                                    
However,  if the  state's policy  decision  was to  increase                                                                    
taxes  it  would place  pressure  on  the operation  of  the                                                                    
second  rig. He  would have  to decide  whether the  company                                                                    
could afford the second rig.  He would rather take the money                                                                    
and  drill additional  wells  in Alaska.  It  not only  made                                                                    
sense for Hilcorp,  it also made future  sense for Alaskans.                                                                    
He  saw nothing  in HB  247 that  encouraged the  company to                                                                    
spend  more  money in  Alaska  over  the current  law.  Both                                                                    
versions would discourage further investment in Alaska.                                                                         
                                                                                                                                
4:24:25 PM                                                                                                                    
                                                                                                                                
Representative   Munoz   thanked   Mr.   Wilkins   for   his                                                                    
presentation  and  for  Hilcorp's  success  in  Alaska.  The                                                                    
legislature   appreciated   the   company's   efforts.   She                                                                    
mentioned  that Mr.  Wilkins had  spoken about  investing in                                                                    
Prudhoe Bay  and Cook  Inlet. In Prudhoe  Bay the  base rate                                                                    
was 35  percent and  in Cook Inlet  there was  no production                                                                    
tax.  She asked  if he  thought it  was appropriate  for the                                                                    
State of  Alaska to consider  a rate similar to  the Prudhoe                                                                    
Bay and the Cook Inlet when the tax cap went away.                                                                              
                                                                                                                                
Mr.  Wilkins responded  that whether  it was  royalty taxes,                                                                    
property taxes, or income taxes  he looked at what the costs                                                                    
were  to Hilcorp.  He  looked  at the  total  cost of  doing                                                                    
business  then  decided  whether   he  could  afford  to  do                                                                    
business.  He concurred  with what  Ms. Moriarty  had stated                                                                    
that the  state made policy  and industry responded  to that                                                                    
policy.  If his  costs went  up it  would likely  drive down                                                                    
activity, capital  costs would  be reduced, and  there would                                                                    
be a reduction  in jobs and production. He  also agreed with                                                                    
ConocoPhillips  that  any one  decision  made  by the  state                                                                    
would  not necessarily  cause a  corresponding response  but                                                                    
would impact Hilcorp's  decisions. He would not  be making a                                                                    
shear investment decision based on  the tax structure but it                                                                    
would certainly be a consideration.                                                                                             
                                                                                                                                
Representative  Munoz reported  hearing testimony  that Cook                                                                    
Inlet was  sufficiently incentivized because of  the lack of                                                                    
a production tax. She asked for his comments.                                                                                   
                                                                                                                                
Mr. Wilkins  responded that the  tax incentives in  the Cook                                                                    
Inlet did  exactly what they  were intended to  do: increase                                                                    
production of  oil, giving  the state  additional royalties,                                                                    
and gas, giving  a stable price to the gas  supply for homes                                                                    
and utilities  thus, avoiding brown  outs. Gas  prices could                                                                    
have  double  had  the  state  had  to  bring  gas  in  from                                                                    
somewhere else. He thought the  tax credit system encouraged                                                                    
many projects  and investment money  to Alaska  resulting in                                                                    
increased production.                                                                                                           
                                                                                                                                
4:27:24 PM                                                                                                                    
                                                                                                                                
Representative  Munoz talked  about the  minimum tax  on the                                                                    
North  Slope.   She  asked  if   he  thought  it   would  be                                                                    
appropriate for  the state  to consider  a time  certain for                                                                    
the net operating loss to be carried forward.                                                                                   
                                                                                                                                
Mr. Wilkins replied that the  state could make any policy it                                                                    
wanted  and he  would  react to  it. He  was  new to  Alaska                                                                    
having only been in the state  for a year. The idea that oil                                                                    
companies had  a lucrative deal  in Alaska lead him  to pose                                                                    
the question as to why  more oil companies were not pounding                                                                    
down the door  to do business in the state.  He noticed that                                                                    
more companies have  left Alaska than come to  Alaska in the                                                                    
previous 4 to 5 years. He  added that Alaska was a difficult                                                                    
environment to operate in.                                                                                                      
                                                                                                                                
Representative  Gattis  asked   if  Hilcorp  had  operations                                                                    
elsewhere in the world.                                                                                                         
                                                                                                                                
