Legislature(2011 - 2012)BARNES 124

02/16/2011 01:00 PM RESOURCES


Download Mp3. <- Right click and save file as

Audio Topic
01:03:39 PM Start
01:03:55 PM Overview: Alaska Oil & Gas Producers
04:40:23 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Overview: Alaska Oil & Gas Producers TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
             OVERVIEW:  Alaska Oil & Gas Producers                                                                          
                [Contains discussion of HB 110]                                                                                 
                                                                                                                                
1:03:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON announced  that the  only order  of business  is                                                               
presentations from the oil and gas industry.                                                                                    
                                                                                                                                
1:05:05 PM                                                                                                                    
                                                                                                                                
MARILYN   CROCKETT,  Executive   Director,  Alaska   Oil  &   Gas                                                               
Association  (AOGA), noted  that AOGA  is the  oil and  gas trade                                                               
association in the state of Alaska.   Its members include the in-                                                               
state explorers  and producers, the three  in-state refiners, and                                                               
Alyeska Pipeline  Service Company.   She said  AOGA's goal  is to                                                               
have a vital  oil and gas industry that contributes  to a vibrant                                                               
economy  for the  state (slide  3).   The association  provides a                                                               
forum for  discussion and consensus on  various policy positions,                                                               
including HB 110.                                                                                                               
                                                                                                                                
MS.  CROCKETT related  that production  from currently  producing                                                               
fields  will  continue  to decline  over  the  forthcoming  years                                                               
(slide 4).  The  new oil projected to come on  line in the future                                                               
includes  production from  current units  of these  fields.   She                                                               
explained that the apparent flattening  of the production decline                                                               
is based  on projections  from the  Department of  Revenue (DOR),                                                               
and  while the  department does  a  good job  of forecasting,  no                                                               
forecast is 100 percent accurate.                                                                                               
                                                                                                                                
1:08:55 PM                                                                                                                    
                                                                                                                                
MS. CROCKETT,  in response to  Representative Gardner,  said that                                                               
the new oil depicted on slide  4 does not include production from                                                               
the federally  owned outer continental  shelf (OCS).   In further                                                               
response,  she said  she  will  be showing  slides  later in  her                                                               
presentation that depict  what new production from  the OCS would                                                               
do to  the curve of the  production decline.  She  clarified that                                                               
slide 4 is based entirely on DOR's projections.                                                                                 
                                                                                                                                
MS. CROCKETT, returning to her  presentation, pointed out that in                                                               
[2020] half  of the  state's production  will come  from existing                                                               
fields and half from new oil.                                                                                                   
                                                                                                                                
MS.   CROCKETT  compared   the  Department   of  Revenue's   2005                                                               
production forecast  with today's production forecast  (slide 5).                                                               
For  the year  2010, the  2005  DOR production  forecast was  for                                                               
832,000 barrels of  oil per day, while the 2010  DOR forecast was                                                               
for 644,000 barrels per day, a  decline of 188,000 barrels a day.                                                               
For  the year  2015, the  2005  DOR production  forecast was  for                                                               
762,000 barrels per  day, while the 2010  DOR production forecast                                                               
was for 608,000 barrels per day.   While DOR does the best it can                                                               
with the  information it has at  a particular point in  time, she                                                               
said that project  economics can shift.   She therefore cautioned                                                               
to not  get comfortable with what  appears to be a  flattening of                                                               
the production  curve on  slide 4 because  history has  shown the                                                               
reality is that the production continues to decline.                                                                            
                                                                                                                                
1:11:46 PM                                                                                                                    
                                                                                                                                
MS. CROCKETT provided a further  example of how production levels                                                               
may not be  reflected in the estimate prepared  by the Department                                                               
of Revenue  (slide 6).   She related  a recent  announcement that                                                               
production from the  Liberty field has been delayed.   The impact                                                               
of Liberty's  delay is a  reduction from the 2010  DOR production                                                               
forecast of 5,000  barrels a day in 2012,  another 39,000 barrels                                                               
per day in 2013, and 31,000 barrels per day in 2014.                                                                            
                                                                                                                                
MS. CROCKETT noted  that in 10 years, half  of Alaska' production                                                               
will  come from  new oil  (slide  7).   Even with  this new  oil,                                                               
however, the  state will  still experience  a decline  of 124,000                                                               
barrels  per  day  in  10  years.   Almost  100  percent  of  the                                                               
production [in  2020] will come  from oilfields that  are located                                                               
within current  unit boundaries.   A  great deal  of the  new oil                                                               
will  come from  investments  within existing  unit boundaries  -                                                               
Prudhoe Bay, Kuparuk, and Alpine.                                                                                               
                                                                                                                                
