Legislature(2013 - 2014)BARNES 124

04/02/2013 06:00 PM House RESOURCES


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06:07:43 PM Start
06:08:10 PM SB21
09:59:26 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                             DRAFT                                                                                            
                                                                                                                                
6:08:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR SENATE BILL NO. 21(FIN) am(efd  fld), "An Act relating to the                                                               
interest rate applicable to certain  amounts due for fees, taxes,                                                               
and payments  made and  property delivered  to the  Department of                                                               
Revenue; providing  a tax credit  against the  corporation income                                                               
tax  for qualified  oil and  gas  service industry  expenditures;                                                               
relating to the oil and gas  production tax rate; relating to gas                                                               
used in  the state; relating  to monthly installment  payments of                                                               
the  oil  and  gas  production  tax;  relating  to  oil  and  gas                                                               
production  tax  credits  for certain  losses  and  expenditures;                                                               
relating  to  oil and  gas  production  tax credit  certificates;                                                               
relating  to nontransferable  tax  credits  based on  production;                                                               
relating to the  oil and gas tax credit fund;  relating to annual                                                               
statements by  producers and explorers; establishing  the Oil and                                                               
Gas   Competitiveness  Review   Board;   and  making   conforming                                                               
amendments."  [Before the  committee was  the proposed  committee                                                               
substitute,  HCS CSSB  21, Version  B, labeled  HCS CSSB  21, 28-                                                               
GS1647\B,  Nauman/Bullock,   3/29/13,  adopted  as   the  working                                                               
document on 3/29/13.]                                                                                                           
                                                                                                                                
6:08:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  informed the  committee that  due to  issues with                                                               
the effective  dates in  Version B,  a new  committee substitute,                                                               
Version K,  was prepared  to merge the  effective dates  into the                                                               
sections of the  bill.  He advised that  amendments submitted for                                                               
consideration should be redrafted to the K version.                                                                             
                                                                                                                                
6:09:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER  moved  to  adopt  HCS  CSSB  21,  Version  28-                                                               
GS1647\K,  Nauman/Bullock,  4/2/13,   as  the  working  document.                                                               
There being no objection, Version K was before the committee.                                                                   
                                                                                                                                
6:09:44 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 6:09 p.m. to 6:22 p.m.                                                                       
                                                                                                                                
6:22:28 PM                                                                                                                    
                                                                                                                                
JANAK  MAYER,   Manager,  Upstream   and  Gas,  PFC   Energy,  as                                                               
consultant  to the  legislature,  said he  will  discuss the  two                                                               
significant changes to CSSB 21(FIN)  am(efd fld) that are made in                                                               
the proposed committee  substitute, HCS CSSB 21,  Version K, that                                                               
affect the  North Slope fiscal  system.   The first change  is in                                                               
the  forms of  new production  that would  qualify for  the gross                                                               
revenue  exclusion  (GRE),  now  being  called  the  gross  value                                                               
reduction (GVR).   The second change is the treatment  of the per                                                               
barrel credit.   New production that qualifies for  the GVR would                                                               
maintain the fixed  $5 per barrel production  credit.  Production                                                               
not qualifying  for the  GVR -  which is  production that  is not                                                               
from a new unit, a new  participating area, or an expansion of an                                                               
existing  participating area,  and  thus,  essentially, the  base                                                               
legacy field production - would  have a stepped per barrel credit                                                               
that is  at a  higher rate when  oil prices are  low and  that is                                                               
reduced to zero when oil prices are high.                                                                                       
                                                                                                                                
6:24:26 PM                                                                                                                    
                                                                                                                                
MR.  MAYER demonstrated  how  a fixed  $5  per barrel  production                                                               
credit  would work  using a  scenario  of 50  million barrels  of                                                               
taxable production at Alaska North  Slope (ANS) West Coast prices                                                               
ranging from  $60-$160 per barrel,  with transportation  costs of                                                               
$10 per barrel  [slide 2].  He described the  fixed $5 per barrel                                                               
production  credit  as   being  like  a  mild   form  of  reverse                                                               
progressivity - instead  of going from a fixed  base and building                                                               
up,  it decreases  from  a  fixed top  level.    He reviewed  the                                                               
calculations on slide  2 for the price  of $60 per barrel:   at a                                                               
transportation cost  of $10,   the  gross value  at the  point of                                                               
production  (GVPP)  is  $2.5  billion;  after  subtracting  lease                                                               
expenditures [of  $1.5 billion],  the production tax  value (PTV)                                                               
is  $1 billion;  application  of the  35  percent production  tax                                                               
results in a  tax liability of $350 million; applying  the $5 per                                                               
barrel  production  allowance  to   the  50  million  barrels  of                                                               
production  results  in  a  total   allowance  of  $250  million;                                                               
subtracting  $250   million  from  $350  million   results  in  a                                                               
production tax  of $100 million.   Thus,  the tax rate  after the                                                               
allowance is  10 percent  rather than the  nominal 35  percent, a                                                               
reduction of 25 percent.   As prices increase, that tax reduction                                                               
steadily decreases.   For example,  at a  price of $140,  the tax                                                               
rate after  the allowance is  30 percent rather than  the nominal                                                               
35  percent, a  reduction  of only  5 percent.    As prices  keep                                                               
increasing,  the tax  rate keeps  rising until  asymptotically it                                                               
approaches 35 percent, but never quite reaches 35 percent.                                                                      
                                                                                                                                
6:27:25 PM                                                                                                                    
                                                                                                                                
MR. MAYER,  responding to  Representative Seaton,  explained that                                                               
on slide  2 the  line for  the GVR/GRE  is blank,  indicating its                                                               
functions are working but  at a 0 percent rate.   Thus, it is not                                                               
applying in  this example and  is not reducing anything  from the                                                               
overall  tax; however,  it will  apply in  a later  example.   In                                                               
further  response,  he  confirmed   the  difference  in  the  tax                                                               
percentage rate is totally from the $5 per barrel credit.                                                                       
                                                                                                                                
6:28:23 PM                                                                                                                    
                                                                                                                                
MR. MAYER,  at Representative P.  Wilson's request,  repeated his                                                               
review of the  calculations on slide 2 for 50  million barrels of                                                               
production at the  ANS West Coast price of $60  per barrel:  from                                                               
that $60,  subtract $10 in  transportation cost to arrive  at $50                                                               
in gross  value at the  point of production per  barrel; multiply                                                               
that  $50 by  the 50  million  barrels of  taxable production  to                                                               
arrive at $2.5 billion in gross  value at the point of production                                                               
(GVPP); multiply  the lease  expenditures of  $30 a  barrel times                                                               
the  50 million  barrels of  taxable  production to  get a  total                                                               
lease expenditure of  $1.5 billion; subtract the  $1.5 billion in                                                               
total lease expenditure  from the $2.5 billion in  GVPP to arrive                                                               
at a total  production tax value (PTV) of $1  billion (i.e. a per                                                               
barrel PTV  of $20); taxed  at 35  percent, the tax  liability is                                                               
$350 million  without any other  deductions or  exclusions; there                                                               
is no GVR/GRE  in this example; multiply the fixed  $5 per barrel                                                               
credit  times 50  million barrels  to arrive  at $250  million in                                                               
credit;  subtract  that $250  million  of  credit from  the  $350                                                               
million of  tax liability to arrive  at a production tax  of $100                                                               
million.   That  $100 million  represents  10 percent  of the  $1                                                               
billion in production tax value, for  an effective tax rate of 10                                                               
percent after the  $5 per barrel credit, rather  than the nominal                                                               
35 percent.                                                                                                                     
                                                                                                                                
6:33:09 PM                                                                                                                    
                                                                                                                                
MR.  MAYER,  in further  response  to  Representative P.  Wilson,                                                               
explained 35  percent is  the nominal tax  rate under  Version K.                                                               
So, at  $60 per barrel,  the production tax without  allowance on                                                               
the $1 billion  in production tax value is $350  million.  The $5                                                               
per barrel credit  provides a total production  allowance of $250                                                               
million.   Subtracting  the allowance  of $250  million from  the                                                               
$350 million leaves a production tax  of $100 million.  That $100                                                               
million represents  10 percent,  rather than  35 percent,  of the                                                               
[$1 billion] in production tax value, a reduction of 25 percent.                                                                
                                                                                                                                
MR.  MAYER reiterated  that this  is a  mild reverse  progressive                                                               
effect, where  the lower  the price  the lower  the rate  and the                                                               
rate comes  down in  a curve.   The  shape of  the curve  is just                                                               
enough to  counteract the regressive  nature of the  royalty that                                                               
is also in  the state's fiscal system, thereby  giving an overall                                                               
flat, neutral level of government take.                                                                                         
                                                                                                                                
6:34:51 PM                                                                                                                    
                                                                                                                                
MR.  MAYER next  demonstrated  how a  variable production  credit                                                               
would work, as proposed in Version K  [slide 3].  He again used a                                                               
scenario of 50 million barrels  of taxable production at ANS West                                                               
Coast   prices   ranging   from   $60-$160   per   barrel,   with                                                               
transportation costs of  $10 per barrel.  At prices  of $60, $70,                                                               
and $80, the per-barrel credit is $8  rather than $5.  At a price                                                               
of $90 the credit  is $7 per barrel, going down  by $1 per barrel                                                               
for each  $10 increase in price  until reaching no credit  at the                                                               
price of $160.   At a price  of $60:  the  production tax without                                                               
any allowance would  be $350 million, representing  35 percent of                                                               
the $1 billion  in production tax value; with a  credit of $8 per                                                               
barrel, the total production allowance  is $400 million, which is                                                               
greater than  the $350 million  in production tax liability.   It                                                               
is explicitly  stated that the  allowance cannot take  a taxpayer                                                               
below  zero, so  there  is no  production tax  in  this case,  as                                                               
compared to  an effective tax rate  of 10 percent for  the $5 per                                                               
barrel credit.   At a  price of $70  per barrel:   the production                                                               
tax without any  allowances is $525 million; with a  credit of $8                                                               
per barrel,  the production allowance is  $400 million; resulting                                                               
in a  production tax of  $125 million, representing  an effective                                                               
tax rate of 8.3 percent, as  compared to an effective tax rate of                                                               
18.3 percent for the $5 per barrel credit.                                                                                      
                                                                                                                                
MR.  MAYER pointed  out  that at  a price  of  $110 the  variable                                                               
production  credit is  $5,  so  the effective  tax  rate of  27.9                                                               
percent is the same as it is  for the fixed credit at this price.                                                               
Under the  variable production credit, the  progressive nature of                                                               
the effective tax  rate is increased from that of  the fixed rate                                                               
-  more  comes off  at  prices  below  $110  and above  $110  the                                                               
effective tax  rate is  higher.  Because  the variable  credit is                                                               
zero  at the  price of  $160, the  effective tax  rate no  longer                                                               
asymptotically approaches  35 percent  - it  actually gets  to 35                                                               
percent at this  price and, therefore, the effective  rate is the                                                               
nominal  rate  of 35  percent.    For  production that  does  not                                                               
qualify  for the  GVR/GRE, the  effective tax  rate is  higher at                                                               
higher prices and lower at lower prices.                                                                                        
                                                                                                                                
6:39:26 PM                                                                                                                    
                                                                                                                                
MR. MAYER  then drew  attention to the  effective tax  rates that                                                               
apply to new production [slide  4], explaining that under Version                                                               
K the definition of new  production is narrower - only production                                                               
from  new  units,  new participating  areas,  and  expansions  to                                                               
existing participating areas.  This  new production would receive                                                               
a  fixed $5  per barrel  credit, rather  than a  variable/stepped                                                               
credit, and would qualify to receive the 20 percent GVR/GRE.                                                                    
                                                                                                                                
MR.  MAYER, responding  to  Representative  P. Wilson,  confirmed                                                               
that at  a price of $60  per barrel the effective  tax rate after                                                               
the per-barrel allowance and the GVR  is 0 percent, so a producer                                                               
would pay no production tax.   In further response, he noted that                                                               
a producer  would still  contribute other forms  of tax,  such as                                                               
royalty, property tax, state income  tax, and federal income tax.                                                               
Because of the regressive nature  of the royalty, he explained, a                                                               
producer  may  well  face  still   a  relatively  high  level  of                                                               
government take.   Responding further,  he noted the  nominal tax                                                               
rate of  35 percent  is reduced  by 35  percent for  an effective                                                               
production tax rate of 0 percent.                                                                                               
                                                                                                                                
REPRESENTATIVE P.  WILSON returned  to slide  3, which  depicts a                                                               
variable production  credit and  no GVR, and  observed that  at a                                                               
price of $70  per barrel the nominal tax rate  is 35 percent, the                                                               
effective  tax  rate  after  allowance  is  8.3  percent,  for  a                                                               
progressive tax rate deduction of 26.7 percent.                                                                                 
                                                                                                                                
MR. MAYER confirmed this is correct.                                                                                            
                                                                                                                                
6:43:58 PM                                                                                                                    
                                                                                                                                
MR. MAYER  turned back to  slide 4, which depicts  new production                                                               
at the fixed  $5 per barrel credit  and the 20 percent  GVR for a                                                               
scenario  of  50  million  barrels of  taxable  production.    In                                                               
response to  Representative P. Wilson,  he said the fixed  $5 per                                                               
barrel credit  is the  line entitled  "Production Allowance/bbl".                                                               
The line  entitled "GRE"  shows the  gross value  reduction (GVR)                                                               
[formerly called the gross revenue  exclusion (GRE)], which is 20                                                               
percent  of the  gross  value at  point of  production.   In  the                                                               
previous slides the GVR/GRE was  zero because the GVR/GRE did not                                                               
apply to those forms of production.                                                                                             
                                                                                                                                
6:45:12 PM                                                                                                                    
                                                                                                                                
MR. MAYER continued his  presentation, reviewing the calculations                                                               
for a price  of $60 per barrel:   $2.5 billion in  gross value at                                                               
point  of production  minus $1.5  billion  in lease  expenditures                                                               
equals a production tax value of  $1 billion, for a tax liability                                                               
of  $350  million; factoring  in  the  20 percent  GVR/GRE  [$500                                                               
million] drops  the production  tax value to  $500 million;  a 35                                                               
percent tax  on $500  million equals  a production  tax liability                                                               
without allowance  of $175  million.  The  $5 per  barrel credit,                                                               
which  totals $250  million, is  more than  the tax  liability of                                                               
$175 million.   Thus, at a price  of $60 with the  GVR/GRE and $5                                                               
per barrel fixed  credit, the effective production tax  rate is 0                                                               
percent.   Comparing the  overall rates  on slide  4 to  those on                                                               
slide 3,  it can be seen  that in all cases  the GVR/GRE combined                                                               
with the  fixed $5 per  barrel credit  gives lower tax  rates for                                                               
new  production than  for  production  with the  stepped-function                                                               
credit and no GVR/GRE.                                                                                                          
                                                                                                                                