Mr.  Wilkins answered  in the  affirmative. He  relayed that                                                                    
the  company  did  business  in   the  Gulf  Coast  and  the                                                                    
Northeast - primarily in the United States.                                                                                     
                                                                                                                                
Representative  Gattis  suggested  that  Hilcorp  had  other                                                                    
options.  If  Alaska took  advantage  of  tax policies  that                                                                    
allowed the company  to take fuller and  better advantage of                                                                    
other options (code-speak for the  company could pick up and                                                                    
go somewhere else).  Alaska would have no  advantage at that                                                                    
point.  The state  could tax  Hilcorp "until  the cows  come                                                                    
home", but if  the company was not in Alaska  to be taxed it                                                                    
would  not  matter. She  thought  the  bigger challenge  for                                                                    
Alaskans to  look at  was that  many industry  companies had                                                                    
other  places to  do business.  She wondered  whether Alaska                                                                    
was  open   for  business.  She  conveyed   that  she  would                                                                    
appreciate having Hilcorp's business  so the state could pay                                                                    
for all of the things Alaskans have become accustomed to.                                                                       
                                                                                                                                
Vice-Chair  Saddler thanked  Mr. Wilkins  for his  testimony                                                                    
and asked him  to provide a copy of his  written comments to                                                                    
staff. He invited Mr. Jepsen  from ConocoPhillips back up to                                                                    
the table. There  was a correction he would like  to make on                                                                    
the record.                                                                                                                     
                                                                                                                                
4:30:40 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen commented that  Vice-Chair Saddler had previously                                                                    
asked about  the percentage of Alaska  residents employed by                                                                    
ConocoPhillips.  He  might  have provided  some  information                                                                    
that could have been misleading.  He relayed that there were                                                                    
about 1200  employees hired  directly by  ConocoPhillips and                                                                    
about  85  to 9o  percent  of  those employees  were  Alaska                                                                    
residents.                                                                                                                      
                                                                                                                                
Vice-Chair Saddler  commented that  the number had  seemed a                                                                    
little low.                                                                                                                     
                                                                                                                                
4:31:23 PM                                                                                                                    
                                                                                                                                
J.   PATRICK  FOLEY,   SENIOR  VICE   PRESIDENT  OF   ALASKA                                                                    
OPERATIONS, CAELUS,  would try  to respond to  the questions                                                                    
asked earlier  in the  meeting. He  asked members  to listen                                                                    
for and  to make  their own  determinations about  whether a                                                                    
company like  Caelus was part  of the solution  or genuinely                                                                    
part  of  the  problem.  He suspected  Caelus  was  not  the                                                                    
problem. He  provided some  background information.  He came                                                                    
to Alaska in 1983 and had  spent more than half of his adult                                                                    
life  in the  state.  He had  worked in  every  oil and  gas                                                                    
jurisdiction  in  the  Lower  48 and  spent  about  4  years                                                                    
working  internationally.  He  had some  experience  in  the                                                                    
related issues.  He wanted to  remind members of  who Caelus                                                                    
was, what the company had  accomplished, and to provide some                                                                    
insight into what the company's  future would hopefully look                                                                    
like.  He  also  wanted  to  share  with  members  what  the                                                                    
proposed changes  to tax policy  would have on  his company.                                                                    
Sadly, he  thought he might  be the expert in  net operating                                                                    
loss transferable  credits. He wished  he was not in  a loss                                                                    
position. Caelus  bought the  Pioneer Natural  Resources Co.                                                                    
(Pioneer)  assets.  Therefore,  when  he  discussed  Caelus'                                                                    
history Pioneer's history was  included. He conveyed that he                                                                    
had  personally  opened  the office  for  Pioneer  14  years                                                                    
previously. The company had been  in the state for 14 years,                                                                    
made  substantial  investments,  but  had  not  yet  made  a                                                                    
profit. The company was still  operating at a loss. He asked                                                                    
members to consider  what a net operating loss  meant in the                                                                    
context of a  production tax system. He relayed  that all in                                                                    
meant was  that Caelus  made more expenditures  (the company                                                                    
invested more capital and paid  additional money) every year                                                                    
than   generated  revenues.   All  businesses   started  out                                                                    
similarly.                                                                                                                      
                                                                                                                                