1:13:58 PM                                                                                                                    
                                                                                                                                
MS.   CROCKETT  addressed   North  Slope   oil  production   with                                                               
production from  the OCS  (slide 8).   She  noted that  when this                                                               
slide was  put together  the production  projection for  2007 was                                                               
greater  than what  actually  happened.   However,  the slide  is                                                               
still a good depiction of  what would happen with OCS production,                                                               
which  is that  production  would increase  to  nearly 2  million                                                               
barrels per day.                                                                                                                
                                                                                                                                
MS. CROCKETT  pointed out that  a challenge faced by  industry in                                                               
Alaska is the  long lead time associated  with development (slide                                                               
9).   Alaska is  very remote,  has a tough  climate, and  is away                                                               
from infrastructure.  For example,  Nikaitchuq took about 6 years                                                               
to come on line from the  time the field was discovered, which is                                                               
an aggressive  time line.   Oooguruk took 5 years  from discovery                                                               
to production.   Liberty was  discovered in 1997,  but production                                                               
there has yet to start.  It  has been 10 years and counting since                                                               
the discovery at  Alpine West (CD-5).  New  production takes time                                                               
to bring into  the queue and no new projects  are coming into the                                                               
queue.                                                                                                                          
                                                                                                                                
1:16:48 PM                                                                                                                    
                                                                                                                                
MS.  CROCKETT  noted that  to  get  to  field discovery  and  new                                                               
production, exploration  wells must  be drilled  (slide 10).   In                                                               
2010 three exploration wells were  drilled, but only one of those                                                               
was a  true exploration well for  oil.  The other  two were wells                                                               
drilled at Point  Thomson and were categorized  as exploration by                                                               
the Alaska  Oil and Gas  Conservation Commission  (AOGCC) because                                                               
that field  is not in  production right now.   For 2011  only one                                                               
exploration well has been permitted.                                                                                            
                                                                                                                                
MS. CROCKETT  said another  indicator of  activity levels  is the                                                               
status  of lease  holdings (slide  11).   The  total acres  under                                                               
lease in Alaska include lands  in the National Petroleum Reserve-                                                               
Alaska (NPR-A),  state offshore, federal offshore,  and the North                                                               
Slope.  In  2008 the total number of acres  under lease peaked at                                                               
just over 9  million acres, declining since then.   [Between 2005                                                               
and 2010]  the number  of lease acres  relinquished to  the state                                                               
has increased dramatically.                                                                                                     
                                                                                                                                
1:18:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  asked how many acres  have been released                                                               
in Alaska's arctic leases versus other leases across the world.                                                                 
                                                                                                                                
MS. CROCKETT replied she does not  know, but will try to research                                                               
that information for members.                                                                                                   
                                                                                                                                
REPRESENTATIVE KAWASAKI said that  to compare Alaska's tax regime                                                               
to  those  across  the  world  he  would  like  to  know  whether                                                               
exploration wells outside  of the North Slope  are being actively                                                               
drilled  as  opposed  to  within  Alaska.   In  response  to  Ms.                                                               
Crockett, he  confirmed that  he is talking  about the  number of                                                               
wells drilled as well as the amount of acres under lease.                                                                       
                                                                                                                                
MS. CROCKETT said she will  try to get the requested information,                                                               
but  that  information on  lease  holdings  could be  problematic                                                               
because some regimes do not have a leasing program.                                                                             
                                                                                                                                
1:20:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON   asked  whether  the  leases   that  were                                                               
relinquished could have been an error  in judgment at the time of                                                               
their selection.  He requested  that this information be provided                                                               
to the co-chairs.                                                                                                               
                                                                                                                                
CO-CHAIR  SEATON surmised  that Representative  Herron is  asking                                                               
whether these leases were explored,  found nonproductive, and let                                                               
go or whether they were let go without exploration.                                                                             
                                                                                                                                
REPRESENTATIVE HERRON responded, "That helps as well."                                                                          
                                                                                                                                
CO-CHAIR SEATON  further requested that Ms.  Crockett provide the                                                               
acreage that was released by each company.                                                                                      
                                                                                                                                
MS.  CROCKETT replied  that the  acreage released  by company  is                                                               
public information  and she would  provide members with a  map in                                                               
this regard.                                                                                                                    
                                                                                                                                