6:47:07 PM                                                                                                                    
                                                                                                                                
MR. MAYER  suggested a  linear function  for the  variable credit                                                               
may be preferable to the  currently proposed step function [slide                                                               
5].  Under  the step function the per-barrel credit  goes down $1                                                               
for  each $10  rise in  price [in  a scenario  of $10  per barrel                                                               
transportation  cost].   This  means  the  marginal rate  is,  in                                                               
general, a flat 35 percent, but  every time one of those steps is                                                               
hit, that  marginal rate spikes up  to about 135 percent  at that                                                               
exact  $1  increment  before  coming back  down  to  35  percent.                                                               
Instead of writing  this as a step function, it  could be written                                                               
as  a single  linear formula.    So, instead  of this  staircase,                                                               
there would  be a  smooth line that  determines exactly  what the                                                               
credit is at any point along that  line.  Rather than a series of                                                               
thresholds  at  which a  particular  rate  applies, it  could  be                                                               
written  that the  credit is  $16  minus one-tenth  of the  gross                                                               
value of  production, and that  it cannot  exceed $8 or  go below                                                               
$0.                                                                                                                             
                                                                                                                                
6:49:01 PM                                                                                                                    
                                                                                                                                
MR.  MAYER  compared the  overall  government  take and  economic                                                               
metrics  for  base production  between  the  state's current  tax                                                               
structure  of Alaska's  Clear and  Equitable  Share (ACES),  CSSB
21(FIN) am(efd  fld), and the proposed  committee substitute, HCS                                                               
CSSB 21, Version K, [slides 6-8].   Under ACES [slide 6, top left                                                               
graph], progressivity  results in  government take  increasing to                                                               
over 75  percent at  a price of  $140.  As  oil prices  rise, the                                                               
state's share of  total net present value  of production diverges                                                               
upward, while  the company's share  rises only  relatively little                                                               
[slide  6, top  right graph].    Under CSSB  21(FIN) am(efd  fld)                                                               
[slide 7, top  left graph], the degree of  progressiveness in the                                                               
fixed  $5  per  barrel  credit  is  just  enough  to  offset  the                                                               
regressive  nature  of  the  royalty,  resulting  in  an  overall                                                               
neutral structure  at just a  little under 65  percent government                                                               
take.   As  oil  prices  rise, the  state's  share  of total  net                                                               
present  value  of  production  is   greater  than  that  of  the                                                               
company's share,  but the two  shares are more evenly  split than                                                               
is  seen under  ACES  [slide  7, top  right  graph].   Under  the                                                               
variable  production  credit of  Version  K  [slide 8,  top  left                                                               
graph], the  production tax has a  substantially more progressive                                                               
slope.   The effect  of that is  a bending down  of the  line for                                                               
overall government  take, rather than  it being a flat  line just                                                               
below 65 percent.  At $80  a barrel, government take gets down to                                                               
63  percent, and  even a  little lower  at lower  prices, and  at                                                               
price levels  above $100 the government  take gets as high  as 67                                                               
percent.  In  the previous slides, it was seen  that at about $60                                                               
a barrel,  there was  little or no  production tax,  depending on                                                               
the cost assumptions.   Under Version K, using  the base producer                                                               
assumptions, there is  no production tax liability  at $55, there                                                               
is a  slight production tax  at $60,  and a steady  increase from                                                               
that point.                                                                                                                     
                                                                                                                                
6:52:16 PM                                                                                                                    
                                                                                                                                
MR.  MAYER,  responding to  Representative  P.  Wilson, said  the                                                               
dotted line in the  lower left graph on slide 8  is the after tax                                                               
cash flow (ATCF).   It represents the difference  between all the                                                               
revenues from production  (the positive green bars  in the graph)                                                               
versus all  the costs, including  government take  (negative bars                                                               
in various  colors).  This  difference is the dotted  line, which                                                               
is the after tax cash flow that the producer receives.                                                                          
                                                                                                                                
MR.  MAYER,  responding  to Representative  Tuck,  confirmed  the                                                               
federal tax rate is  35 percent on slide 8, but  said a number of                                                               
tax shields  available at a  project level are factored  in, such                                                               
as being able to expense intangible  drilling tasks.  There is no                                                               
treatment  of any  other federal  rate effective  reductions that                                                               
might come through corporate shielding  of income.  Because it is                                                               
the project and  the project economics that are  being looked at,                                                               
it  makes sense  to look  at  the tax  rate that  applies to  the                                                               
project.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  TUCK recalled  an article  that reported  "Exxon"                                                               
only paid 10 percent to  the federal government last year because                                                               
it shielded  its income from  offshore.  He understood  [slide 8]                                                               
would not  factor that in because  the slide is just  by project.                                                               
He inquired  whether state  taxes are  deducted from  the federal                                                               
taxes in the graphs on slide 8.                                                                                                 
                                                                                                                                
MR. MAYER confirmed they are deducted.                                                                                          
                                                                                                                                
6:54:04 PM                                                                                                                    
                                                                                                                                
MR. MAYER  continued his presentation, pointing  out that Version                                                               
K has  a lower  level of government  take at a  price of  $80 per                                                               
barrel  [62.94  percent] than  CSSB  21(FIN)  am(efd fld)  [64.22                                                               
percent,  slide 7].   At  higher prices  Version K  has a  higher                                                               
level of government  take; for example, at  $100, government take                                                               
is 65.26  percent under  Version K and  64.54 percent  under CSSB
21(FIN) am(efd fld).  At $110 there  is parity in terms of the $5                                                               
per barrel  credit, he  said, so  it would  seem there  should be                                                               
"exactly  the same  level of  government  take at  $110 and  less                                                               
below  that."   However, the  answer to  that comes  back to  the                                                               
question of  inflation.   Moving to  slide 9,  he noted  the time                                                               
series at the top  of the chart is the same  time series that was                                                               
used to generate the cash flow charts on slides 6, 7, and 8 ...                                                                 
                                                                                                                                
6:55:28 PM                                                                                                                    
                                                                                                                                
MR. MAYER,  in response to  Co-Chair Saddler, confirmed  that the                                                               
labels on the left  side of the slide 9 chart  are in dollars for                                                               
the ANS West Coast price  per barrel, the transportation cost per                                                               
barrel,  and the  gross  value  at the  point  of production  per                                                               
barrel.    Returning  to  his  overview of  slide  9,  Mr.  Mayer                                                               
explained  why  government take  is  higher  at $100  per  barrel                                                               
[under Version  K than  under CSSB  21(FIN) am(efd  fld)].   At a                                                               
price of  $100, less  $9 per barrel  in transportation  cost, the                                                               
gross  value at  point of  production  is $91  per barrel,  which                                                               
qualifies for a  credit of $6 per  barrel.  To hold  the ANS West                                                               
Coast price constant at $91 as time  goes on, it is raised by 2.5                                                               
percent inflation  [per year].  The  Trans-Alaska Pipeline System                                                               
(TAPS) tariff  is raised by 3.5  percent a year to  be consistent                                                               
with what has  been seen in the  past.  The gross  value at point                                                               
of production rises  accordingly, so in nominal  dollars it rises                                                               
from $91 in 2012 to $93.18 in 2013,  and so on.  The credit of $6                                                               
per  barrel applies  [for years  2012-2015], falling  to $5  [for                                                               
years 2016-2020],  and continuing  to fall  over the  years until                                                               
the year  2034 when there  is no per-barrel  credit at all.   The                                                               
credit  becomes  zero  because  the   gross  value  at  point  of                                                               
production has risen  in nominal terms even though  in real terms                                                               
it is still -  in 2012 dollars - $100 oil.   Inflation results in                                                               
the value of  the credit being eroded over time  in both real and                                                               
nominal terms.  In nominal  terms the credit itself actually gets                                                               
smaller year after year.  "The  reason for that is it is actually                                                               
this series  of credits at  $100 a barrel  that is being  used in                                                               
that previous result and is why  what we see is actually slightly                                                               
higher government take  at $100 a barrel across  the lifecycle of                                                               
a project  or, in  this case,  across the  lifecycle of  the base                                                               
production, rather than slightly lower government take."                                                                        
                                                                                                                                
6:58:17 PM                                                                                                                    
                                                                                                                                
MR.   MAYER,  responding   to   Representative  Tuck,   clarified                                                               
government take  at $100  per barrel  is higher  in Version  K as                                                               
compared  to CSSB  21(FIN)  am  (efd fld).    Where CSSB  21(FIN)                                                               
am(efd fld) has  a steady credit of $5 per  barrel, Version K has                                                               
a couple of years at $6, five years  at $5, and a lower credit in                                                               
the following  years.   Toggling back and  forth between  slide 7                                                               
for  CSSB 21(FIN)  am(efd  fld)  and slide  8  for  HCS CSSB  21,                                                               
Version K, he drew attention to  the purple cash flow bars in the                                                               
bottom left graph on each  slide, explaining that government take                                                               
is lower  in the  earlier years  and higher  in the  later years,                                                               
which is what leads to the  slight increase in government take at                                                               
$100 a barrel, but lower government take at lower prices.                                                                       
                                                                                                                                
6:59:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON noted that while  it is interesting to look                                                               
at it this way, Alaska's tax  rate is based on overall individual                                                               
corporate  taxes  rather  than  a  ring-fenced  production.    He                                                               
inquired what  will be the way  the state looks at  this and what                                                               
will be  that impact when  it is  not a single  ring-fenced field                                                               
that is being looked at.                                                                                                        
                                                                                                                                
MR.  MAYER  answered  that  [slide  9]  represents  typical  base                                                               
production from the most mature  fields for an existing producer;                                                               
thus, no factoring in of  new developments, and looking simply at                                                               
a  declining base  portfolio.   It is  not a  single asset  ring-                                                               
fenced; it is  a collection of assets.  In  further response, Mr.                                                               
Mayer clarified this is looking  at base production rather than a                                                               
50 million barrel field.                                                                                                        
                                                                                                                                
7:00:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  said he is  trying to equate  the previous                                                               
slides, which looked at a  50 million barrel field, with Alaska's                                                               
tax structure  that is company-wide  and has no ring-fences.   He                                                               
asked whether  it is  the proportion  of an  individual company's                                                               
base production versus how much  with GVR/GRE that must be looked                                                               
at to understand how this would affect different players.                                                                       
                                                                                                                                
MR. MAYER replied  that can be done, but  said the administration                                                               
and its  consultant are in a  better position to do  that because                                                               
they have  access to confidential  taxpayer data.  The  three big                                                               
producers,  by  and  large,  do not  have  significant,  if  any,                                                               
production that would  initially apply for the  GVR/GRE.  Looking                                                               
at it  in terms  of the  variable credit and  the impact  on base                                                               
production is the best way  to understand overall what this looks                                                               
like for  them, not including  any new  things in new  areas that                                                               
they might do.  One  can distinguish between those and understand                                                               
their  economics separately  without needing  to perfectly  layer                                                               
them on top and put a final precise number on the combination.                                                                  
                                                                                                                                
REPRESENTATIVE SEATON said  he would like to ask  the question of                                                               
the  administration  because  the  committee  needs  to  see  the                                                               
proportion of what  to expect, given there is  quite a difference                                                               
in the tax rates depending on what a company is doing.                                                                          
                                                                                                                                
7:03:01 PM                                                                                                                    
                                                                                                                                
MR. MAYER  commenced his  presentation, outlining  a hypothetical                                                               
scenario for  a new  development of 50  million barrels  with $18                                                               
per barrel  in costs [slide 10].   For this scenario  under ACES,                                                               
he said the overall tax  rate with progressivity would rise above                                                               
76 percent at the upper price levels.                                                                                           
                                                                                                                                
MR.  MAYER,  in response  to  two  questions from  Representative                                                               
Seaton, confirmed  the $18  is solely capital  cost and  does not                                                               
relate to the $30 per barrel  in lease expenditure.  He clarified                                                               
the  earlier slides  are  a  very simplified  way  of looking  at                                                               
overall base production  - they are 50 million barrels  a year in                                                               
production, not a 50 million barrel  field.  Slide 10] is looking                                                               
at  actual  lifecycle  economics  of a  hypothetical  50  million                                                               
barrel field.                                                                                                                   
                                                                                                                                
7:04:32 PM                                                                                                                    
                                                                                                                                
MR.  MAYER  moved  to slide  11,  discussing  the  aforementioned                                                               
scenario  under  CSSB  21(FIN)  am(efd  fld)  with  12.5  percent                                                               
royalty and  20 percent GVR/GRE.   Rather than  progressive rates                                                               
rising above 76  percent government take, the rate  is just under                                                               
61  percent.    This  61 percent  rate  remains  unchanged  under                                                               
Version K; the  only change is the categories  of production that                                                               
qualify for this level of government take.                                                                                      
                                                                                                                                
MR. MAYER,  responding to  Representative Tuck,  said the  $18 is                                                               
the total drilling and capital  cost of development per barrel of                                                               
reserves in the 50 million barrel field.                                                                                        
                                                                                                                                
7:06:08 PM                                                                                                                    
                                                                                                                                
MR.  MAYER, in  response to  Representative P.  Wilson, explained                                                               
the  top left  graph  on  slide 11  tallies  the  total level  of                                                               
government take  for this  scenario, which  is then  reflected in                                                               
the bottom  right chart labeled  "Economic Summary."   The column                                                               
in  the bottom  right  chart labeled  "GT0"  is the  undiscounted                                                               
government take.                                                                                                                
                                                                                                                                
REPRESENTATIVE  P. WILSON  observed that  at a  price of  $80 per                                                               
barrel  the total  government take  is [60.56]  percent and  at a                                                               
price of $45 there is no tax except for royalty.                                                                                
                                                                                                                                
MR. MAYER  replied that  in this scenario  of cost  structure and                                                               
12.5 percent  royalty, royalty alone  at a  price of $45  gets to                                                               
100 percent government  take.  In further  response, he explained                                                               
that at  a price  of $45,  the government  take with  other taxes                                                               
could be  more than 100 percent,  but it would not  be productive                                                               
to show more than 100 percent  on the chart.  The essential point                                                               
is that  at $45 a  barrel, all of  the cash the  project produces                                                               
net of its costs is taken  up just in paying the royalty, nothing                                                               
is left for anything else.                                                                                                      
                                                                                                                                