4:33:49 PM                                                                                                                    
                                                                                                                                
Mr.  Foley introduced  his  PowerPoint Presentation:  "House                                                                    
Finance CS HB 247 (RES) Testimony."   He began with slide 2:                                                                    
"Caelus  Energy   Alaska:  Key  Facts  &   Information."  He                                                                    
reminded members that  when he was discussing  Caelus he was                                                                    
also including Pioneer's history.  Since the company came to                                                                    
the  state  in 2002  it  had  invested  over $2  billion  in                                                                    
capital. In  2016 the company  had a capital budget  of $300                                                                    
million. Currently  the company  had 70  full-time employees                                                                    
in Alaska  and had approximately 400  contractors working on                                                                    
the  Slope  at  present.  When  he  summed  the  information                                                                    
together  and took  into account  the  fact that  it took  2                                                                    
bodies to do  1 position and some of the  jobs were seasonal                                                                    
it represented about 600 full time positions.                                                                                   
                                                                                                                                
Mr. Foley spoke  to the accomplishments of  his company. The                                                                    
company had produced  23 million barrels of  oil since 2008.                                                                    
In  2015 the  company made  4 million  barrels of  oil. Many                                                                    
people  questioned Caelus'  small size  and commented  about                                                                    
its safety records and technical  expertise. However, he was                                                                    
proud  of the  company's  safety  record, its  environmental                                                                    
record,  and  its  technical  standpoint.  The  company  was                                                                    
drilling some  of the longest  wells on the North  Slope. In                                                                    
all  of its  wells the  company employed  super giant  frack                                                                    
technology. The  company pumped about 2.6  million pounds of                                                                    
proppant in its  wells. It was the largest frack  job on the                                                                    
North Slope.  Not only  was he the  expert in  Net Operating                                                                    
Losses, he  was also becoming  the expert in trying  to make                                                                    
money on tight  crummy reservoirs (that was  all the company                                                                    
had). The  company's reservoirs, the Torok  and the Nuiqsuk,                                                                    
required very  intensive capital  and fracking.  The company                                                                    
took  reservoir rocks  that  would make  a  small amount  of                                                                    
production and  employed very large fracks  on them (costing                                                                    
about $10  million to  frack a  producer). The  results were                                                                    
that the wells had initial  production IP rates in the 5000,                                                                    
6000, and 7000  barrels per day. After a year  the wells had                                                                    
sustained rates  of about 1500  barrels per day.  Caelus had                                                                    
found a way to take  difficult reservoirs that had been left                                                                    
behind by  other companies  on the North  Slope and  found a                                                                    
way  to  be profitable  requiring  very  large capital.  The                                                                    
company was profitable at  reasonable prices. However, today                                                                    
oil  was not  at  reasonable prices.  He  admitted that  his                                                                    
company was  struggling to  exist. He  thought he  could say                                                                    
the same  about every other  oil company. He thought  it was                                                                    
probably the same for the  State of Alaska. He reported that                                                                    
in the  current day  the price  of oil  was $37  per barrel.                                                                    
Although  the company  was struggling  to exist  it did  not                                                                    
mean the  company was at risk  of going out of  business. It                                                                    
meant that  Caelus was  at risk  of not  being able  to make                                                                    
further  capital  investments  and   continue  to  grow  its                                                                    
business.                                                                                                                       
                                                                                                                                
Mr. Foley  explained that the state  received production out                                                                    
of the producers that received  the state's tax credits. The                                                                    
state  also received  royalty monies  equaling close  to $70                                                                    
million and production taxes of about $60 million to date.                                                                      
                                                                                                                                