1:21:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE,   following  up  on   Representative  Kawasaki's                                                               
request,  asked Ms.  Crockett  to also  provide  a comparison  of                                                               
acres  under lease  that  have  been added  to  the  totals.   In                                                               
response  to Ms.  Crockett, he  clarified that  if companies  are                                                               
relinquishing  acres in  Alaska  it would  be  important to  note                                                               
whether they are  also relinquishing acres in  other provinces or                                                               
acquiring acreage in  other provinces because this  would give an                                                               
indication of the relative competitiveness of Alaska.                                                                           
                                                                                                                                
MS. CROCKETT agreed to try to provide this information.                                                                         
                                                                                                                                
CO-CHAIR  SEATON  understood  that  this  might  be  a  challenge                                                               
because many places have a  production sharing agreement in which                                                               
the  agreement is  cancelled if  things  do not  happen within  a                                                               
certain timeframe.                                                                                                              
                                                                                                                                
1:23:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER commented  that slide  11 implies  to her                                                               
that the  leases were  released because  of Alaska's  tax system.                                                               
She maintained,  however, that there  could be a host  of reasons                                                               
for relinquishing the acreage and  therefore she is interested in                                                               
who relinquished them and why.                                                                                                  
                                                                                                                                
MS. CROCKETT  agreed that there are  a number of reasons  for why                                                               
the  leases were  relinquished  and said  she  will provide  that                                                               
characterization.   However, she continued, there  is no question                                                               
in AOGA's mind,  or the minds of some of  the companies that have                                                               
left the state, that a  number of factors impacted their decision                                                               
to leave, including Alaska's fiscal regime.                                                                                     
                                                                                                                                
1:24:31 PM                                                                                                                    
                                                                                                                                
MS.  CROCKETT, returning  to her  presentation, stated  that AOGA                                                               
supports  HB 110  and  supports the  governor's  goals of  making                                                               
Alaska  more  competitive,  creating more  jobs,  and  increasing                                                               
production (slide 12).   She related that AOGA  thinks the number                                                               
one  threat  facing  Alaska right  now  is  declining  production                                                               
through the Trans-Alaska Pipeline System (TAPS).                                                                                
                                                                                                                                
MS. CROCKETT outlined  AOGA's position on the elements  of HB 110                                                               
(slide  13).     She  said   AOGA  supports  the   provision  for                                                               
progressivity rates, bracketing, and tax  cap.  Under the current                                                               
system,  each  time  the production  tax  value  (PTV)  increases                                                               
beyond  $30 [per  barrel] all  dollars prior  to that  amount are                                                               
taxed at the higher tax rate  instead of just the incremental tax                                                               
rate.   The bracketing in  HB 110 would  not reach back  like the                                                               
current system and would add  stability and predictability to the                                                               
tax.  As  companies realize higher prices  and greater production                                                               
tax value,  the state would  likewise continue to share  in those                                                               
benefits.   Additionally,  HB 110  would  cap the  base rate  and                                                               
progressivity at 50 percent of  the combined rate rather than the                                                               
current 75  percent; this would  motivate companies  to undertake                                                               
the high  risk projects  on which the  future economic  health of                                                               
Alaska will  depend.  A  business climate would be  created where                                                               
the reward is  commensurate with the risk and keeps  the needs of                                                               
the producers and the state in a more appropriate balance.                                                                      
                                                                                                                                
1:26:41 PM                                                                                                                    
                                                                                                                                
MS. CROCKETT offered  AOGA's support for the provision  in HB 110                                                               
that would  change the  calculation for the  payment of  tax from                                                               
monthly to annual.   The current system  of progressivity creates                                                               
a huge mismatch  by using each month's actual gross  value at the                                                               
point  of production  while deducting  one-twelfth of  the actual                                                               
expenses.   This  result is  achieved  at the  annual true-up  on                                                               
March  31 of  the following  year.   In making  estimated monthly                                                               
payments the  mismatch is compounded because  taxpayers have used                                                               
the actual gross value at the  point of production for the entire                                                               
year to calculate the PTV  with the estimated lease expenditures,                                                               
thus resulting in a progressivity rate for the month.                                                                           
                                                                                                                                
CO-CHAIR SEATON  asked whether the  annual true-up goes  back and                                                               
calculates the actual expenses per month.                                                                                       
                                                                                                                                
MS.  CROCKETT replied  it does,  but  it does  not annualize  the                                                               
production tax value; it annualizes  the lease expenses that were                                                               
paid on a  monthly basis based on production and  the gross value                                                               
each month, and that component does not true up on March 31.                                                                    
                                                                                                                                