7:09:17 PM                                                                                                                    
                                                                                                                                
MR. MAYER  next looked  at the aforementioned  in the  context of                                                               
Alaska's  competitiveness with  other  comparable regimes  [slide                                                               
12],  noting  that  for  new production  qualifying  for  the  20                                                               
percent GVR/GRE,  the government take is  decreased substantially                                                               
from the  very high levels  under ACES.  Interpreting  the chart,                                                               
he  explained the  [right-most red  arrow] on  the chart  depicts                                                               
government take for new production  under ACES and the [left-most                                                               
blue  arrow] depicts  government  take for  new production  under                                                               
Version K.   Under Version  K, the  level of government  take for                                                               
new production  is much  more in  the "heart  of the  pack" among                                                               
Alaska's peer  groups, particularly the  peer group of  the Lower                                                               
48.   For production  not qualifying for  the GVR/GRE,  Version K                                                               
(the right-most blue arrow) puts Alaska  in the heart of the pack                                                               
at a  price of  $80 per  barrel; however, at  prices of  $100 and                                                               
above,  Version K  [is less  competitive than  the middle  of the                                                               
pack].  Responding to Representative  P. Wilson, he confirmed the                                                               
left-most blue arrow  is new production and  the right-most arrow                                                               
is  the  legacy  fields,  both  under  Version  K.    He  further                                                               
explained that  for new  oil, government take  is the  same under                                                               
Version K  as it is under  CSSB 21(FIN) am(efd fld).   For legacy                                                               
production,  Version  K  is  a little  better  at  $80-$100,  but                                                               
slightly  higher  at $100  and  above,  than under  CSSB  21(FIN)                                                               
am(efd fld).                                                                                                                    
                                                                                                                                
7:13:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON posited  Version K  accomplishes little                                                               
for improving worldwide competitiveness of the legacy fields.                                                                   
                                                                                                                                
MR. MAYER responded that when  looking across the lifecycle of an                                                               
asset, if  looking at  just the  next year or  two, Version  K is                                                               
lower at  $100 and  the same  at $110,  so all  of the  change is                                                               
below those levels.  He  suggested asking the companies that will                                                               
testify after him  as to whether lower take at  those prices will                                                               
make a material difference to them.                                                                                             
                                                                                                                                
7:15:25 PM                                                                                                                    
                                                                                                                                
MR. MAYER resumed his presentation,  noting that the 12.5 percent                                                               
royalty rate  included in the aforementioned  scenario applies to                                                               
many of the older  leases in Alaska [slide 13].   In a 50 million                                                               
barrel field of new development at  12.5 percent royalty and a 20                                                               
percent GVR/GRE,  the overall  level of  government take  is just                                                               
below 61  percent across the board.   However, most of  the newer                                                               
leases have a 16.7 percent  royalty rate [slide 14], which raises                                                               
the  government  take  to  63-64  percent and  is  the  level  of                                                               
government  take that  will apply  to many  things that  might be                                                               
done  across  the  North Slope,  particularly  by  new  companies                                                               
coming to Alaska  to invest.  The impact of  that high royalty is                                                               
worth  bearing in  mind when  thinking about  competitiveness, he                                                               
said.   For those  leases at 16.7  percent royalty,  he suggested                                                               
consideration  be given  to raising  the GVR/GRE  to 30  percent,                                                               
which would lower the government take to 61 percent [slide 15].                                                                 
                                                                                                                                
7:17:16 PM                                                                                                                    
                                                                                                                                
MR. MAYER, responding to Representative  Tuck, confirmed that the                                                               
assumptions  in slide  15  are  not included  in  any version  of                                                               
SB 21.   He said purpose  of the slide is  only to show  what the                                                               
impact would be if the GVR/GRE  were to be raised for leases with                                                               
16.7   percent   royalty   to   achieve   the   same   level   of                                                               
competitiveness.                                                                                                                
                                                                                                                                
MR. MAYER,  responding to Co-Chair  Saddler, understood  that new                                                               
leases are  more likely  to be at  one-sixth [16.7  percent] than                                                               
one-eighth  [12.5  percent].   He  suggested  the  Department  of                                                               
Natural Resources be asked about this.                                                                                          
                                                                                                                                
7:18:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON observed that  when the state's split of                                                               
the  net  present value  of  production  goes down,  the  federal                                                               
government's split goes up, and vice versa.  She asked why.                                                                     
                                                                                                                                
MR. MAYER  explained this  is because federal  income tax  is the                                                               
last form  of tax applied.   Thus, all the costs  for production,                                                               
including  state taxes,  are deducted  in calculating  profit and                                                               
loss  for the  perspective  of  paying federal  income  tax.   In                                                               
further response, he  confirmed that if a company  pays the state                                                               
less, it will  then pay the federal government  more.  Responding                                                               
further, he  said the companies  do better,  relatively speaking,                                                               
when the state  taxes them less, but the degree  to which they do                                                               
better  is  reduced  slightly  by   having  to  pay  the  federal                                                               
government that little bit more.                                                                                                
                                                                                                                                
REPRESENTATIVE  P. WILSON  inquired whether  it is  good for  the                                                               
companies if  the state taxes  them less,  but they then  have to                                                               
pay more in federal tax.                                                                                                        
                                                                                                                                
MR. MAYER responded the amount  in federal tax that companies pay                                                               
in addition  is substantially less  than the reduction  that they                                                               
get from the state because it is a 35 percent rate.                                                                             
                                                                                                                                
7:22:22 PM                                                                                                                    
                                                                                                                                
BARRY PULLIAM, Economist & Managing  Director, Econ One Research,                                                               
Inc., as consultant to the  administration, compared the fixed $5                                                               
per barrel credit provision in  CSSB 21(FIN) am(efd fld) with the                                                               
sliding  per barrel  credit provision  in the  proposed committee                                                               
substitute, HCS CSSB  21, Version K.  He said  the sliding credit                                                               
starts at a high of $8 per  barrel when the wellhead value is $80                                                               
a barrel  or less, moving  down at the rate  of $1 for  every $10                                                               
increase in the  wellhead value until reaching $0  credit at $150                                                               
wellhead value.  In Version  K, this sliding scale credit applies                                                               
only to areas without the  gross value reduction (GVR); for areas                                                               
with the GVR, the credit is fixed at $5 per barrel.                                                                             
                                                                                                                                
7:24:10 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  provided  an  example  of  tax  calculation  [under                                                               
Version K] using the sliding  scale production credit for volumes                                                               
not subject to the GVR [slide 3].   At an ANS West Coast price of                                                               
$100 per  barrel, less a  transportation cost of $10  per barrel,                                                               
the  gross  value  at  the  wellhead comes  to  $90  per  barrel.                                                               
Subtracting  lease expenditures  of $30  per barrel,  the taxable                                                               
value per  barrel comes  to $60.   For  100 taxable  barrels, the                                                               
total  production tax  value  comes to  $6,000  ($60 times  100).                                                               
Multiplying that $6,000 by the tax  rate of 35 percent results in                                                               
a production  tax before credit of  $2,100.  At a  wellhead value                                                               
of $90 per barrel, the credit  is $6 per barrel.  Multiplying the                                                               
100 taxable barrels  by $6, the total production  credit comes to                                                               
$600.   Subtracting the  $600 of  credit from  the $2,100  of tax                                                               
leaves a  tax obligation of $1,500.   Dividing the $1,500  in tax                                                               
obligation by  the $6,000 in  production tax value arrives  at an                                                               
effective tax rate on the net  value of 25 percent.  Dividing the                                                               
$1,500 in tax obligation by the  gross value of $9,000 ($90 gross                                                               
value per barrel  times 100 barrels) arrives at  an effective tax                                                               
rate on the gross value of  16.7 percent.  Following the chart to                                                               
the left, it can be seen that  as the price per barrel falls, the                                                               
credit  amount  increases  until  reaching  the  maximum  of  $8.                                                               
Following the  chart to  the right,  it can be  seen that  as the                                                               
price rises,  the credit  amount falls until  phasing out  at the                                                               
wellhead  head value  of  $150.   The effective  tax  rate, as  a                                                               
result  of the  interaction  with  the credit,  is  lower at  low                                                               
prices and moves up to a maximum of 35 percent at high prices.                                                                  
                                                                                                                                
7:28:33 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  in response to  Representative P.  Wilson, restated                                                               
how to  calculate the production tax  after credit at a  price of                                                               
$100:   the $600  in total production  credit is  subtracted from                                                               
the  $2,100  in production  tax  before  credit, resulting  in  a                                                               
production  tax after  credit of  $1,500.   To arrive  at the  25                                                               
percent effective tax  rate after credit, the  total tax actually                                                               
paid of $1,500 is divided by the production tax value of $6,000.                                                                
                                                                                                                                
7:30:15 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  then provided  an  example  tax calculation  [under                                                               
Version K] using the fixed $5  per barrel credit for volumes that                                                               
qualify for  the 20  percent GVR  [slide 4].   Different  than on                                                               
slide 3  is that the per-barrel  credit line (fifth line  up from                                                               
the bottom) remains  fixed at $5 per barrel  rather than varying,                                                               
and there  is a  line for  the 20  percent gross  value reduction                                                               
(eighth line  down).   The bottom line  on the  chart illustrates                                                               
that  the effective  tax rates  are uniformly  lower for  volumes                                                               
qualifying for the GVR.   Responding to Representative P. Wilson,                                                               
he confirmed that production fits  into either the sliding credit                                                               
scale or the GVR [and a fixed credit of $5 per barrel].                                                                         
                                                                                                                                
7:32:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON understood  that, currently, all production                                                               
would fall  under the  sliding scale  production credit  shown on                                                               
slide 3.                                                                                                                        
                                                                                                                                
MR. PULLIAM  replied almost  all.   He believed  some production,                                                               
such  as Nikaitchuq  and Oooguruk,  would qualify  for the  gross                                                               
value reduction.   In further response, he  confirmed that except                                                               
for Nikaitchuq  and Oooguruk, all  production would be  under the                                                               
sliding scale production credit.                                                                                                
                                                                                                                                
7:33:35 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  compared the  average  government  take across  all                                                               
existing producers for  Version K, for CSSB  21(FIN) am(efd fld),                                                               
and for ACES for fiscal years  2015-2019 [slide 5].  He explained                                                               
the fiscal years  match those in the fiscal note.   The effect of                                                               
the sliding scale credit and 35  percent base tax in Version K is                                                               
to reduce government  take below that of the fixed  $5 credit and                                                               
35  percent base  tax in  CSSB 21(FIN)  am(efd fld)  at ANS  West                                                               
Coast prices  of $100 and  less, and to increase  government take                                                               
somewhat at prices  over $100 per barrel.   Government take would                                                               
top out  at about 67 percent  when the sliding credit  goes to $0                                                               
at the  price of $150.   Thus, at higher prices,  government take                                                               
under  Version  K  is  1.5-2.0 percent  higher  than  under  CSSB
21(FIN)  am(efd  fld); at  lower  prices,  government take  under                                                               
Version  K is  a few  percentage points  lower than  CSSB 21(FIN)                                                               
am(efd fld).   Essentially, the line  for Version K is  tilted to                                                               
be  a more  progressive line,  with the  axis point  at $100  per                                                               
barrel where the $5 credit applies.                                                                                             
                                                                                                                                
7:35:34 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  responding to  Representative Tuck,  confirmed that                                                               
the  percentage of  government take  depicted  on slide  5 is  an                                                               
average for  the five-year time  period with all the  credits and                                                               
deductions.                                                                                                                     
                                                                                                                                
7:35:53 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM, responding to  Representative Seaton, confirmed that                                                               
at  the price  of $160  and above,  the percentage  of government                                                               
take under the  sliding scale decreases from 67  percent and that                                                               
this is  the result of royalty.   He explained the  royalty has a                                                               
slight regressivity to  it and there is no  progressivity left in                                                               
the  tax system  at that  point, so  the overall  government take                                                               
comes down slightly.                                                                                                            
                                                                                                                                
7:36:34 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  responding to  Representative P.  Wilson, explained                                                               
the chart  on slide 5 is  calculated across all producers  on the                                                               
North Slope, so  some of those producers will not  fall under the                                                               
sliding scale.  Some of them will  fall under the GVR with the $5                                                               
credit.  In further response,  he confirmed "all producers" means                                                               
he lumped  all of  the producers together  and then  averaged it.                                                               
He said  this is  done to  protect confidentiality  because these                                                               
are based on cost projections  that are provided by the taxpayers                                                               
to the Department of Revenue (DOR)  and those figures are used in                                                               
DOR's forecasts.   Essentially, the forecast  values developed by                                                               
DOR are  used for  both the  volumes and the  costs.   To protect                                                               
confidentially the  information for a  particular field or  for a                                                               
particular taxpayer is  not revealed - it is  aggregated over the                                                               
total.  He  added that the production on the  North Slope will be                                                               
overwhelmingly based on just the  sliding scale rates, as opposed                                                               
to the GVR.                                                                                                                     
                                                                                                                                
7:39:16 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  moved to slide  6, explaining that  the calculations                                                               
for estimated  state revenues  are his, not  DOR's.   The revenue                                                               
depicted by the  blue bars is for CSSB 21(FIN)  am(efd fld).  The                                                               
revenue  depicted by  the  green bars  is for  Version  K and  to                                                               
calculate this revenue he replaced  the flat $5 per barrel credit                                                               
with the  sliding scale  where that would  apply.   Comparing the                                                               
two bill  versions, the  revenues under  Version K  would be:   a                                                               
little lower at  an ANS West Coast price of  $80 per barrel, down                                                               
ever so slightly at $100, flat  at the DOR forecast price because                                                               
the $5 credit  would be applying to both versions,  and higher at                                                               
$120 and above.                                                                                                                 
                                                                                                                                
7:40:55 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  explained slide 7  is a pictorial  representation of                                                               
the  tax rates;  the  lines  on this  graph  correspond with  the                                                               
percentages shown  in the charts [on  slides 3-4].  Version  K is                                                               
depicted in  green and  CSSB 21(FIN) am(efd  fld) is  depicted in                                                               
blue.  The solid line for  each bill version is the effective tax                                                               
rate on the  net value of the  oil and the dashed  green line for                                                               
each bill  version is the effective  tax rate on the  gross value                                                               
of the  oil.   The tax  rate for the  sliding scale  credit under                                                               
Version  K increases  in a  stair step  function.   The tax  rate                                                               
lines for  both bill versions  cross over each other  between the                                                               
ANS wellhead value  of $100 to $110, so above  that level the tax                                                               
rates under  Version K are  higher than CSSB 21(FIN)  am(efd fld)                                                               
and below that level the tax rates are lower.                                                                                   
                                                                                                                                