4:37:13 PM                                                                                                                    
                                                                                                                                
Mr.  Foley moved  to  slide 3:  "North  Slope Exploration  &                                                                    
Development Program." He pointed to  the left top portion of                                                                    
the slide.  He reported that  out at Smith Bay  in Tulimaniq                                                                    
Caelus had  drilled 2 very  exciting exploration  wells. The                                                                    
wells were very expensive and  the company would be spending                                                                    
well over  $100 million  to drill the  2 wells.  He reported                                                                    
that currently  the operations  were finishing,  the company                                                                    
was encouraged  by the  results, and  it had  started making                                                                    
plans  to  be  back  in  the near  future  to  continue  its                                                                    
appraisal.  At Oooguruk,  the cornerstone  of the  company's                                                                    
business,  the costs  were  higher than  most  of the  North                                                                    
Slope  fields  because it  was  a  remote island  site.  The                                                                    
company produced  anywhere from  10 thousand to  20 thousand                                                                    
barrels per day  because of the frack  nature of production.                                                                    
Caelus  drilled wells  all year,  fracked them,  and brought                                                                    
them online.  The company saw  really high  production rates                                                                    
in the summertime  and then they depleted.  In the following                                                                    
year  they would  drill all  over again.  He pointed  to the                                                                    
next  picture of  Nuna, a  project in  the process  of being                                                                    
developed. It  was a project  Caelus committed to  at higher                                                                    
oil prices. He  admitted that the company  was struggling to                                                                    
keep the  pad that  had nothing on  it. Lastly,  the company                                                                    
had acquired  a 325 thousand  acre block in the  far eastern                                                                    
portion of  the North Slope. It  was to the East  of Prudhoe                                                                    
Bay and  to the west of  Point Thomson. Even before  the oil                                                                    
and  gas  leases  were  issued   Caelus  had  begun  a  high                                                                    
resolution  seismic  3D   acquisition  program.  Caelus  was                                                                    
chasing the  same reservoirs at  Smith Bay,  Oooguruk, Nuna,                                                                    
and in the  East. They were the same  type crummy reservoirs                                                                    
that  the  company  thought  it   would  be  the  master  of                                                                    
unlocking.                                                                                                                      
                                                                                                                                
Vice-Chair  Saddler  asked  about  the  term  he  had  used,                                                                    
"crummy" reservoir.                                                                                                             
                                                                                                                                
Mr. Foley responded, "Sadly I did say crummy."                                                                                  
                                                                                                                                
Vice-Chair Saddler thought there  was some technical term he                                                                    
was missing.                                                                                                                    
                                                                                                                                
4:39:48 PM                                                                                                                    
                                                                                                                                
Representative Wilson asked about  the odds of Caelus coming                                                                    
back if the state started changing its tax regime again.                                                                        
                                                                                                                                
Mr. Foley  indicated that he  had a slide  that specifically                                                                    
addressed  Nuna,  potential  opportunities, and  what  would                                                                    
have  to  happen  for  Caelus   to  move  forward  with  its                                                                    
investment.                                                                                                                     
                                                                                                                                
Mr.  Foley  turned  to  slide   4:  "Alaska:  An  Attractive                                                                    
Investment  Opportunity?" He  had mentioned  before that  he                                                                    
had  worked  internationally  as   a  negotiator  and  in  a                                                                    
strategic   planning   group.   The  group   evaluated   new                                                                    
opportunities  by  answering  several  questions  that  were                                                                    
listed  on the  slide.  The questions  included whether  the                                                                    
resource  was  world  class, whether  there  was  access  to                                                                    
infrastructure,   whether  there   were  leases   available,                                                                    
whether there  was an expert  community of  contractors, and                                                                    
whether the regulatory environment  could be managed. Alaska                                                                    
received  fairly   high  marks  in  the   answers  to  these                                                                    
questions. However, there were  some downsides to investment                                                                    
opportunities  in Alaska.  First, Alaska  was an  expensive,                                                                    
cold,  and remote  operating  environment. Another  question                                                                    
his group  answered was whether  Alaska's fiscal  regime was                                                                    
favorable.  He  relayed  that  under   SB  21  it  was  very                                                                    
favorable.  The changes  currently being  contemplated would                                                                    
make the regime unfavorable.  Another question to answer was                                                                    
whether  the fiscal  regime was  stable and  predictable. In                                                                    
his history he  had seen about 5 or 6  tax regime changes in                                                                    
the  prior 10  years.  Alaska received  very  poor marks  in                                                                    
fiscal regime stability.  Caelus was a company  that went to                                                                    
outside  sources for  its capital.  The company's  investors                                                                    
needed to  have confidence in  the system. He  reported that                                                                    
investors were  very nervous about  continuing to  invest in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
4:42:43 PM                                                                                                                    
                                                                                                                                