CO-CHAIR SEATON understood the true  up goes back and does actual                                                               
expenses in the month they occurred.                                                                                            
                                                                                                                                
MS. CROCKETT responded correct.                                                                                                 
                                                                                                                                
1:28:30 PM                                                                                                                    
                                                                                                                                
MS.  CROCKETT,  turning  back  to  her  presentation,  said  AOGA                                                               
supports moving  from a monthly  calculation of  progressivity to                                                               
an  annual  calculation  to synchronize  the  revenues  with  the                                                               
expenses, avoid the mismatching,  and more accurately reflect the                                                               
philosophy behind what a progressivity feature should look like.                                                                
                                                                                                                                
MS. CROCKETT endorsed  the provision in HB 110  that would expand                                                               
the 40  percent well lease  expenditure tax credit  to production                                                               
on the North Slope, a credit  that is currently available only to                                                               
qualified  expenditures in  the Cook  Inlet basin.   This  credit                                                               
targets  qualified  capital  expenditures for  infield  drilling,                                                               
which  would enhance  production from  currently existing  fields                                                               
and this  credit includes labor  costs, which would  impact jobs.                                                               
Additionally,  the  credit  is   a  recognized,  convenient,  and                                                               
readily accessible  accounting designation.  Also,  this proposal                                                               
has the advantage of an  earlier effective date, thus potentially                                                               
jump starting production that is needed to stem the decline.                                                                    
                                                                                                                                
MS.  CROCKETT noted  that  the proposed  effective  dates are  of                                                               
concern  to  AOGA, but  not  enough  to  oppose  the bill.    The                                                               
effective dates  differ for  the various  provisions of  the bill                                                               
and the  delay of  these effective dates  in a  staggered fashion                                                               
does not  reflect the urgency  of the need for  this legislation;                                                               
instead,  the delayed  effective dates  will protract  commercial                                                               
decisions over  the next  several years.   Production  decline in                                                               
Alaska is an immediate issue  and the delayed effective dates for                                                               
provisions that  would enhance  production ignore  this immediate                                                               
problem.                                                                                                                        
                                                                                                                                
1:31:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  inquired   whether  Ms.  Crockett  is                                                               
suggesting that  all of  the effective dates  happen at  the same                                                               
time or that they need to be sooner.                                                                                            
                                                                                                                                
MS.  CROCKETT replied  that in  2012 the  amendments for  the tax                                                               
credit  provisions become  effective, in  2013 the  progressivity                                                               
provisions  become   effective,  and  in  2014   the  statute  of                                                               
limitations shifts  from six years to  four years.  She  said she                                                               
has  provided supporting  testimony for  those provisions  of the                                                               
bill  that  AOGA  thinks  will  make  a  difference  in  industry                                                               
investment,  but  some of  those  provisions  would not  go  into                                                               
effect for two, three, or  four years, which delays the certainty                                                               
associated with those particular provisions.                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  asked  what  the  advantages  are  of  an                                                               
immediate effective date.                                                                                                       
                                                                                                                                
MS.  CROCKETT responded  that  the advantage  is  certainty.   As                                                               
companies sit  down to make  investment decisions they  will have                                                               
the certainty  that they can move  forward based on the  law that                                                               
is on the books.                                                                                                                
                                                                                                                                
1:32:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  pointed out that  it will  take time for  DOR to                                                               
write the  new regulations, and  the question in the  meantime is                                                               
how  to have  stability, continuity,  and full  knowledge of  the                                                               
details  that would  be provided  by these  regulations when  the                                                               
companies are preparing their taxes.                                                                                            
                                                                                                                                
MS.  CROCKETT  allowed  that  that  is  a  valid  point  for  new                                                               
legislation establishing new  ground rules.  However,  all of the                                                               
provisions  in HB  110 already  have a  complementary section  in                                                               
statute and  regulation that  would be  amended.   Therefore, the                                                               
effort  required   by  the  Department  of   Revenue  to  produce                                                               
amendments to  the regulations  and to get  them adopted  will be                                                               
significantly  less than  it would  be for  a brand  new taxation                                                               
regime.   The  provisions in  HB 110  would be  relatively simple                                                               
changes to the current regulations.                                                                                             
                                                                                                                                