7:42:42 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM  pointed out  that  at  every  increment of  $10  in                                                               
wellhead  value, the  stair step  credit moves  by $1  [slide 8].                                                               
For example,  between the wellhead  value of $80 and  $89.99, the                                                               
credit is $8 per barrel and [at  $90] the credit drops to $7.  He                                                               
recalled  that Mr.  Mayer showed  committee members  what happens                                                               
with  the  marginal  takes.     He  further  recalled  Mr.  Mayer                                                               
mentioning  that the  sliding  credit could  be  structured as  a                                                               
straight linear  function so  that with each  $1 movement  in the                                                               
value  of  the oil  the  credit  could  be moved  and  accomplish                                                               
essentially the same thing as would a stair stepped method.                                                                     
                                                                                                                                
7:43:46 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  responding to Representative P.  Wilson, said there                                                               
is no benefit  one way or the other between  using either a stair                                                               
stepped  versus  smoothed  sliding   credit.    However,  in  his                                                               
opinion, the smoothness  to the linear function  is somewhat more                                                               
attractive than the abrupt change  at each $10 level.  Responding                                                               
further, he  said the  tax would  be just as  simple for  a stair                                                               
stepped credit  as for linear.   Directing attention to  slide 9,                                                               
he  said a  linear  credit, as  opposed to  a  stair step,  would                                                               
flatten out  the tax  rate over  the price  range, which,  in his                                                               
view, is more attractive than the other method.                                                                                 
                                                                                                                                
7:45:18 PM                                                                                                                    
                                                                                                                                
MR.  PULLIAM, responding  to Representative  Tuck, said  he could                                                               
provide  a formula  for a  linear  function.   He explained  that                                                               
whether this linear line falls above  or below the stair steps on                                                               
a graph depends  upon which dots are connected.   For example, on                                                               
slide 8  at $150  wellhead value  the credit is  $0, at  $140 and                                                               
above it is  $1, so he connected the linear  line at that portion                                                               
of  the stair  because,  in  his view,  that  fits  with what  is                                                               
written in the bill if one wanted to smooth out the line.                                                                       
                                                                                                                                
7:46:41 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM,  responding to Representative  Seaton, said  he does                                                               
not have  these same charts  with the GVR/GRE, but  could provide                                                               
one.                                                                                                                            
                                                                                                                                
REPRESENTATIVE SEATON  said he  would appreciate  that.   He then                                                               
inquired whether the administration has  a time estimate for when                                                               
30 and 50 percent of the oil  would be subject to the GVR/GRE and                                                               
fixed $5 credit rather than just the stair step credit.                                                                         
                                                                                                                                
MR. PULLIAM responded he would  have to talk with the forecasters                                                               
at the  department.  He  offered his belief  that it would  be "a                                                               
while  out" before  50  percent was  reached  because the  legacy                                                               
fields would,  by and  large, be  subject to  the stair  step and                                                               
will continue  to be more than  50 percent of the  oil for "quite                                                               
some time."                                                                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON  commented  it  would be  helpful  to  see                                                               
because shale  oil could take off  and in fifteen years  could be                                                               
350,000 barrels a day.                                                                                                          
                                                                                                                                
MR. PULLIAM said he will talk with the department's forecasters.                                                                
                                                                                                                                
7:48:30 PM                                                                                                                    
                                                                                                                                
MR. PULLIAM  returned to Representative  Tuck's question  about a                                                               
formula and advised  that a formula is easy  to derive regardless                                                               
of whether one  wants to connect it  at the bottom or  the top of                                                               
the stair steps.                                                                                                                
                                                                                                                                
MR. PULLIAM  concluded his presentation  by drawing  attention to                                                               
graphs  comparing the  share of  profits received  by the  state,                                                               
industry,  and  federal  government  under ACES  (slide  10,  top                                                               
graph)  to the  shares that  each would  receive under  Version K                                                               
(slide 10, bottom  graph).  To create the charts  he combined the                                                               
2012 historical information for the two legacy fields.                                                                          
                                                                                                                                
7:51:18 PM                                                                                                                    
                                                                                                                                
DAMIAN  BILBAO, Head  of Finance,  BP Exploration  (Alaska) Inc.,                                                               
testified it  is important to  remember that the  benchmarking is                                                               
against  the  ACES  policy,  the  policy  that  has  left  Alaska                                                               
uncompetitive  relative to  other locations  where BP  can direct                                                               
its  investments,  and  said that  is  fundamentally  the  policy                                                               
decision  before the  committee.   He reminded  members that  [on                                                               
3/26/13] he talked  about how [CSSB 21(FIN)  am(efd fld)] created                                                               
a step change  for Alaska in terms of competitiveness.   It would                                                               
position  Alaska in  a better  place  than under  ACES, which  is                                                               
uncompetitive, complex to administer,  and difficult for planning                                                               
a business.   It would create a more  competitive environment and                                                               
would  provide  a simpler  model  to  administer  and to  plan  a                                                               
business.    Being  able  to  run  models  for  what  a  business                                                               
investment  would look  like is  valuable for  both existing  and                                                               
potential investors.                                                                                                            
                                                                                                                                
7:54:25 PM                                                                                                                    
                                                                                                                                
MR.  BILBAO noted  slide 2  is the  same slide  he displayed  [on                                                               
3/26/13], except  it includes  checkmarks highlighting  where the                                                               
proposed  committee substitute,  HCS  CSSB 21,  Version K,  makes                                                               
additional  progress beyond  that  of CSSB  21(FIN) am(efd  fld).                                                               
Both  bill versions  do  well in  their  provisions to  eliminate                                                               
progressivity,  include  the  GVR/GRE  which  positively  impacts                                                               
economics, and simplify Alaska's fiscal  system.  Version K takes                                                               
an additional  step by simplifying  the GVR/GRE to make  it clear                                                               
that  there really  are  two  levers to  work  within the  legacy                                                               
fields - the  base rate and the sliding scale  [credit].  Version                                                               
K takes  an even  further step in  simplifying the  fiscal system                                                               
because  a  producer would  not  have  to determine  whether  the                                                               
GVR/GRE applies,  which makes  it simpler  to model  business and                                                               
project economics.                                                                                                              
                                                                                                                                
MR. BILBAO recounted that [on  3/26/13] he testified to what CSSB
21(FIN) am(efd  fld) could do  better:   below $100 a  barrel the                                                               
high base  rate of 35  percent presents  a challenge.   Version K                                                               
addresses  this.   Another  provision to  which  he testified  on                                                               
3/26/13  that  could be  better  was  the  GVR/GRE:   under  CSSB
21(FIN) am(efd fld),  it was uncertain what  projects the GVR/GRE                                                               
would apply  to.  Version  K addresses  this.  This  progress was                                                               
partly accomplished by "taking the line  ... and tilting it a bit                                                               
to the  right so it corrects  some of the challenge  below $100 a                                                               
barrel and takes  away some of the upside  opportunity above $100                                                               
a  barrel, effectively  reintroducing a  slight progressivity  to                                                               
the equation."                                                                                                                  
                                                                                                                                
7:56:45 PM                                                                                                                    
                                                                                                                                
MR. BILBAO said  BP believes that, overall, Version  K is another                                                               
positive step forward and is a  positive balance.  Version K does                                                               
not  attempt to  select winners  or losers;  it provides  a level                                                               
playing field that ensures the  state, large producers, and small                                                               
producers  have  opportunities to  benefit.    Although there  is                                                               
opportunity  to take  that even  further,  Version K  repositions                                                               
Alaska on  the competitive landscape  and it represents  a policy                                                               
shift because it shifts the  burden to benefit from those credits                                                               
from spend  to production.  It  is a signal from  the legislature                                                               
that  the  policy  will  require the  producers  to  deliver  the                                                               
production in  order to  benefit from  the credits.   He  said BP                                                               
believes this shift  in policy is fair  because the progressivity                                                               
is also eliminated, which allows BP  to capture the upside of its                                                               
projects and places that opportunity under BP's control.                                                                        
                                                                                                                                
7:58:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  noting the elimination  of progressivity,                                                               
asked how many  years it would take for BP,  the largest operator                                                               
on  the  North   Slope,  to  see  an   increased  investment  and                                                               
production  to  at   least  stem  the  decline   and  have  equal                                                               
production to that of 2013.                                                                                                     
                                                                                                                                
MR.  BILBAO  replied  Version K  encourages  not  only  long-term                                                               
investments,  but also  near-term and  mid-term investments.   If                                                               
the  bill passes  in its  current  form, near-term  opportunities                                                               
could be expected as a  result of additional drilling, additional                                                               
pads, and some opportunities within the legacy fields.                                                                          
                                                                                                                                
REPRESENTATIVE SEATON  related the  committee has heard  three to                                                               
four  years as  a timeframe  for seeing  something in  the legacy                                                               
fields.  His comment at that time  was that if the bill is passed                                                               
and  within  five  years  it   fails  to  produce  the  rates  of                                                               
production that  the state has now,  he will consider the  bill a                                                               
failure and not working.  He  asked whether five years would be a                                                               
legitimate timeframe from BP's standpoint.                                                                                      
                                                                                                                                
MR.  BILBAO responded  it depends  on what  the final  bill looks                                                               
like and  how meaningful  the tax  change is.   As stated  by the                                                               
legislature's consultants,  different levels  of tax  change will                                                               
lead to different levels of investment.   If a bill passes in the                                                               
current form, he would expect to  see an impact to investment and                                                               
production within the next five years.                                                                                          
                                                                                                                                
8:00:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  observed  slide   2  states  that  prices                                                               
averaged $80 per  barrel in 2010.  Since people  have been saying                                                               
they do not  like ACES at high prices, he  is surmising that 2010                                                               
is  considered high  prices.   According to  the presentation  by                                                               
Econ One,  he further observed,  $80 would have an  effective tax                                                               
rate after credit [under Version K]  of 15 percent on the net and                                                               
8.6 percent  on the gross.   He  inquired whether 8.5  percent on                                                               
the gross  is about where BP  is thinking the tax  rate should be                                                               
for the legacy fields which already have facilities.                                                                            
                                                                                                                                
MR. BILBAO  answered he cannot  disclose what prices BP  uses for                                                               
its economic modeling or for  planning its business.  However, he                                                               
advised,  today's price  futures  typically assume  for the  next                                                               
five years  a range of between  $85 and $95.   The market expects                                                               
that to be a mid-level range for  prices - not high, not low, but                                                               
where the  market is  expected to  be; with that  in mind,  it is                                                               
important that the  bill is meaningful and  impacts investment in                                                               
that  price  range  as  well.   The  legislature  is  looking  to                                                               
incentivize not just  BP, but investors across a  broad range and                                                               
of  different sizes.   The  legislature's consultants  have shown                                                               
the  impact  at those  levels,  and  at  prices  of $80  and  $90                                                               
[Version K] shifts Alaska "to  the left" in terms of competition.                                                               
It is up to legislators to  decide how far left to shift, whether                                                               
to remain at the top of the middle of the pack or to be lower.                                                                  
                                                                                                                                
REPRESENTATIVE  SEATON  said  he  is hoping  the  committee  will                                                               
receive  a fiscal  note  that  is generated  on  the prices  that                                                               
industry expects, as well as the prices that DOR expects.                                                                       
                                                                                                                                
8:03:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  remarked he is  not sure the base  rate in                                                               
Version K results in meaningful  change.  He requested Mr. Bilbao                                                               
to  discuss the  problem/issue of  joint interest  billing (JIB),                                                               
which is not included in Version  K.  He noted that AS 43.55.165,                                                               
which  came into  law with  the original  production profits  tax                                                               
(PPT),  defines the  basis for  what is  an allowable  deductible                                                               
expenditure  in calculating  production taxes.   The  initial PPT                                                               
recognized the  importance and validity  of JIBs as a  basis from                                                               
which to begin  determining what ought be  considered and allowed                                                               
in DOR's  process of  reviewing and  auditing what  are allowable                                                               
lease  expenditures.   However, ACES  substantially rewrote  that                                                               
section  and now  DOR believes  it is  prohibited from  using JIB                                                               
statements to determine what is a legitimate lease expenditure.                                                                 
                                                                                                                                
MR.  BILBAO  replied it  would  be  BP's preference  to  leverage                                                               
existing  processes  or  instruments that  industry  has  already                                                               
created  for use  internally  and between  companies.   The  JIBs                                                               
exchanged  between  companies  are   audited  by  the  other  co-                                                               
venturers.   In BP's opinion,  those JIBs present  an opportunity                                                               
for DOR  to leverage an  existing instrument for  informing DOR's                                                               
analysis and  audit process.   The decision  to not use  the JIBs                                                               
results  in  the  creation of  separate  processes  and  separate                                                               
instruments.  Using  something that is already  being created and                                                               
already being audited  makes it easier and more  efficient for BP                                                               
to satisfy the  requests of the state.  In  further response, Mr.                                                               
Bilbao   confirmed  that   JIBs  are   one  of   the  fundamental                                                               
instruments  used by  BP for  it Internal  Revenue Service  (IRS)                                                               
filings.  Responding  further, he deferred to DOR  to say whether                                                               
it is familiar with JIBs.                                                                                                       
                                                                                                                                
8:07:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK related  the committee has heard  in the past                                                               
that the bill  is a great start, but may  not get the investments                                                               
the state  would like to see.   He inquired whether  BP's overall                                                               
investment per  year in  Alaska is  directly proportional  to the                                                               
state's  taxes,   such  that  if   taxes  are  reduced   BP  will                                                               
proportionally invest more in the state.                                                                                        
                                                                                                                                
MR.  BILBAO  responded  the  more robust  the  economics  of  the                                                               
projects, the more  likely they are to compete for  capital.  The                                                               
more competitive  Alaska is  the more  investment the  state will                                                               
see  from BP  as well  as other  existing and  new players.   The                                                               
process used by BP is to  regularly review what has changed - not                                                               
just  the  fiscal policy  but  also  technology, resourcing,  and                                                               
other factors.   Once  BP knows  that a  project meets  a certain                                                               
minimum  threshold,   that  project   will  compete   with  other                                                               
opportunities around  the world.   At  the end  of the  day, good                                                               
projects with good economics get funded.                                                                                        
                                                                                                                                