Mr.  Foley advanced  to slide  5: "Alaska  Oil Tax  Policy -                                                                    
Integrated Tax  System." He acknowledged that  the slide was                                                                    
borrowed from  enalytica. The slide showed  the government's                                                                    
take  over  a  broad  range of  prices.  He  explained  that                                                                    
government take  was determined by profit  and distribution.                                                                    
Gross  revenues minus  costs equaled  profit which  was then                                                                    
shared.  He relayed  that SB  21 reflected  a fiscal  system                                                                    
that was flat over a very  broad range of prices. He pointed                                                                    
to  the  dotted   line  on  the  chart   that  depicted  the                                                                    
government take over a range  of prices. He highlighted that                                                                    
from  $70 and  up  the government  take remained  shockingly                                                                    
flat.  At the  lowest  end, reflecting  current prices,  100                                                                    
percent of  the take  went to the  state. There  was nothing                                                                    
left for the investor.                                                                                                          
                                                                                                                                
Representative Wilson  wondered if  there was an  issue with                                                                    
SB 21 or with the price of oil.                                                                                                 
                                                                                                                                
Mr.  Foley answered  that the  company was  struggling first                                                                    
because of price. Secondly, the  company was concerned about                                                                    
what would happen in the  future. He furthered that under SB                                                                    
21, an  integrated balanced  system, companies  were allowed                                                                    
to earn tax  credits by doing work. He  suggested members to                                                                    
think of it as an early  assistance provided by the state to                                                                    
fund  and  move  projects forward.  In  exchange,  companies                                                                    
would pay a  larger piece once a project got  off the ground                                                                    
and became profitable.                                                                                                          
                                                                                                                                
Representative Wilson had heard of  the benefits of SB 21 at                                                                    
high oil  prices such as $90,  $100, and $120. The  reason a                                                                    
change was being considered was  because the legislature had                                                                    
not  properly considered  the regime  at low  prices of  the                                                                    
present  day.  She  asked  if  Mr.  Foley  agreed  with  her                                                                    
statement.                                                                                                                      
                                                                                                                                
Mr.  Foley agreed  that  oil  at high  prices  was the  only                                                                    
scenario  people  had  envisioned.  He did  not  think  that                                                                    
anyone had contemplated oil at $37 per barrel.                                                                                  
                                                                                                                                
4:46:04 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  asked  if   Mr.  Foley  thought  the                                                                    
changes being  considered would fix the  situation the state                                                                    
was in.                                                                                                                         
                                                                                                                                
                                                                                                                                
Mr.  Foley  thought  the  changes  exacerbated  the  problem                                                                    
rather than helping the problem.                                                                                                
                                                                                                                                
Vice-Chair Saddler asked  if the dark blue or  purple on the                                                                    
chart represented the producer take.                                                                                            
                                                                                                                                
Mr.  Foley suggested  directing the  question to  enalytica.                                                                    
The dark blue was not represented in the key.                                                                                   
                                                                                                                                
Mr.  Foley moved  on  to  slide 6:  "Tax  Program Changes  &                                                                    
Impacts to Caelus." He explained  that the slide represented                                                                    
the impacts that the original  bill, HB 247, would have upon                                                                    
Caelus. The  slide showed the  net present value (NPV)  on a                                                                    
life-cycle   basis   of   the  company's   current   project                                                                    
inventory. It included Oooguruk  and Nuna using strip prices                                                                    
similar to current prices. Over  the course of the following                                                                    
5 years the price would creep  up every year until, in about                                                                    
5 years, the  price would be about $52 and  it would be flat                                                                    
forever. He  thought it was  unsustainable. The  slide tried                                                                    
to walk through  the additive impacts of  the various pieces                                                                    
of  the  initial bill  offered  by  the administration.  The                                                                    
first impact was the GVR fix.  Caelus was one of the company                                                                    
that earned  a net operating  loss. The way the  statues and                                                                    
regulations were  written they  allowed Caelus  to basically                                                                    
increase its  net operating loss  by applying the  GVR. Some                                                                    
people claimed  it was an unintended  consequence and needed                                                                    
to be  removed. From his  prospective he had assumed  it was                                                                    
an intended  consequence because the taxes  were starting to                                                                    
increase under SB 21 and  the credit system was changing. He                                                                    
saw it as  something that could balance  them. He understood                                                                    
the  legislature's  belief  and  the  public's  concern  and                                                                    
suspected he  would lose  on the issue  the result  of which                                                                    
would erode the  value of his business by  about 13 percent.                                                                    
The  bars on  the graph  demonstrated the  impact on  an NPV                                                                    
basis created by each proposed change.                                                                                          
                                                                                                                                