1:35:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON said  he  is less  secure in  this  than is  Ms.                                                               
Crockett, one  reason in particular  being the ring  fencing that                                                               
would be introduced on the  North Slope with any new developments                                                               
within  existing units.   Companies  with both  new and  existing                                                               
fields will have  two different [tax] rates  and regulations will                                                               
be needed to direct how  those expenses are taken and categorized                                                               
because right now  all the expenses and  credits are companywide.                                                               
Additionally, there  is the bracketing  provision which  was seen                                                               
as a problem  by industry in previous years when  such jumps were                                                               
being  considered.   A tremendous  amount  of restructuring  will                                                               
need to be done by DOR to incorporate those items.                                                                              
                                                                                                                                
MS. CROCKETT concurred that the new  rate for new fields is a new                                                               
concept,  but said  AOGA does  not  see that  as overwhelming  in                                                               
terms  of  regulation   drafting.    Also,  AOGA   does  not  see                                                               
challenges with bracketing progressivity.                                                                                       
                                                                                                                                
1:37:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI commented that  [DOR] is still working on                                                               
some of the 2006 petroleum  production profits tax (PPT) filings.                                                               
He then noted  the tax regime has been changed  twice in the four                                                               
years he has  been in the legislature.  He  inquired whether AOGA                                                               
would rather  have some  certainty for a  period of  years versus                                                               
changing the tax regime every other year.                                                                                       
                                                                                                                                
MS. CROCKETT  answered that AOGA  would prefer that the  State of                                                               
Alaska  and   the  legislature  adopt  a   policy  position  that                                                               
recognizes   that   production   is  declining,   investment   is                                                               
declining, and  something needs  to be  done about  it.   The two                                                               
aforementioned tax changes were  significant tax increases on oil                                                               
and gas production;  HB 110 represents a tax decrease  on oil and                                                               
gas  production  and  recognizes  some  of  the  challenges  that                                                               
production faces  in the  state of Alaska.   Thus,  AOGA believes                                                               
that HB 110  is a step in the right  direction to addressing some                                                               
of those challenges.                                                                                                            
                                                                                                                                
1:39:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI recalled  previously DOR  testimony that                                                               
during the first few years  of Alaska's Clear and Equitable Share                                                               
(ACES) investment was  up, as was the number of  jobs and capital                                                               
expenditures, and  the price of  oil was  very high at  the time.                                                               
He cautioned  that the  proposed changes  are being  made without                                                               
any  clear  and  concise  information   from  the  Department  of                                                               
Revenue.                                                                                                                        
                                                                                                                                
MS. CROCKETT  said AOGA's concern is  that time is going  to pass                                                               
both the industry and the legislature  by.  The quest for perfect                                                               
information sounds  good on the  surface, but perhaps  once every                                                               
piece  of   data  and  information  is   on  legislators'  desks,                                                               
production on the North Slope and  in Alaska may have declined to                                                               
the point  that there  will be  another problem  to deal  with in                                                               
terms of production.                                                                                                            
                                                                                                                                
1:41:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON noted that  the proposed base  tax rate                                                               
reduction from  25 percent  to 15 percent  would be  for forever.                                                               
She asked whether it might be  wise to establish a timeline of 10                                                               
years.                                                                                                                          
                                                                                                                                
MS. CROCKETT  clarified that the aforementioned  provision is the                                                               
proposed new  rate for new fields.   She said AOGA  supports this                                                               
provision because it  is important for developing  new fields and                                                               
new players.   While  the incentive  would still  be there  for a                                                               
certain  provision with  an expiration  deadline,  the degree  of                                                               
certainty associated with the provision would not be there.                                                                     
                                                                                                                                
1:43:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER inquired whether  the producers agree with                                                               
the state's  forecast that  half of  Alaska's production  will be                                                               
from  new  oil   (slide  7).    She   also  requested  additional                                                               
explanation regarding  the statement on  slide 7 that  98 percent                                                               
of  the production  in 2020  will  be from  oilfields located  in                                                               
current unit boundaries.                                                                                                        
                                                                                                                                
MS.  CROCKETT replied  that AOGA's  observations were  taken from                                                               
DOR's  forecast book.   She  suggested that  members look  at the                                                               
chart in the book's appendix  that has the numbers for production                                                               
anticipated  year  by  year.   Units  and  the  satellite  fields                                                               
associated with  those units can  be identified and  the drilling                                                               
activity within  those units characterized  to see where  some of                                                               
this  new oil  would  be  coming from  as  opposed  to brand  new                                                               
fields.  She offered to provide that information to members.                                                                    
                                                                                                                                
REPRESENTATIVE   GARDNER  asked   whether  she   is  correct   in                                                               
understanding that the  concept of new oil from  legacy fields is                                                               
that  satellite fields  reached from  an existing  unit would  be                                                               
called new oil.                                                                                                                 
                                                                                                                                