8:09:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  noted the  goal is to  at least  flatten, if                                                               
not reverse, the  decline.  He said the committee  has heard that                                                               
an [additional] 40,000 barrels a day  over 30 years [is needed to                                                               
offset the projected fiscal impact  of CSSB 21(FIN) am(efd fld)].                                                               
The committee also heard 25,000 barrels  a day is needed to lower                                                               
the decline from 6  percent to 1 percent.  If  the state needs to                                                               
get to  40,000 barrels  a day, where  does it need  to be  in the                                                               
competition and will Version K get  the state there and how soon,                                                               
he asked.   He understood the legacy fields are  the quickest way                                                               
for getting additional  oil down TAPS.  If the  state saves BP 20                                                               
percent in taxes  a year, can the state expect  to see 20 percent                                                               
more production out of BP's portfolio, he further asked.                                                                        
                                                                                                                                
MR. BILBAO  answered it is not  as simple as 20  percent here and                                                               
20 percent there.  However, he  continued, what is simple is that                                                               
the more competitive it is  the more investment from all players,                                                               
and more  rate-adding investment leads  to more production.   The                                                               
more  competitive the  state is  the more  rate-adding investment                                                               
the state  will see.   To provide  context, he explained  that if                                                               
nothing was  done at Prudhoe Bay  the decline would be  closer to                                                               
20 percent; it  is only because of investing and  running a fleet                                                               
of  rigs that  BP is  able  to cut  the decline  to 6-8  percent.                                                               
Those are  tens of thousands  of barrels that are  being produced                                                               
every year that  were not flowing through that  pipeline the year                                                               
before.  It  is a significant investment to get  to today's level                                                               
of  6-8 percent  decline  and  it will  also  take a  significant                                                               
investment to get above that.   Often lost in the conversation is                                                               
that Alaska  has a fantastic resource  base.  Within BP  there is                                                               
only one  other location that  has the resource  opportunity seen                                                               
in Alaska.   Additionally, Alaska has a fantastic  talent pool of                                                               
employees  and  contractors  that   develop  technology  and  are                                                               
recognized for it on a regular  basis.  Alaska's problems are not                                                               
below the  surface; they are  that Alaska's policy does  not make                                                               
those  projects economic.   With  the right  policy, BP  believes                                                               
there is great opportunity for Alaska  to create a new future and                                                               
a different production profile than that seen in the past.                                                                      
                                                                                                                                
8:13:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE, assuming  Version K  becomes law,  inquired what                                                               
logistical  hindrances BP  might  encounter  moving forward  with                                                               
projects, such  as sufficient drill rigs,  service companies, and                                                               
fabricators, that might prevent BP from increasing production.                                                                  
                                                                                                                                
MR.  BILBAO  acknowledged  there are  geographic  and  logistical                                                               
challenges to shifting  the activity profile in  Alaska, but said                                                               
some are the result of seven  years of no encouragement to invest                                                               
in the  aforementioned.   There would need  to be  an appropriate                                                               
time  to correct  for that  and ensure  the infrastructure  is in                                                               
place, whether  that is  ensuring rigs are  available or  even as                                                               
simple  as ensuring  that  BP is  able  to go  back  and look  at                                                               
opportunities to  see if they compete  under the new policy.   It                                                               
is the  logistical and infrastructure  challenges that  will have                                                               
to be dealt with first.  Beyond  that, it is the simple matter of                                                               
ensuring  BP does  the right  frontend loading  of some  of these                                                               
projects.  Once there is a green  light BP would have to catch up                                                               
with six or seven years of  living under a policy that encourages                                                               
a  short-term focus.    That may  be  as equal  a  hurdle as  the                                                               
logistical one, but BP is up for the challenge.                                                                                 
                                                                                                                                
CO-CHAIR FEIGE asked what sort of timeframe could be expected.                                                                  
                                                                                                                                
MR. BILBAO replied  he thinks it is realistic to  say that in the                                                               
next  few  years the  state  would  begin  to  see an  impact  on                                                               
additional production.   That would  likely be attributed  to how                                                               
BP allocates  it rig fleet more  so than constructing a  new pad,                                                               
for example.   He offered to  do the work necessary  to provide a                                                               
specific answer if the committee would like.                                                                                    
                                                                                                                                
8:16:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  inquired  whether  it  is  a  simple  matter  to                                                               
reactivate the rigs that are currently stacked at Prudhoe Bay.                                                                  
                                                                                                                                
MR. BILBAO responded  it is more complex than putting  the key in                                                               
ignition.   The  rigs would  need  a full  safety and  efficiency                                                               
review and BP would have to  ensure they are capable of operating                                                               
to the  standards that BP  requires to be  used in the  fields it                                                               
operates.   Additionally, there needs  to be the right  people to                                                               
staff them.   Therefore, it can take several months  to get a rig                                                               
from zero to ready to drill.                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE opined  that the  variable per  barrel credit  in                                                               
Version K that would apply to  legacy fields would induce what he                                                               
would refer  to as a  progressivity type of effect,  although not                                                               
progressivity the way it currently is.   It would take a slightly                                                               
higher bite  at higher prices and  a lower bite at  lower prices.                                                               
He asked  whether the  variability of that  tax credit  makes the                                                               
tax code simpler or is a complicating factor.                                                                                   
                                                                                                                                
MR. BILBAO answered it has a dual  impact.  He confirmed it has a                                                               
positive effect below $100, but  said that is problematic because                                                               
the  base  rate  is  quite   high.    It  reintroduces  a  slight                                                               
progressivity to the  tax structure, which is  concerning from an                                                               
investor's perspective  because at higher prices  an investor may                                                               
not  have the  trade-off opportunity  versus some  other factors.                                                               
The shift of  the burden to a production-linked  credit is offset                                                               
by the  opportunity of  the removal of  progressivity.   The more                                                               
that  progressivity  is  reintroduced  it will  factor  into  the                                                               
equation to  a certain degree and  to what degree will  depend on                                                               
the individual company to determine.                                                                                            
                                                                                                                                
8:19:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  recalled BP's [February 2013]  testimony that the                                                               
order  in which  deductions  are  taken affects  the  tax rate  -                                                               
changing  the  order  changes  the   tax  rate,  which  makes  it                                                               
difficult for an investor trying to  plan a project to be able to                                                               
determine  what  the tax  rate  will  be.   He  inquired  whether                                                               
Version K still presents this same problem.                                                                                     
                                                                                                                                
MR. BILBAO replied that while BP  must make an assumption for the                                                               
dollars  per barrel  to model,  Version K  is fundamentally  much                                                               
simpler to administer  and to model from a  business planning and                                                               
economic perspective.   It would be pretty hard to  get much more                                                               
complicated than ACES, he added.                                                                                                
                                                                                                                                
CO-CHAIR FEIGE presumed  BP could possibly have  areas within its                                                               
acreage  that  would  fall  under the  GVR  versus  legacy  field                                                               
property.  Thus, there would be  two different tax schedules.  In                                                               
setting  up this  tax structure,  legislators tried  to keep  the                                                               
percentages of  government take  relatively close,  especially at                                                               
the price ranges the companies  have indicated are used for basic                                                               
planning.   He  asked  whether  there are  any  issues with  this                                                               
slight difference  in percentages of government  take between GVR                                                               
and non-GVR production at prices of $70-$90 per barrel.                                                                         
                                                                                                                                
MR.  BILBAO responded  BP does  not expect  for the  GVR to  be a                                                               
factor in the fields it operates,  at least not for near- to mid-                                                               
term.   When looking at its  modeling, BP has kept  it simple and                                                               
has only  looked at  a base rate  and a dollar  per barrel.   The                                                               
company has not considered any  unintended consequences of having                                                               
dual systems  within a  single unit, although  there is  always a                                                               
potential  for  that  if  there are  different  structures.    He                                                               
suggested  that the  base  structure  of the  base  rate and  the                                                               
dollar  per  barrel  actually  provide  the  legislature  with  a                                                               
structure that could  be used for specific  types of developments                                                               
in the future, which is a conversation for another day.                                                                         
                                                                                                                                
8:22:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER recalled hearing  that the expiration of credits                                                               
might induce frontend  loading, such as some  quick purchases and                                                               
quick capital expenses.  He  inquired whether BP would spend more                                                               
than  it  ordinarily would  to  take  advantage  of that  if  the                                                               
qualified capital expenditure credit was sunset at year's end.                                                                  
                                                                                                                                
MR. BILBAO answered  BP typically lays out its plans  one year or                                                               
more in advance, so  he does not expect that BP  would a shift to                                                               
try  to respond  to a  change in  the policy.   Rather,  he would                                                               
expect that BP's  focus would be on how its  plans may change for                                                               
after the new policy is in place.                                                                                               
                                                                                                                                
CO-CHAIR  SADDLER asked  about  BP's  perspective regarding  what                                                               
goes into making an investment decision no matter the location.                                                                 
                                                                                                                                
MR. BILBAO  replied the  decision making  can be  as much  art as                                                               
science,   and  depends   on  individual   factors  as   well  as                                                               
opportunities.  He may look  at different factors for a deepwater                                                               
Gulf of  Mexico project than  he does  for an onshore  project in                                                               
Texas or  Alaska, or even  more so an  unconventional hydrocarbon                                                               
project like coalbed  methane.  So, it is not  quite as simple as                                                               
a  certain  number and  another  number  and then  comparing  and                                                               
whatever is above  the line is undertaken,  in particular because                                                               
there  are   so  many  intangible  factors,   such  as  political                                                               
stability  or   durability  of  the  fiscal   framework.    Those                                                               
intangible factors  must be injected  throughout the  process and                                                               
ultimately  a  business plan  is  developed  that BP  feels  best                                                               
reflects its strategy across a broad portfolio.                                                                                 
                                                                                                                                
8:26:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER noted  it is  heard  that the  oil industry  is                                                               
making a profit  in Alaska, so no matter what  the state does the                                                               
industry will  continue spending  money in  Alaska.   He inquired                                                               
whether  BP  seeks  profit  or the  highest  profit  when  making                                                               
investment  decisions.   He clarified  he is  asking whether  the                                                               
factor of  being profitable is  more important than  the relative                                                               
profit.  He is asking whether  BP actually evaluates where it can                                                               
make the most money, not just make money.                                                                                       
                                                                                                                                
MR. BILBAO answered  BP has choices on where it  invests the next                                                               
dollar.  First and foremost, there  is a base level of investment                                                               
that  ensures the  fields are  operated  safely and  efficiently,                                                               
which  is   typically  constrained  more  so   by  logistics  and                                                               
resourcing  than  by  funding.    Beyond  that,  the  dollars  do                                                               
compete.  If BP  is going to decide on whether to  build a pad in                                                               
Alaska or spend  those billions of dollars to drill  wells in the                                                               
Gulf of Mexico or offshore  Angola, those opportunities are going                                                               
to compete  against each other.   It  is about competing  for the                                                               
rate-adding  investment,  not   necessarily  the  rate-sustaining                                                               
investment.   Those rate-adding investments must  compete because                                                               
day the company's return per barrel is not the same everywhere.                                                                 
                                                                                                                                
MR.  BILBOA, responding  further to  Co-Chair Saddler,  explained                                                               
that rate-sustaining  investments are  those investments  that BP                                                               
makes to  ensure the fields are  renewed for the long-term.   For                                                               
example, Prudhoe Bay was built  for 30-something years and it has                                                               
been more than 35  years and so there are new  things that BP has                                                               
to put in place to ensure  that the field is prepared and renewed                                                               
to produce for another 30 years.   Those are large investments in                                                               
facilities  and pipeline.   Also,  it must  be ensured  that BP's                                                               
employees  are  developed  and  learning  the  new  technologies.                                                               
Rate-adding investments are the ones  that bring on an additional                                                               
barrel, such as a  rig that drills a well or  a pad that provides                                                               
a  new location  to drill  multiple  wells from,  or a  deepwater                                                               
platform that allows drilling in several  miles of water.  All of                                                               
those are rate-adding investments that must ultimately compete.                                                                 
                                                                                                                                
8:28:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON related  it is  being heard  that there                                                               
are more  workers on the  North Slope  than ever before,  but Mr.                                                               
Bilbao is saying  BP must spend lots of money  to keep production                                                               
going, which tells  her that much of that is  maintenance work or                                                               
bringing things up to par.  She requested Mr. Bilbao to comment.                                                                
                                                                                                                                
MR. BILBAO replied it is  not just maintenance, but also renewing                                                               
the facilities for  the next 30 years.  He  agreed that today the                                                               
level  of employment  on the  North Slope  is high,  pointing out                                                               
that  five of  every  six  people on  the  slope  are focused  on                                                               
renewing the  infrastructure - rate-sustaining,  not rate-adding,                                                               
projects.   Only one person  of the six  is focused on  a project                                                               
that delivers new rate, which  is consistent with the policy that                                                               
is  in place.   If  the policy  encourages companies  to maintain                                                               
production   in  an   efficient  way   and  focus   on  near-term                                                               
opportunities, then  that is the  ratio of how personnel  will be                                                               
deployed.  If  the policy were to change, the  ratio might change                                                               
to something different.                                                                                                         
                                                                                                                                
8:30:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK recounted  that when  legislation was  first                                                               
before the  committee, the [Department of  Revenue and Department                                                               
of Natural Resources] stated the  credits lead to investments but                                                               
not necessarily  production.  However, the  smaller oil companies                                                               
have  stated   they  are  scratching   their  heads   over  those                                                               
statements.  He  inquired whether BP has  seen investments across                                                               
the North Slope that do not lead to production.                                                                                 
                                                                                                                                
MR.  BILBAO  responded  that by  definition  an  investment  must                                                               
either sustain the production for a  longer period of time or add                                                               
new production.   So, fundamentally,  the answer to  the question                                                               
is  that  new production  comes  from  investment and  sustaining                                                               
production  comes  from investment.    In  further response,  Mr.                                                               
Bilbao explained if  a company does not sustain it  will not have                                                               
the facilities to be able to  decline; in fact, the decline would                                                               
be 100 percent because there  would be no pipelines or facilities                                                               
to flow through.   He specified it is  important to differentiate                                                               
between  sustaining  infrastructure   and  sustaining  production                                                               
decline.     If  one  considers   what  it  took  to   build  the                                                               
infrastructure  to begin  with, and  that it  has lasted  30-plus                                                               
years, it can  be seen that a significant level  of investment is                                                               
needed to  ensure it lasts another  30 years.  That  is different                                                               
from sustaining production  decline.  If BP continues  to do what                                                               
it is  doing now with  the same number of  rigs, at best  BP will                                                               
continue  to  decline  at  its current  levels  of  6-8  percent,                                                               
assuming things continue as they are.                                                                                           
                                                                                                                                