4:49:44 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  asked about his NPV  rate assumption and                                                                    
to define "strip price."                                                                                                        
                                                                                                                                
Mr.  Foley  responded  that  the  graph  represented  a  NPV                                                                    
discounted  at 10  percent.  The strip  price  was what  the                                                                    
financial  markets  predicted would  be  the  price of  oil.                                                                    
Currently, they  predicted that the  price would be  what it                                                                    
was at present. It assumed  a very modest increase each year                                                                    
for the following 5 years at about $52 per barrel.                                                                              
                                                                                                                                
Vice-Chair Saddler  remarked that  NPV at  10 percent  was a                                                                    
fairly high assumption. He asked Mr. Foley to comment.                                                                          
                                                                                                                                
Mr.  Foley  answered  that   when  companies  made  economic                                                                    
evaluations  they considered  what they  would look  like at                                                                    
various  NPV amounts.  The next  bar  depicted the  negative                                                                    
impact  of  hardening the  floor.  At  present, because  the                                                                    
company was  at a NOL  position and  because it was  a small                                                                    
start-up business it  could actually use all  of its credits                                                                    
to  go below  the  floor.  He confirmed  there  was a  gross                                                                    
minimum tax floor but the  credits allow the company beneath                                                                    
that floor. Presently  Caelus did not pay  a production tax.                                                                    
If  the legislature  changed  legislation  resulting in  the                                                                    
creation of a 4 percent hard  floor it would erode the value                                                                    
of his business by (plus the  GVR fix so they were additive)                                                                    
31  percent. The  next  piece  showed the  impact  of a  $25                                                                    
million   transferable  credit   limit   which  eroded   the                                                                    
company's  value  down  to 77  percent  erosion.  The  final                                                                    
element of change  that impacted the company's  value was an                                                                    
increase in a  hard firm floor from 4 percent  to 5 percent.                                                                    
At  the  end  of  the  day with  the  proposed  changes  his                                                                    
business  would be  worth 17  percent of  what it  was worth                                                                    
prior to HB 247.                                                                                                                
                                                                                                                                
Vice-Chair  Saddler   asked  if   he  had   any  information                                                                    
regarding the  effect on  his business  at the  $200 million                                                                    
credit limit.                                                                                                                   
                                                                                                                                
Mr. Foley reported  Caelus having a capital  budget of about                                                                    
$300  million  and  the  company would  earn  NOL  plus  EIC                                                                    
credits equal to about $100 million.                                                                                            
                                                                                                                                
4:52:41 PM                                                                                                                    
                                                                                                                                
Mr.  Foley continued  to slide  7: "Nuna:  A Project  on the                                                                    
Bubble." He explained that the  project was ready to go: the                                                                    
gravel  was installed,  all of  the  engineering design  was                                                                    
complete,  and   equipment  was  queued  up   for  purchase.                                                                    
However,  the project  was placed  on  hold due  to the  oil                                                                    
price decline.  The project would  remain on hold  until oil                                                                    
prices  recovered  and  Alaska stabilized  its  tax  policy.                                                                    
Originally, Caelus had anticipated  having first oil for the                                                                    
Nuna project  in the fourth  quarter of  2017. Unfortunately                                                                    
the  company would  not be  able  to meet  the timeline.  He                                                                    
estimated at least  a year delay. He relayed  details of the                                                                    
project. Caelus  owned 100 percent of  the working interest.                                                                    
There was  just more than  100 million barrels  of reserves.                                                                    
At  peak production  it  would generate  20  thousand to  25                                                                    
thousand barrels of  oil per day. It would  employ about 300                                                                    
fulltime   contractors  for   the  first   2  years   during                                                                    
construction. It would have 300  fulltime employees for 4 to                                                                    
5 years  of the drilling phase.  He commented on all  of the                                                                    
economic benefits  the state would  enjoy because of  all of                                                                    
the  direct   jobs  and  the  20:1   multiplier  effect.  In                                                                    
addition,  the project  would bring  future revenues  to the                                                                    
state  of approximately  $1.75  million.  The payments  came                                                                    
from  the  integrated fiscal  system  create  by the  state.                                                                    
There  would be  $900 million  royalty payments  as well  as                                                                    
$500  million  in net  profit  share  lease payments.  There                                                                    
would also be  future production tax payments  in the amount                                                                    
of about  $250 million  and property  tax payments  of about                                                                    
$100 million.                                                                                                                   
                                                                                                                                