MS. CROCKETT responded that it is a combination of all of those.                                                                
                                                                                                                                
1:45:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  surmised  that   some  of  the  timeline                                                               
between  discovery  and  production  has  to  do  with  the  U.S.                                                               
Environmental Protection Agency (EPA) and  the U.S. Army Corps of                                                               
Engineers.   She  suggested  that members  think  about what  the                                                               
legislature can do  in this regard, one such  suggestion being to                                                               
get a  permit coordinator  at the  federal level  to try  to keep                                                               
things  moving forward.    She requested  that  AOGA provide  the                                                               
committee with suggestions in this regard.                                                                                      
                                                                                                                                
REPRESENTATIVE  GARDNER,  regarding  the  number  of  exploration                                                               
wells drilled on the North  Slope, stated that the implication is                                                               
that there is a lack of  interest because of the fiscal regime or                                                               
other  reason.    However,  regarding  the  two  wells  at  Point                                                               
Thomson,  she  said she  heard  there  were actually  five  wells                                                               
planned but the  EPA exerted jurisdiction over three  of them for                                                               
permitting.  Thus,  not drilling those three wells  may have been                                                               
for reasons other than those being discussed today.                                                                             
                                                                                                                                
1:48:08 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 1:48 p.m. to 1:49 p.m.                                                                       
                                                                                                                                
1:49:24 PM                                                                                                                    
                                                                                                                                
KEN  SHEFFIELD,  President,   Pioneer  Natural  Resources  Alaska                                                               
(Pioneer Alaska),  Pioneer Natural  Resources, first  offered his                                                               
company's support for HB 110,  saying the bill would bring better                                                               
balance  to   the  state's  severance  tax   structure,  increase                                                               
drilling  activity, put  more oil  in the  pipeline, and  produce                                                               
more  jobs  for Alaskans.    He  said  he  will be  sharing  some                                                               
forecasts about Pioneer's future  activity; hence he has included                                                               
a disclaimer slide in his presentation (slide 2).                                                                               
                                                                                                                                
1:50:21 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD  stated that while  Pioneer Natural Resources  is a                                                               
large independent  oil/gas company listed  on the New  York Stock                                                               
Exchange, it is  about one-tenth the size of  the other operators                                                               
on the North  Slope (slide 3).   Pioneer is in the top  10 of the                                                               
most  active  drillers in  the  U.S.;  last year  Pioneer  ranked                                                               
seventh in the U.S. in  footage drilled.  Like most independents,                                                               
most of  Pioneer's assets  are heavily focused  on the  Lower 48,                                                               
with 95  percent of  Pioneer's reserves and  about 90  percent of                                                               
its production derived from the Lower 48.                                                                                       
                                                                                                                                
1:51:10 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD reported that Pioneer  Alaska began its business in                                                               
Alaska  from scratch  in 2003  (slide 4).   It  has gone  from no                                                               
employees to 60 full-time Alaska  employees plus about 120 Alaska                                                               
contract workers on the North Slope.   Pioneer Alaska made a huge                                                               
commitment  to the  state in  2006 when  it sanctioned  the world                                                               
class  Oooguruk Project.    In 2008,  Pioneer  Alaska became  the                                                               
first independent  operator on the  North Slope.  Operating  in a                                                               
challenging  environment, Pioneer  Alaska is  applying everything                                                               
that technology  provides to make  this successful.   His company                                                               
would not  be where it  is today  without the solid  support from                                                               
the State of Alaska and the other producers on the North Slope.                                                                 
                                                                                                                                
1:52:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI  inquired  how Alaska's  royalty  relief                                                               
provisions played  into Pioneer  Alaska's decisions  to construct                                                               
and operate Oooguruk.                                                                                                           
                                                                                                                                
MR.  SHEFFIELD replied  that Pioneer  Alaska was  granted royalty                                                               
relief prior  to the  sanction of  this project.   At  that time,                                                               
about  2006, oil  prices were  approximately $30  per barrel  and                                                               
Pioneer  Alaska  was looking  at  sanctioning  a project  in  the                                                               
hundreds   of  millions   in  a   very  remote   offshore  arctic                                                               
environment.    The  company  worked with  the  State  of  Alaska                                                               
through existing [law] to successfully secure royalty relief.                                                                   
                                                                                                                                
1:53:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  asked whether royalty relief  was one of                                                               
the company's main reasons for coming to Alaska.                                                                                
                                                                                                                                