8:32:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER asked  whether the tax regime of  net base, GVR,                                                               
and credits as  proposed in Version K looks similar  to any other                                                               
regimes in the U.S. or world.                                                                                                   
                                                                                                                                
MR. BILBAO  replied he  has worked in  several countries  and has                                                               
never seen  a structure with  a base  rate this high  and credits                                                               
the way  they are.   Remarking that  similar questions  have been                                                               
asked in  the past  by the  co-chair with regard  to new  and old                                                               
production, he  said that in every  place he has worked  all that                                                               
was cared  about was production  without regard to whether  it is                                                               
new or old, so long as it is more than there was the day before.                                                                
                                                                                                                                
8:34:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  inquired whether the  employment information                                                               
of five out of  six and one out of six cited by  Mr. Bilbao has a                                                               
source or is anecdotal.                                                                                                         
                                                                                                                                
MR.  BILBAO  responded  it  is  based on  data  from  BP's  human                                                               
resources department.  As operator  of Prudhoe Bay and many other                                                               
fields  on  the  North  Slope,   BP  knows  what  its  staff  and                                                               
contractors are  doing and  what projects  they are  deployed to.                                                               
Additionally,  BP  knows what  proportion  of  its investment  is                                                               
going towards rate-sustaining projects  as opposed to rate-adding                                                               
projects as opposed to drilling projects.                                                                                       
                                                                                                                                
REPRESENTATIVE TARR  asked whether Mr. Bilbao  included employees                                                               
of other companies in his numbers for exploration work.                                                                         
                                                                                                                                
MR. BILBAO answered BP does not  do exploration, so that would be                                                               
zero for  BP.  The numbers  are primarily focused on  BP operated                                                               
facilities - Prudhoe Bay, Milne Point, Northstar, and Endicott.                                                                 
                                                                                                                                
REPRESENTATIVE TARR surmised the numbers  cited by Mr. Bilbao are                                                               
reflective  of  that  particular  employment  situation  and  not                                                               
encompassing everyone.                                                                                                          
                                                                                                                                
MR.  BILBAO  understood  the  numbers  are  reflective  of  other                                                               
fields, but suggested those operators be asked.                                                                                 
                                                                                                                                
8:35:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  said a  concern about Version  K is  that it                                                               
disadvantages small  companies by the  way it changes  the credit                                                               
system that is for bringing them  up to do exploration.  Given it                                                               
has been  suggested that  both near-  and long-term  scenarios be                                                               
looked at, there  needs to be more exploration, she  opined.  She                                                               
inquired whether  BP anticipates returning to  exploration on the                                                               
North Slope.                                                                                                                    
                                                                                                                                
MR. BILBAO  agreed it  is important  that all  good opportunities                                                               
move forward for large players as  well as new entrants and small                                                               
producers.   As a large  operator, BP benefits from  that because                                                               
its  facilities are  underutilized.   Just  like  TAPS is  three-                                                               
fourths  empty,   BP's  facilities  could  benefit   from  having                                                               
additional  flow-through, which  benefits  existing operators  as                                                               
well as  new entrants.  While  he cannot speak for  BP's board of                                                               
directors regarding strategy  direction in Alaska, he  can say BP                                                               
has significant existing opportunities  in its portfolio, in both                                                               
light and  heavy crudes as well  as gas, and those  are more than                                                               
adequate to keep BP busy for quite some time.                                                                                   
                                                                                                                                
8:36:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  said he has  heard the argument that  there are                                                               
limitations to production and Alaska  should not dare to hope for                                                               
increased production because there is  not enough capacity in the                                                               
North  Slope for  the handling,  processing,  and transit  lines.                                                               
Given that  BP's facilities are  underutilized, he  asked whether                                                               
there is  any difficulty  in ramping up  production based  on the                                                               
current state of the physical plant.                                                                                            
                                                                                                                                
MR. BILBAO  allowed that  is correct and  said there  are certain                                                               
facilities where a bottleneck is  possible.  When considering new                                                               
projects, BP looks  at what additional investment  is required to                                                               
ensure  the   facilities  have  the   capacity  to   accept  that                                                               
production.   He requested that his  statement not be taken  as a                                                               
broad application  to all  of BP's  facilities, adding  there are                                                               
some where  there is opportunity when  a new project comes  on to                                                               
ensure  that  the  production  will flow  through.    In  further                                                               
response,  he explained  that currently  in BP's  fields, Prudhoe                                                               
Bay  in particular,  a  tremendous  amount of  water  and gas  is                                                               
produced along with some oil.   Thus, BP must work hard to manage                                                               
that  ratio  and  ensure  that the  water  is  properly  managed.                                                               
Oftentimes it is reinjected to  maximize the recovery of oil, and                                                               
that delicate balance can be  more challenging in some facilities                                                               
than others.   So, when BP looks at new  investments, that is one                                                               
of the things considered.                                                                                                       
                                                                                                                                
8:39:40 PM                                                                                                                    
                                                                                                                                
BART ARMFIELD,  Chief Operating  Officer, Brooks  Range Petroleum                                                               
Corporation, first  provided an  update on his  company's Mustang                                                               
development as a  response to the question being  raised in other                                                               
bodies and  committees about  what the state  is getting  for its                                                               
investment [slide 2].   He said his company is  10 days away from                                                               
completion  of an  access road  and  production pad  that is  4.5                                                               
miles  off of  the Kuparuk  River Unit  infrastructure.   Results                                                               
from this project  are very good:  the overburden,  the amount of                                                               
material that  has to be  removed to  get to the  gravel product,                                                               
has been less  than expected; the gravel quantity  is much larger                                                               
than was expected;  and the quality is  well above specification.                                                               
The  plan is  to  condition  that road  over  the  summer, to  do                                                               
facilities  design, procurement,  and  some  fabrication, and  to                                                               
begin onsite  construction in second  quarter 2014.   The project                                                               
is 17 months  away from contributing new oil to  TAPS at the rate                                                               
of 15,000 barrels  a day.  Therefore, there are  results from the                                                               
investment the State of Alaska is making.                                                                                       
                                                                                                                                
8:42:40 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD,  referencing   BP's  testimony  about  production,                                                               
sustaining  production,  and  increasing  production  within  the                                                               
legacy fields, he  stressed the state needs  both exploration and                                                               
production [slide 3].   "One size does  not fit all -  it means a                                                               
totally different  result for a  major than  it does for  a small                                                               
producer like  Brooks Range  Petroleum," he  said.   Brooks Range                                                               
Petroleum as  a small independent  has delivered and  has brought                                                               
significant value  to the  state for the  credits that  have been                                                               
provided.   Overall, his joint  venture has received  $69 million                                                               
in credits  over a period  of 7 years  for its total  North Slope                                                               
portfolio.   The  Mustang project  alone will  recover all  those                                                               
credits within  a single year  and over its project  life Mustang                                                               
will return $1.2  billion in revenue to the State  of Alaska - 17                                                               
times the credits paid out.                                                                                                     
                                                                                                                                
MR. ARMFIELD,  responding to Representative  P. Wilson  about the                                                               
Mustang project's  timeframe, turned  to slide 4,  explaining the                                                               
blue  line at  the bottom  of the  graph is  Mustang, which  will                                                               
start production in  2014 and go 15 years through  2031.  It will                                                               
contribute 15,000  barrels per day  to TAPS.  With  an aggressive                                                               
schedule  that  his  company  has  planned  and  with  the  other                                                               
remaining projects in his company's  inventory, a total of 55,000                                                               
barrels per day will be reached within five years (2018).                                                                       
                                                                                                                                
8:45:08 PM                                                                                                                    
                                                                                                                                
MR.  ARMFIELD   returned  to  his  presentation,   providing  his                                                               
company's  comments on  the  proposed  committee substitute,  HCS                                                               
CSSB  21, Version  K.   He  requested consideration  be given  to                                                               
reducing the  35 percent base tax  rate to 30 percent  (slide 5].                                                               
Regarding elimination  of credits, he requested  consideration be                                                               
given to  extending the qualified  capital expenditure  (QCE) and                                                               
exploration incentive  (EIC) credits to 2016.   Understanding the                                                               
long-term effects on  the fiscal note that  extending the credits                                                               
would  create,  he said  his  company  supports the  $5  produced                                                               
barrel credit.   To offset the  loss of the credits,  he proposed                                                               
that  monetization  of  the  35 percent  net  operating  loss  be                                                               
transitioned from  a starting rate of  45 percent down to  the 35                                                               
percent rate.   He explained 45 percent is the  equivalent of the                                                               
20 percent  QCE credits and the  25 percent loss equaling  the 45                                                               
percent  that  the  Mustang  project  was  originally  sanctioned                                                               
under.   All of his  company's acreage  would qualify for  the 20                                                               
percent GVR/GRE.   Brooks Range  Petroleum would qualify  for the                                                               
small producer credit  that will expire in 2016  under Version K,                                                               
but  this  will not  impact  the  company  because it  will  have                                                               
production in 2014 thereby qualifying  for the 10-year benefit of                                                               
this credit.  To support  the exploration side of exploration and                                                               
development, however,  he suggested qualification for  the credit                                                               
be extended to 2022 in anticipation of new players coming in.                                                                   
                                                                                                                                
8:47:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  asked whether Mr.  Armfield's aforementioned                                                               
suggestions would  put the exploration back  into the exploration                                                               
and production.                                                                                                                 
                                                                                                                                
MR.  ARMFIELD  replied they  would  provide  a better  basis  for                                                               
exploration than the current proposal under Version K.                                                                          
                                                                                                                                
REPRESENTATIVE TUCK inquired whether that  would bring it back to                                                               
the current exploration under ACES.                                                                                             
                                                                                                                                
MR.  ARMFIELD responded  he  does not  believe  it would  because                                                               
Brooks  Range Petroleum  will get  out of  the 45  percent credit                                                               
basis once  it goes into production  and is profitable.   At that                                                               
time  the company  will  fall  under the  same  tax structure  as                                                               
everyone else.   Hopefully,  his company  will provide  the basis                                                               
with its  Mustang project  to be able  to sustain  an exploration                                                               
program moving forward to backfill  the decline that is generated                                                               
from the Mustang project and later those projects through 2018.                                                                 
                                                                                                                                
REPRESENTATIVE TUCK  asked why there  is such a concern  with the                                                               
base rate,  given the effective  tax rate is low  when everything                                                               
is combined.                                                                                                                    
                                                                                                                                
MR.  ARMFIELD answered  the slides  provided by  both consultants                                                               
are for  a new producer  with a 50  million barrel field,  and in                                                               
this scenario  the government take at  $100 per barrel oil  is in                                                               
the range  of 64 percent.   A 5  percent adjustment in  that base                                                               
rate is a significant base  position that creates added value for                                                               
his company's projects.                                                                                                         
                                                                                                                                
8:50:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  inquired  whether the  suggestion  for  a                                                               
transition  from  45  percent  to  35  percent  would  be  for  a                                                               
durational  time  or  for  anyone   who  qualifies  for  the  net                                                               
operating loss (NOL).                                                                                                           
                                                                                                                                
MR. ARMFIELD assumed that 35  percent is the legislature's target                                                               
rate for a net operating loss.   The only basis he has to request                                                               
the 45 percent is to make  Brooks Range Petroleum whole to the 45                                                               
percent combination of QCE's and 25  percent loss that was in the                                                               
old program  under which  the project was  sanctioned.   Once the                                                               
company becomes  profitable, it would  transition out of  that 45                                                               
percent, which would also be the case at 35 percent.                                                                            
                                                                                                                                
REPRESENTATIVE  SEATON noted  that  once  Brooks Range  Petroleum                                                               
goes  into   production,  it   would  depend   upon  company-wide                                                               
expenditures,  not  just  expenditures   for  Mustang.    If  the                                                               
transition does  not apply to  a number  of years, then  that net                                                               
operating  loss  could  apply  for  as  long  as  a  company  was                                                               
continuing to invest and developing other  fields.  He said he is                                                               
asking whether Brooks Range Petroleum  needs a specific number of                                                               
years or a duration that applies until it is profitable.                                                                        
                                                                                                                                
MR. ARMFIELD concurred  a company could spend itself  into a loss                                                               
position, but that is not  what Brooks Range Petroleum is looking                                                               
for.   In his company's forecast,  the spend for those  fields is                                                               
driven by the revenue generated  from the Mustang project; so, he                                                               
is asking  for the  45 percent relative  to the  Mustang project,                                                               
which is two years, not the portfolio as a whole.                                                                               
                                                                                                                                
8:53:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  pointed out that although  Brooks Range Petroleum                                                               
may be  reinvesting the profits so  to speak, it is  resulting in                                                               
significant production as seen by the graph on slide 4.                                                                         
                                                                                                                                
8:54:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  surmised Brooks  Range  Petroleum  is                                                               
saying it  needs as much  as possible  in credits when  it starts                                                               
production because  that cash flow  will be used to  continue the                                                               
company's other projects.                                                                                                       
                                                                                                                                
MR.  ARMFIELD  replied   yes,  the  front  side   support  in  an                                                               
exploration  company transitioning  to  a  production company  is                                                               
very important.   Effectively losing 23 percent  of those capital                                                               
credits by the  elimination of QCE and  EIC significantly impacts                                                               
Brooks  Range  Petroleum.   Going  back  to that  forecast  would                                                               
require a more modest growth  to that production profile than the                                                               
aggressive nature that it is in now.                                                                                            
                                                                                                                                
8:55:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR asked whether  the [six] projects outlined on                                                               
slide 4 were all sanctioned under ACES.                                                                                         
                                                                                                                                
MR. ARMFIELD  responded the only project  currently sanctioned is                                                               
Mustang.  The graph is  an extrapolation of his company's current                                                               
inventory,  tested oil,  and application  of the  parameters that                                                               
result in this profile.                                                                                                         
                                                                                                                                
REPRESENTATIVE  TARR recalled  previous  testimony  in which  Mr.                                                               
Armfield said the  Mustang project would have been  shifted out a                                                               
few  years had  the  credits not  been in  place.   She  inquired                                                               
whether the  timeline depicted  on slide 4  is reflective  of how                                                               
investment opportunities would go under the current system.                                                                     
                                                                                                                                
MR.  ARMFIELD answered  this is  his company's  original forecast                                                               
and  it was  based under  the  assumption of  20 percent  capital                                                               
credits and 25 percent loss credits.                                                                                            
                                                                                                                                
8:57:07 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 8:57 p.m. to 9:12 p.m.                                                                       
                                                                                                                                