Mr.  Foley reported  that one  question regularly  posed was                                                                    
whether  the state  provided more  credits than  the company                                                                    
paid  back  in  production  tax. It  showed  that  the  Nuna                                                                    
project at  the current prices earned  NOL transferable cash                                                                    
payments  of about  $250 million  and in  the future  Caelus                                                                    
would pay  that money  back. Coincidentally, at  the current                                                                    
price  it would  equal  about $250  million  paid in  future                                                                    
production  tax  payments.  He  considered  it  a  wash.  In                                                                    
addition,  Caelus would  pay $1.5  billion  in royalty,  net                                                                    
profits, and property tax payments to the State of Alaska.                                                                      
                                                                                                                                
4:55:54 PM                                                                                                                    
                                                                                                                                
Representative Gara asked if Nuna was a GVR field.                                                                              
                                                                                                                                
Mr.  Foley answered  that both  Nuna and  Oooguruk were  GVR                                                                    
fields. He  reminded members  that they  were GVR  fields at                                                                    
the rate of 20 percent. At the  time SB 21 came about it was                                                                    
a  field intended  to  be  eligible for  a  30 percent  GVR.                                                                    
However, SB 21 was written  such that it excluded any leases                                                                    
with  a field  with a  one-eighth  royalty. At  the time  he                                                                    
believed that his lease would  qualify because it was a one-                                                                    
eighth plus  lease. However, it  turned out that he  was not                                                                    
eligible for a 30 percent GVR.                                                                                                  
                                                                                                                                
Representative  Gara  asked what  oil  price  Mr. Foley  had                                                                    
assumed  in  his  estimation  of   $1.7  billion  in  future                                                                    
payments.                                                                                                                       
                                                                                                                                
Mr. Foley responded that the work  was done at $70. He noted                                                                    
that it did not make sense  to do it at strip prices because                                                                    
otherwise Nuna would not likely happen.                                                                                         
                                                                                                                                
4:58:05 PM                                                                                                                    
                                                                                                                                
Mr. Foley turned  to slide 8: "Closing Thoughts."   He urged                                                                    
members,  as they  contemplated changes,  to make  sure that                                                                    
the changes the legislature  made would incent the behaviors                                                                    
that  the  state  wanted.  He  believed SB  21  was  a  very                                                                    
balanced  system.  He thought  that  SB  21 and  the  credit                                                                    
system  were  the  reasons  why Caelus  was  in  Alaska.  He                                                                    
reported  that when  Caelus had  evaluated opportunities  in                                                                    
Alaska  it came  to  the conclusion  that  there were  great                                                                    
opportunities even  though prices  were high and  the fiscal                                                                    
regime was  unfriendly. Under  SB 21  because of  the credit                                                                    
system  it incented  Caelus to  close on  the purchase  with                                                                    
Pioneer and to commit to  the Nuna project, buy 325 thousand                                                                    
acres of  leases in  the East, shoot  a high  resolution 3D,                                                                    
and drill 2 exciting exploration wells at Smith Bay.                                                                            
                                                                                                                                
Representative Wilson asked if he  had been consulted by the                                                                    
administration  about  any   possible  proposals  and  their                                                                    
potential impact.                                                                                                               
                                                                                                                                
Mr.  Foley  indicated   that  he  had  had   more  than  one                                                                    
opportunity to  speak with the  administration. He  was able                                                                    
to share his  concerns. He could not say  anything more than                                                                    
the bill was what it was.                                                                                                       
                                                                                                                                
Representative Wilson  asked about  the per barrel  price it                                                                    
would need  to reach to be  profitable and to allow  for the                                                                    
continuation of the project.                                                                                                    
                                                                                                                                