MR.  SHEFFIELD responded  that royalty  relief was  not what  his                                                               
company was  looking for.   When drilling its  exploration wells,                                                               
his  company  was hoping  to  hit  large, high  productivity  oil                                                               
reservoirs that  would not  require having  to apply  for royalty                                                               
relief in order to sanction the  project.  However, a low quality                                                               
reservoir was  what was  found and the  economics were  tough, so                                                               
the company applied for royalty relief.   He pointed out that the                                                               
royalty relief phases out when the project pays out.                                                                            
                                                                                                                                
1:54:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  inquired whether the  application process                                                               
for royalty relief was onerous or unnecessarily challenging.                                                                    
                                                                                                                                
MR.  SHEFFIELD  answered that  it  was  a fairly  exhaustive  and                                                               
challenging  process to  demonstrate the  economic need  for some                                                               
sort of relief.   The complexities of making a  big decision like                                                               
that,  the  risks, what  future  prices  are  going to  be,  what                                                               
production is  going to be, and  what costs are going  to be make                                                               
it extremely difficult for a producer  and a government to get on                                                               
the same  page.  But, the  State of Alaska did  work with Pioneer                                                               
and royalty relief was approved.                                                                                                
                                                                                                                                
1:55:34 PM                                                                                                                    
                                                                                                                                
MR.  SHEFFIELD, returning  to  his  presentation, said  Pioneer's                                                               
focus when it  came to Alaska in 2002 was  on growing the company                                                               
through exploration  around the world  (slide 5).  At  that time,                                                               
Pioneer had an active exploration  program in the deep water Gulf                                                               
of Mexico  and on the continent  of Africa, and had  just started                                                               
exploration  in  Alaska.   When  considering  entry into  Alaska,                                                               
Pioneer put  together a scorecard  to compare Alaska  against the                                                               
company's legacy  assets in the Lower  48 (slide 6).   What stood                                                               
out  was the  tremendous  resource potential  in  Alaska and  the                                                               
general  lack of  competition, although  Pioneer recognized  that                                                               
Alaska would  be more challenging from  a regulatory perspective.                                                               
When looking  at profitability in Alaska,  however, Pioneer could                                                               
see  there would  be  challenges, one  challenge  being the  long                                                               
project  cycle times.    For  example, in  Texas  a  well can  be                                                               
drilled and  put into  production in  just a  few months,  but in                                                               
Alaska it takes several years.   Additionally, the execution risk                                                               
is challenging  in Alaska as is  the capital cost.   But, Pioneer                                                               
thought  the operating  margins  in Alaska  could potentially  be                                                               
better than the  Lower 48 given the zero severance  tax for lower                                                               
rate  producing fields  like Oooguruk  under  the Economic  Limit                                                               
Factor (ELF) tax regime in place  at that time.  Plus, there were                                                               
exploration incentives in place at that time as well.                                                                           
                                                                                                                                
1:57:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  asked whether  it  would  have taken  big                                                               
ticket items  or small  increments to  have moved  the checkmarks                                                               
from Alaska's column to the Lower 48 column, and vice versa.                                                                    
                                                                                                                                
MR. SHEFFIELD replied  that it was more of a  "back of a cocktail                                                               
napkin" type of  analysis.  Picking the best place  to explore is                                                               
a lot  like picking the  best stocks.   While there  is technical                                                               
and  economic information,  the money  is spent  and the  hope is                                                               
that the  predictions are correct.   Therefore, he  allowed, such                                                               
an analysis is somewhat subjective.                                                                                             
                                                                                                                                
REPRESENTATIVE HERRON  remarked that the scorecard's  two columns                                                               
represent  black and  white to  him,  yet there  are hundreds  of                                                               
shades of  gray.  So, to  characterize something as either  on or                                                               
off  seems over-simplistic  to the  complex  legislation that  is                                                               
being looked at.                                                                                                                
                                                                                                                                
MR. SHEFFIELD said  this scorecard was an  internal assessment of                                                               
the pros and cons of  making Pioneer's initial investments in the                                                               
Alaska  and it  really  did  not pertain  to  the fiscal  policy,                                                               
although that was one of the components that was looked at.                                                                     
                                                                                                                                
2:00:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER requested  further elaboration  about the                                                               
scorecard regarding the terms oil  bias, regulatory process ease,                                                               
and resource competition.                                                                                                       
                                                                                                                                