9:11:47 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  noted Pioneer Natural Resources  Alaska, Inc. has                                                               
submitted written testimony.                                                                                                    
                                                                                                                                
9:12:01 PM                                                                                                                    
                                                                                                                                
DAN  SECKERS, Tax  Counsel, ExxonMobil  Corporation, stated  both                                                               
CSSB 21(FIN)  am(efd fld) and  the proposed substitute,  HCS CSSB
21, Version  K, make significant  progress to reforming  ACES and                                                               
represent  a  strong  step  forward  towards  improving  Alaska's                                                               
investment   climate.     Version  K   would  make   Alaska  more                                                               
competitive  and would  improve  the  state's overall  investment                                                               
climate.    As  to  whether  Version K  would  make  Alaska  more                                                               
attractive  across all  prices compared  to its  competitors, the                                                               
answer  is yes  and no.   ExxonMobil's  concern remains  that the                                                               
base rate  is too  high relative  to competitors,  especially the                                                               
lower 48  states, which was  demonstrated by PFC  Energy's chart.                                                               
Also,  while  Version K  provides  more  attractiveness at  lower                                                               
prices, tying the GVR/GRE for  legacy fields to price reduces the                                                               
competitiveness  of that  as prices  rise.   Alaska represents  a                                                               
critical component  of ExxonMobil's  worldwide portfolio  and the                                                               
company looks forward  to being in Alaska for many  years.  It is                                                               
ExxonMobil's  view  that  the  need   for  Alaska  to  develop  a                                                               
competitive and attractive  fiscal regime is one of  the most, if                                                               
not the  most, important issues facing  Alaska today.  It  is the                                                               
legislature's policy call as to  whether either bill makes Alaska                                                               
as  competitive   and,  more  importantly,   globally  attractive                                                               
against  the state's  competitors at  all prices  to attract  the                                                               
investment that  is needed  on the North  Slope for  Alaskans and                                                               
for development of the state's resources going forward.                                                                         
                                                                                                                                
9:14:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   TUCK  understood   Version   K  makes   Alaska's                                                               
investment  climate better  but  not necessarily  the  best.   He                                                               
asked whether the bill will be able to stop the decline curve.                                                                  
                                                                                                                                
MR.  SECKERS  replied  that is  everyone's  goal  and  ExxonMobil                                                               
believes   that  with   the  right   improvements  to   ACES  the                                                               
marketplace will  dictate more investments be  made.  Investments                                                               
coming forward  from making Alaska  more attractive will  lead to                                                               
more production and more investment in Alaska from all players.                                                                 
                                                                                                                                
REPRESENTATIVE  TUCK  surmised  Mr.   Seckers  agrees  that  more                                                               
investment leads to more production.                                                                                            
                                                                                                                                
MR. SECKERS responded  clearly there will not  be more production                                                               
without  more  investment,  and  it   is  critical  to  get  that                                                               
investment from all players.                                                                                                    
                                                                                                                                
9:15:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether  it would  mean the  tax                                                               
change was  unsuccessful if within  five years production  is not                                                               
at 2013 levels.                                                                                                                 
                                                                                                                                
MR. SECKERS answered  it will be important for the  state to take                                                               
a good look  at that point in time to  decide whether the changes                                                               
went  far enough.    If  the hoped-for  production  has not  been                                                               
reached by that time, the  state could make further changes after                                                               
conferring with its consultants.                                                                                                
                                                                                                                                
9:16:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  expressed his  concern that, in  regard to                                                               
increasing  production  in Alaska's  larger  fields,  it may  not                                                               
matter what short-term changes are  made because investments made                                                               
by the  major oil  companies are driven  by the  companies' long-                                                               
term strategic plans.   He inquired whether  ExxonMobil makes its                                                               
investments based on a long-term  strategic plan or vacillates in                                                               
its investments fairly rapidly with changes in tax rates.                                                                       
                                                                                                                                
MR. SECKERS reiterated  ExxonMobil has been in Alaska  for a long                                                               
time and  looks forward to staying  for many years to  come.  The                                                               
company is  actively looking for  investments in Alaska  that are                                                               
attractive to make, and will  make them as they become attractive                                                               
to do  so.  A number  of variables are reviewed  when making both                                                               
long-term and  short-term decisions.  Most  investments are long-                                                               
term driven investments  because it takes quite a  bit of upfront                                                               
capital before  recovery is  ever made.   However, that  does not                                                               
mean ExxonMobil cannot move on the  shorter term if need be or if                                                               
opportunity  presents   itself.    The  company   makes  as  many                                                               
investments as it can because that is the business it is in.                                                                    
                                                                                                                                
9:19:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  noted  the governor's  proposed  legislation  is                                                               
based  on  several  principles  -  make  the  tax  code  simpler,                                                               
durable, and  equally affect all  players.  He asked  whether Mr.                                                               
Seckers believes Version  K has the potential to  be a relatively                                                               
stable tax regime and treats all taxpayers relatively equally.                                                                  
                                                                                                                                
MR. SECKERS responded it is  up to current and future legislators                                                               
to  decide whether  the  proposed  change has  the  chance to  be                                                               
durable.   It is  the legislature's purview  to change  taxes and                                                               
policy when it  deems necessary or desirable.   ExxonMobil values                                                               
stability, so the  longer a good policy is in  place and the more                                                               
stable it is  the better it is for investment  climate.  The more                                                               
changes that  are made  the less predictable  a structure  is and                                                               
therefore the less  attractive the structure.  The  goal would be                                                               
to establish a policy that  is competitive and attractive for the                                                               
long-term.  Regarding  equal treatment of all  taxpayers, he said                                                               
ACES does not because it  has different rules for different areas                                                               
within  the state  - Cook  Inlet, "Middle  Earth," and  the North                                                               
Slope - and Version K does not change  any of that.  On the North                                                               
Slope, Version K  distinguishes the legacy fields  apart from the                                                               
GVR/GRE,   which   creates   disparity  between   the   different                                                               
taxpayers.   The proposed $5  per barrel credit is  different for                                                               
the legacy fields than  it is for the others.   So, no, Version K                                                               
does  not treat  everybody the  same  and that  could bear  being                                                               
looked at, at least for the players on the North Slope.                                                                         
                                                                                                                                
9:22:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE inquired  whether  Mr. Seckers  sees any  obvious                                                               
instances  in  the  bill  that  would  create  disincentives  for                                                               
various companies.                                                                                                              
                                                                                                                                
MR.  SECKERS answered  he cannot  say how  other companies  might                                                               
look  at the  bill,  but  ExxonMobil is  looking  to  do all  the                                                               
investments it can that are attractive with its partners.                                                                       
                                                                                                                                
9:23:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON noted  the legislature  is looking  at gas                                                               
pipelines and  understood ExxonMobil is  also looking.   He asked                                                               
whether ExxonMobil plans to hold  to the 35-year fiscal certainty                                                               
requirement before it will engage in a gas sales agreement.                                                                     
                                                                                                                                
MR. SECKERS replied he cannot answer questions regarding gas.                                                                   
                                                                                                                                
9:25:55 PM                                                                                                                    
                                                                                                                                
SCOTT  JEPSEN, Vice  President  External Affairs,  ConocoPhillips                                                               
Alaska,  Inc., provided  one slide  in a  PowerPoint presentation                                                               
regarding  the  proposed  committee   substitute,  HCS  CSSB  21,                                                               
Version K.  He said the left  column on the slide [slide 2] lists                                                               
the  issues with  ACES that  ConocoPhillips believes  need to  be                                                               
addressed  to create  an improved  investment  on Alaska's  North                                                               
Slope.   The right column  lists ConocoPhillips'  perspectives on                                                               
Version K.   Progressivity is the most difficult  element of ACES                                                               
in terms of attracting new investment  in the state, and needs to                                                               
be changed.  Version K  has a slightly progressive tax structure,                                                               
but would  predominantly address the  major issue under  ACES and                                                               
is  therefore a  positive.   ConocoPhillips has  advocated for  a                                                               
flatter tax  rate over  a broad  range of  prices where  there is                                                               
equal  sharing in  the upside  as prices  increase and  as prices                                                               
decrease  and  also  as  margins   change,  so  Version  K  is  a                                                               
significant  improvement  over  ACES.   Relative  to  ACES,  CSSB
21(FIN) am(efd fld)  represented a tax increase  at lower prices,                                                               
and the progressive tax credit  per barrel structure in Version K                                                               
addresses that  issue.  ConocoPhillips  would prefer there  be no                                                               
progressivity,  but  the  company  understands  the  balance  the                                                               
committee took  into account  when it  changed the  effective tax                                                               
rate at lower prices in Version K.                                                                                              
                                                                                                                                
MR.  JEPSEN reminded  members that  ConocoPhillips has  advocated                                                               
for  a  competitive  tax structure  that  creates  a  competitive                                                               
attractive  investment.   This would  include  a competitive  tax                                                               
rate,  incentives  to  balance   the  high  cost  environment  on                                                               
Alaska's  North Slope,  and the  incentives and  tax rates  would                                                               
apply  to both  legacy and  new  fields.   The base  tax rate  in                                                               
Version K is still  too high, he specified.  As  seen in the data                                                               
provided by  the legislature's and  administration's consultants,                                                               
a 30 percent rate is about  the average of the competition in the                                                               
other areas that are attracting  significant investment.  As that                                                               
dollar  per barrel  tax rate  decreases as  prices go  up, Alaska                                                               
moves backwards  and ends up on  the high end of  average.  While                                                               
it is the  committee's policy call on where it  wants to position                                                               
Alaska for investment,  ConocoPhillips thinks this is  an area to                                                               
look into to potentially improve the bill.                                                                                      
                                                                                                                                
9:29:01 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN  pointed out  Version K  has no  investment incentives                                                               
inside the  legacy fields, which  have many  challenged projects.                                                               
He  said  ConocoPhillips  is drilling  around  the  periphery  of                                                               
legacy  fields and  drilling for  bypassed reserves  and isolated                                                               
fault blocks  inside fields like  Kuparuk and Prudhoe Bay.   Some                                                               
very complex and costly wells are  being drilled to try to access                                                               
those  reserves.   Regarding what  needs to  be done  to position                                                               
Alaska to attract more investment,  Alaska still is challenged by                                                               
its  location,  weather,  logistics, and  environmental  and  tax                                                               
frameworks.  A positive change in  Version K is the committee has                                                               
looked  at some  of the  comments ConocoPhillips  made previously                                                               
about the application  of the GVR/GRE to  participating area (PA)                                                               
expansions inside the  legacy fields.  It appears  there would be                                                               
a  greater  likelihood  of PA  expansions  inside  legacy  fields                                                               
having  the GVR/GRE  application  as well  as  the 35  percent/$5                                                               
credit applied  to those sorts  of expansions versus  the current                                                               
progressivity structure.                                                                                                        
                                                                                                                                
MR. JEPSEN,  addressing an earlier  question about  whether these                                                               
changes will  lead to  increased investment,  said ConocoPhillips                                                               
believes  Version K  does change  the investment  climate on  the                                                               
North Slope and will lead  to increased investment and additional                                                               
production.   However,  until  a  bill is  passed  he cannot  say                                                               
exactly what  projects ConocoPhillips  is going  to do,  how much                                                               
production the company will add,  how many billions of dollars in                                                               
investment  on the  North Slope  might change.   Once  a bill  is                                                               
passed,  ConocoPhillips  can look  more  closely  at all  of  its                                                               
project  economics  and  determine which  projects  to  sanction.                                                               
Version K,  by and  large, is a  positive step  forward, although                                                               
there are  some things that  could be  done to attract  even more                                                               
investment.  Version K is a  better bill than CSSB 21(FIN) am(efd                                                               
fld) and is  a good start towards  putting Alaska on a  path to a                                                               
healthier longer-term economy.                                                                                                  
                                                                                                                                
9:31:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR understood it is  more expensive to invest in                                                               
Alaska,  but noted  much infrastructure  is already  developed on                                                               
the North Slope.   She asked how that factors  into investment in                                                               
the state.                                                                                                                      
                                                                                                                                
MR. JEPSEN responded  that in many areas  where ConocoPhillips is                                                               
currently investing considerable amounts  of capital, such as the                                                               
Bakken  and the  Eagle  Ford, significant  infrastructure is  not                                                               
required to bring those wells  on line.  Also, the infrastructure                                                               
the company  is building [in  those locations] does not  begin to                                                               
compare with  the costs  and infrastructure  on the  North Slope.                                                               
So, even  though there is  infrastructure on the North  Slope, it                                                               
is still highly constrained by the regulatory environment.                                                                      
                                                                                                                                
REPRESENTATIVE TARR  inquired as  to the exploration  activity of                                                               
ConocoPhillips.                                                                                                                 
                                                                                                                                
MR. JEPSEN  answered there was  a hiatus, but  ConocoPhillips has                                                               
been active in exploration for quite  a while on the North Slope.                                                               
The  company will  probably drill  two exploration  wells on  the                                                               
Cassin  prospect, and  has other  opportunities  where there  has                                                               
been success in the National Petroleum Reserve-Alaska (NPR-A).                                                                  
                                                                                                                                
9:33:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER  asked whether ConocoPhillips believes  it has a                                                               
good understanding of the proposed system.                                                                                      
                                                                                                                                
MR.  JEPSEN  replied  he  cannot say  ConocoPhillips  has  a  100                                                               
percent confidence  factor that it understands  all the potential                                                               
unintended consequences of Version K.   For example, he is unsure                                                               
he fully understands  the impact on the marginal tax  rate as the                                                               
thresholds are  crossed over.   However, his  company understands                                                               
it well enough relative to the  current tax framework to say that                                                               
it is a big improvement.                                                                                                        
                                                                                                                                
CO-CHAIR  SADDLER   asked  whether   the  looming   deadline  for                                                               
qualified capital credits would  encourage ConocoPhillips to make                                                               
additional frontend loading investments.                                                                                        
                                                                                                                                
MR.  JEPSEN  responded  there are  many  structural  issues  with                                                               
attempting to  do that - it  takes time to get  additional kit on                                                               
site, to gear up people to do  work, and to order materials.  The                                                               
system basically has  a built in governor regarding  the level of                                                               
activity that can be ramped up quickly.  So, the answer is no.                                                                  
                                                                                                                                
9:35:45 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE, assuming  Version K  becomes law,  inquired what                                                               
logistical  hindrances ConocoPhillips  might encounter  in moving                                                               
projects  forward  and  what  things  could  the  legislature  do                                                               
outside of taxes that would  help smooth some of those logistical                                                               
road blocks.                                                                                                                    
                                                                                                                                