Mr. Foley  stated that the work  was done at $70  per barrel                                                                    
oil. He  was unsure of the  price necessary to move  on with                                                                    
the project.  He estimated that  it was in  the neighborhood                                                                    
of $70 million.                                                                                                                 
                                                                                                                                
5:00:34 PM                                                                                                                    
                                                                                                                                
Representative Pruitt  asked if he  had seen an  increase in                                                                    
taxes in any other regimes Caelus operated.                                                                                     
                                                                                                                                
Mr. Foley relayed that the company only acted in Alaska.                                                                        
                                                                                                                                
Representative  Pruitt referred  to slide  7 and  pointed to                                                                    
the  $250 million  in NOL  cash payments  from the  State of                                                                    
Alaska  as  well  as  the other  benefits.  He  asked  about                                                                    
whether the  project would move  forward if  the legislation                                                                    
moved forward.                                                                                                                  
                                                                                                                                
Mr. Foley answered that, in  regards to tax law changes, the                                                                    
company needed  to reach a  certain economic  threshold. The                                                                    
more  erosion the  company suffered  due to  tax change  the                                                                    
more the price  would have to increase to  offset costs. For                                                                    
example, if the  project was done at $70 per  barrel and the                                                                    
system changed it would take a higher price.                                                                                    
Representative Pruitt  asked if  the company was  looking to                                                                    
invest in other projects.                                                                                                       
                                                                                                                                
Mr.  Foley  responded  in the  affirmative.  He  added  that                                                                    
Caelus' large exploration  block out to the East  was one of                                                                    
them. He hoped  to drill some wells in the  future. He hoped                                                                    
for a  follow up  season at  Smith Bay  which he  also hoped                                                                    
would  lead  to  development.  He  mentioned  that  the  one                                                                    
underlying  theme that  keeps coming  about was  the concern                                                                    
that the payment  of transferable NOL credits was  a drag on                                                                    
the system. There was a fear  that the amount of monies that                                                                    
the state  would have to pay  for the credits would  be very                                                                    
high. He argued  that it was a problem that  sadly was self-                                                                    
correcting. He  explained that at  high prices  the projects                                                                    
would go forward and would  likely earn credits but it would                                                                    
be in a  time when Alaska's economy was more  robust and the                                                                    
state would  have the  ability to fund  those credits.  In a                                                                    
very  low price  environment like  the state  was currently,                                                                    
sadly the projects would not  go forward and there would not                                                                    
be investments and  there would not be NOL's  that the state                                                                    
had to reimburse.                                                                                                               
                                                                                                                                
Representative Pruitt  asked if Caelus had  already received                                                                    
credits from  the state  for the  Nuna project  and Oooguruk                                                                    
project.  He wondered  if it  was fair  to say  that if  the                                                                    
projects  did  not  go  forward  the  state  paid  money  on                                                                    
something it would not receive a benefit.                                                                                       
                                                                                                                                
Mr. Foley  responded, "Yes, we  have made expenditures  on a                                                                    
project like Nuna.  We have incurred losses.  We have earned                                                                    
transferable NOL credits and, you  are exactly right, if the                                                                    
project  does  not go  forward,  there  would be  no  future                                                                    
revenue to the state for that project."                                                                                         
                                                                                                                                
Vice-Chair Saddler thanked Mr. Foley for his testimony. He                                                                      
directed him to submit his written testimony.                                                                                   
                                                                                                                                
SB 247 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
Vice-Chair Saddler discussed the agenda for the following                                                                       
meeting.                                                                                                                        
                                                                                                                                

Document Name Date/Time Subjects
HB 247 AOGA Presentation HFIN 04 01 16.pdf HFIN 4/1/2016 1:30:00 PM
HB 247
HB 247 Caelus Energy House Finance Apr 1 2016.pdf HFIN 4/1/2016 1:30:00 PM
HB 247
HB 247 Conoco Apr 1 House Finance COP.pdf HFIN 4/1/2016 1:30:00 PM
HB 247
HB 247 Conoco Phillips 2015 Net earnings.pdf HFIN 4/1/2016 1:30:00 PM
HB 247
HFIN CHSB247 Hilcorp Wilkins 4 1 16 FINAL.pdf HFIN 4/1/2016 1:30:00 PM
SB 247