MR. JEPSEN  answered there are  obviously things that have  to be                                                               
done to  mobilize, but they  are what ConocoPhillips does  and so                                                               
it knows how to  do them.  What his company is  looking for is to                                                               
create the investment climate on  the North Slope that will allow                                                               
it to make those decisions and implement those new projects.                                                                    
                                                                                                                                
CO-CHAIR  FEIGE asked  whether Mr.  Jepsen  believes the  changes                                                               
made  to the  GVR/GRE definitions  in Version  K are  clearer and                                                               
provide certainty as to whether a project qualifies.                                                                            
                                                                                                                                
MR. JEPSEN  replied ConocoPhillips  might like  to expand  the PA                                                               
for its West  Sac development inside its Kuparuk River  Unit.  As                                                               
Version K  reads now,  it is  clearer the  acreage that  would be                                                               
expanded  onto would  probably qualify  for the  GVR/GRE.   While                                                               
there is still  some discretion, he could go into  it with a much                                                               
higher degree  of confidence than  he would have before  - before                                                               
he would  have thought it would  not qualify or much  of it would                                                               
be unlikely  to qualify.   Also, there is still  some uncertainty                                                               
about how  to measure  the production, but  there is  history and                                                               
precedent  for  how  the   company  monitors  production  without                                                               
actually  having  a meter  on  every  well.    This change  is  a                                                               
positive,  although the  company will  have  to test  it to  know                                                               
exactly how it will be interpreted.                                                                                             
                                                                                                                                
CO-CHAIR FEIGE commented  the committee will look  forward to see                                                               
if the expected results of the change in policy do pan out.                                                                     
                                                                                                                                
9:38:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON noted  ConocoPhillips has  quite a  bit of                                                               
experience in shale  in the Lower 48.  He  understood the company                                                               
holds  interests on  the North  Slope that  have shale  underlay.                                                               
He  inquired how  ConocoPhillips would  interpret the  GVR/GRE in                                                               
the development  of shale  and how  shale developments  would fit                                                               
into PA or PA expansions where  the wells are not contiguous with                                                               
anything else.                                                                                                                  
                                                                                                                                
MR. JEPSEN responded  that in the abstract,  not paying attention                                                               
as to whether the economics of  shale make any sense, it would be                                                               
a separate  PA or production  from these horizons and  his belief                                                               
is that  it would  probably qualify  for the  GVR/GRE.   There is                                                               
currently no production on any  of the leases that ConocoPhillips                                                               
has coming  out of  the shales  and the company  has no  PAs that                                                               
encompass the shales or production from shales.                                                                                 
                                                                                                                                
REPRESENTATIVE SEATON surmised, then,  that Mr. Jepsen's estimate                                                               
is that each  well would qualify for the exclusion  and $5 credit                                                               
because it would not have continuity with another reservoir.                                                                    
                                                                                                                                
MR. JEPSEN answered  his understanding of Version  K, as written,                                                               
and the  definition of  what would qualify  for GVR/GRE,  is that                                                               
ConocoPhillips would  probably form a single  PA that encompasses                                                               
the entire area it would  be developing in this contiguous shale.                                                               
Rather than thinking about it well  by well, he would think about                                                               
it  as any  well  inside that  PA that  was  producing from  that                                                               
horizon  because that  horizon  is qualified.    For example,  as                                                               
discussed by Mr. Armfield, every  well in the Mustang field would                                                               
qualify for the  GVR/GRE - it is not individual  well by well, it                                                               
is any well inside that PA.                                                                                                     
                                                                                                                                
9:41:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether  it would  mean the  tax                                                               
change was  unsuccessful if within  five years production  is not                                                               
at 2013 levels.                                                                                                                 
                                                                                                                                
MR. JEPSEN replied the answer  is a relative answer because right                                                               
now he  cannot say what  might happen to the  existing production                                                               
from  the current  fields.   Based  upon all  his  years in  this                                                               
business, he  can say it  is difficult to predict  how reservoirs                                                               
are  going to  perform,  particularly as  they age.    It is  not                                                               
beyond the realm of possibility  that base decline might actually                                                               
steepen for some  reason and there could be a  much bigger gap to                                                               
overcome by  the investment that  this bill might attract  to the                                                               
North Slope.  At that time in  the future, there would need to be                                                               
a look  at how much new  investment happened, how many  new wells                                                               
were drilled, what was the  production from those wells, and what                                                               
was the  base decline, and  then make a relative  judgment rather                                                               
than sitting  here today making  an absolute judgment  based upon                                                               
preconceived ideas of what would constitute success.                                                                            
                                                                                                                                
9:43:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON,  noting there  would no longer  be credits                                                               
[as  a way  to track  investments], asked  what Mr.  Jepsen would                                                               
suggest  for providing  a handle  on what  investments have  been                                                               
made during that  time period; for example,  whether there should                                                               
be  something in  the bill  requiring companies  to report  their                                                               
investments so a comparison of investment levels can be made.                                                                   
                                                                                                                                
MR.  JEPSEN responded  DOR receives  investment numbers  from all                                                               
producers  and explorers,  so that  would be  a gauge  as to  how                                                               
investment levels  might be changing.   However, he added,  it is                                                               
again a  relative answer.   If the price of  oil were to  go down                                                               
but the  tax environment or  the investment climate on  the North                                                               
Slope competes favorably with  other locations, maybe investments                                                               
are down  but relative to  other places  it is robust.   Judgment                                                               
needs  to  be  made  at  that point  in  time  when  the  current                                                               
environment can be considered.                                                                                                  
                                                                                                                                
9:45:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   addressed  the  co-chairs,   saying  the                                                               
committee needs to hear from  DOR whether the legislature has the                                                               
right to know  or whether it is in-house  knowledge regarding the                                                               
level of investment in terms  of determining whether changes were                                                               
successful.   He said something  may need  to be included  in the                                                               
bill that requires aggregated investment data.                                                                                  
                                                                                                                                
9:46:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER requested  Mr. Jepsen's  opinion about  the Oil                                                               
and Gas  Competitiveness Review Board  proposed under  Version K,                                                               
and  the board's  composition,  mission,  activity schedule,  and                                                               
confidentiality provisions.                                                                                                     
                                                                                                                                
MR. JEPSEN answered  all of those could  be somewhat problematic,                                                               
depending upon  how they are handled.   He suggested the  bill be                                                               
given time to  work and, if the legislature wants  to have such a                                                               
board,  to push  it out  far enough  in time  where there  is the                                                               
opportunity to have  a meaningful look back.  He  would argue the                                                               
legislature  should ensure  the  board has  the  ability to  hire                                                               
qualified consultants  to make  that assessment.   It  could work                                                               
under the  right setup,  but doing  it on  a very  frequent basis                                                               
would not be terribly helpful because  it takes time to do things                                                               
on the North Slope and for investors to react.                                                                                  
                                                                                                                                
CO-CHAIR  SADDLER said  he thinks  the board  is on  a four  year                                                               
schedule.   He asked whether  Mr. Jepsen  believes ConocoPhillips                                                               
would feel safe sharing confidential information with the board.                                                                
                                                                                                                                
MR.  JEPSEN replied  he has  not  looked at  the provision  close                                                               
enough to answer the question.                                                                                                  
                                                                                                                                
CO-CHAIR SADDLER asked whether the  review board would be seen as                                                               
a benefit to the industry as well as a possible negative.                                                                       
                                                                                                                                
MR. JEPSEN responded that is a possibility.                                                                                     
                                                                                                                                
9:48:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  said she thinks  Version K provides  for the                                                               
board  to meet  no more  than once  a calendar  year.   She asked                                                               
whether Mr. Jepsen  meant once a year is too  often and commented                                                               
she does not think that to be too often.                                                                                        
                                                                                                                                
MR. JEPSEN said  his comment was about how  often a pronouncement                                                               
is actually  made as  to whether  the state  is competitive.   He                                                               
reiterated he thinks the state needs to give it time to work.                                                                   
                                                                                                                                
9:48:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  requested the Department of  Natural Resources to                                                               
address the shale issue brought up by Representative Seaton.                                                                    
                                                                                                                                
JOE  BALASH, Deputy  Commissioner,  Office  of the  Commissioner,                                                               
Department  of  Natural  Resources  (DNR), replied  that  as  the                                                               
hypothetical is  laid out,  the question that  must be  asked is,                                                               
"Where is the  production from the shale  resource taking place?"                                                               
If it is taking place in a  unit that was formed after 2003, then                                                               
clearly it will  qualify for the GVR/GRE.  If  it is taking place                                                               
in a PA that  is newly formed in a unit  that formed before 2003,                                                               
it will  qualify for  a GVR/GRE.   If it is  acreage that  is not                                                               
currently in a unit, and if a  unit is not being formed for shale                                                               
production, then it will not qualify  for a GVR/GRE; what it will                                                               
qualify for is  the per barrel credit that slides  from $8 to $0.                                                               
The way the  definitions unfold is that the  per-barrel credit is                                                               
determined based on  whether or not the  production qualifies for                                                               
the GVR/GRE.   If  production does not  qualify for  the GVR/GRE,                                                               
then it gets the sliding per barrel credit.                                                                                     
                                                                                                                                
9:50:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  presumed there would be  two different tax                                                               
rates for production  out of the same source rock  in a unit such                                                               
as  Prudhoe   Bay  or   Kuparuk  where   there  is   no  previous                                                               
participating area.                                                                                                             
                                                                                                                                
MR.  BALASH interpreted  the question  as whether  - because  the                                                               
Prudhoe Bay  Unit was formed  before 2003  - that source  rock is                                                               
going to  be in a participating  area.  He  said:  "If it  is not                                                               
going  to be  in a  participating area,  if it  just going  to be                                                               
drilled and  produced, then  it will not  qualify through  any of                                                               
the three buckets for the GVR.  So, ... it will get the slider."                                                                
                                                                                                                                
9:52:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR inquired  whether  there  is an  established                                                               
process  for the  expansion of  participating areas,  given there                                                               
has  not been  a  reason previously  to do  so.   She  understood                                                               
participating areas were previously  developed with the idea that                                                               
that was the acreage needed for development.                                                                                    
                                                                                                                                
MR.  BALASH confirmed  there  is  a procedure,  saying  it is  an                                                               
amendment to  Exhibit C in the  unit documents.  A  change in the                                                               
file would correspond  with a date, an action, and  a review that                                                               
comes in through the division process.                                                                                          
                                                                                                                                
9:53:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   related  that  his   understanding  from                                                               
testimony  is  producers anticipated  the  source  rock would  be                                                               
established as  a PA and wells  drilled in that PA  would get the                                                               
GVR.  However, DNR  is saying if it is source  rock then it would                                                               
not  be certified  as  a PA  at  all, whether  it  was inside  or                                                               
outside an existing unit.                                                                                                       
                                                                                                                                
MR. BALASH said the question  goes to the particular hypothetical                                                               
being  looked at.   Due  to the  time, effort,  and expense  that                                                               
would be  required, it is unlikely  a PA will be  formed for each                                                               
well that  is drilled  in a resource  play development.   Because                                                               
the drainage from  a fractured well is fairly  limited - measured                                                               
in feet  - it would  not be worth  the effort.   Establishing PAs                                                               
for the dozens of horizontal legs  out from the well is not going                                                               
to make much sense, so DNR does  not expect that is the way it is                                                               
going to  work out.   Returning to  the Prudhoe Bay  scenario, he                                                               
said a unit established prior to 2003  and not in a new PA, would                                                               
not qualify  for the  GVR.   However, a PA  recorded for  each of                                                               
those wells would  qualify because it would  be in a new  PA in a                                                               
unit formed  prior to 2003.   For  the operator, the  question is                                                               
the price environment  and whether it would be better  to get the                                                               
$8  or the  higher side  that the  GVR affords.   Because  of the                                                               
steep decline  that occurs  in a shale  well, maybe  the operator                                                               
would play a little bit of a  price game there, he allowed.  That                                                               
would be  the operator's  choice coming  into the  department and                                                               
the department  would have the  discretionary tool of  whether to                                                               
grant the  PA.   The operator  can still  drill and  produce that                                                               
well if a PA is not granted.                                                                                                    
                                                                                                                                
9:56:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON stated this is  fairly critical in terms of                                                               
a durable system.   There is potential for  significant finds and                                                               
developments, so  there should be  something that  actually deals                                                               
with the  entire play  since it  is different  than conventional,                                                               
rather than leaving it up to  whoever happens to be in the office                                                               
at the time.   He urged this be considered  as the committee goes                                                               
forward.                                                                                                                        
                                                                                                                                
CO-CHAIR FEIGE allowed the aforementioned  is a legitimate point,                                                               
but said it is a policy  decision on the committee's part whether                                                               
to  incentivize  shale oil  development  and  there has  been  no                                                               
testimony from  a company trying  to advance  such a project.   A                                                               
GVR could be  defined to apply to that and  would be a reasonable                                                               
way  to provide  an  incentive, if  an  incentive was  necessary.                                                               
Since the  costs of  such a  project are  unknown, it  is unknown                                                               
what amount of incentive would be  needed and would be a guess at                                                               
this point.                                                                                                                     
                                                                                                                                
MR. BALASH  advised that unconventional resources,  such as shale                                                               
or heavy  oil, might require  different treatments.  There  is no                                                               
answer  right  now because  today  it  is  not economic.  As  the                                                               
understanding of those resources  improves, that opportunity will                                                               
afford future  legislatures the opportunity to  make a reasonable                                                               
decision.   However,  the  current structure  of  Version K  does                                                               
provide tools to deal with that.                                                                                                
                                                                                                                                
[CSSB 21(FIN) am(efd fld) was held over.]                                                                                       

Document Name Date/Time Subjects
FY15sensitivity HRES CS WDRAFT Supplemental Slide HRES 4.2.13.pdf HRES 4/2/2013 6:00:00 PM
HRES HCS CSSB21 BP 4.2.13.pdf HRES 4/2/2013 6:00:00 PM
SB 21
HRES HCS CSSB21 Brooks Range Petroleum 4.2.13.pdf HRES 4/2/2013 6:00:00 PM
SB 21
HRES HCS CSSB21 Pioneer Natural Res. 4.2.13.pdf HRES 4/2/2013 6:00:00 PM
SB 21
HRES HCS CSSB21 ConocoPhillips 4.2.13.pdf HRES 4/2/2013 6:00:00 PM
SB 21
House CS for CSSB21(RES) Work Draft Version K - 4.2.13.pdf HRES 4/2/2013 6:00:00 PM
SB 21