MR. SHEFFIELD  explained that  regarding the  term oil  bias, the                                                               
rocks in the North Slope are  usually filled with oil rather than                                                               
gas,  which  is a  good  thing.    The  regulatory process  is  a                                                               
combination of  state, federal, and  local jurisdictions,  and in                                                               
Alaska  the  process  is  significantly  more  complex  and  time                                                               
consuming than in the Lower  48.  Regarding resource competition,                                                               
he said  the State of  Alaska was  and continues to  hold regular                                                               
land  sales, which  is  a good  thing.   Pioneer  found that  few                                                               
companies showed  up at  Alaska's lease  sales relative  to lease                                                               
sales held in other petroleum provinces.                                                                                        
                                                                                                                                
REPRESENTATIVE GARDNER commented that  members would like to hear                                                               
any  suggestions Pioneer  has about  how to  improve the  state's                                                               
regulatory process.                                                                                                             
                                                                                                                                
2:02:56 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD,  continuing his  presentation, noted  that Pioneer                                                               
participated in  11 exploration wells  from 2003-2007  (slide 7).                                                               
Some  of  the  wells  were  operated by  Pioneer  and  some  were                                                               
operated by  ConocoPhillips with  Pioneer as a  minority partner,                                                               
particularly  in  the  NPR-A.    Of  those  11  wells,  1  had  a                                                               
commercial  discovery,  which  became the  Oooguruk  development.                                                               
Oil was found in nearly all of  the wells, but the quality of the                                                               
reservoirs  was  generally  insufficient   to  make  an  economic                                                               
development.                                                                                                                    
                                                                                                                                
MR.  SHEFFIELD said  Pioneer spent  a couple  of years  doing the                                                               
engineering and  assessments for the Oooguruk  project (slide 8).                                                               
Pioneer sanctioned  the project  in January 2006  and went  on to                                                               
make it  a reality.   The total  cost of the  project will  be in                                                               
excess of  $1 billion.  Over  600 people were on  the site during                                                               
peak construction in 2007.   The first production was established                                                               
in  June 2008  and average  production in  2010 was  about 10,000                                                               
barrels a day.   Pioneer sees the gross  resource potential being                                                               
in the  range of  120-150 million barrels,  although how  much of                                                               
that will  be economic remains  to be  seen.  Pioneer  is quickly                                                               
wrapping up  the original  project that  was envisioned  and over                                                               
the next few years all of  the wells originally planned will have                                                               
been drilled.   The  challenge for Pioneer  is finding  that next                                                               
opportunity in Alaska to grow its business.                                                                                     
                                                                                                                                
2:05:28 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD reviewed changes that  have occurred over Pioneer's                                                               
eight years in  Alaska (slide 9).  Technology  continued to drive                                                               
opportunities in  Pioneer's business.   Oil and gas  prices moved                                                               
much higher, along with the cost  of doing business.  Prices have                                                               
provided a financial incentive to  develop some of the lower tier                                                               
resources  in  North America  and  around  the world.    Resource                                                               
development plays  - shales, tight  sand reservoirs,  coal seams,                                                               
and such  - have clearly taken  center stage in the  Lower 48 for                                                               
oil and  gas investment.   Lastly, Alaska's severance  tax system                                                               
changed twice during the last eight years.                                                                                      
                                                                                                                                
MR. SHEFFIELD  related that the combination  of two technologies,                                                               
horizontal wells and fracture stimulation,  has created a boom of                                                               
activity across the  Lower 48 (slide 10).   Multiple stimulations                                                               
are now being  done along the horizontal well  bores in petroleum                                                               
reservoirs.   In 2004 less than  10 percent of the  wells drilled                                                               
in the  U.S. were horizontal wells,  but by the end  of 2009 that                                                               
number was nearly 50 percent (slide 11).                                                                                        
                                                                                                                                
2:07:41 PM                                                                                                                    
                                                                                                                                
MR.  SHEFFIELD  noted  that rising  prices  and  technology  have                                                               
fueled the  growth in resource  plays, and represent  the primary                                                               
competition for  his Alaska team  when it is competing  for funds                                                               
(slide 12).   Over the past  eight years oil prices  have gone up                                                               
from around $30 a barrel to over  $100 and now back down to about                                                               
$80.  Over that same time  period natural gas prices in the Lower                                                               
48 have gone  up from about $3  to $8 and now back  down into the                                                               
range of $4-$5.  Gas  prices have fallen because these successful                                                               
resource  plays have  increased  the  gas supply.    Oil and  gas                                                               
shales in  the U.S.  have taken center  stage and  are attracting                                                               
tens  of  billions  of  dollars  of  capital  (slide  13).    The                                                               
geography of those  shales happens to be  near infrastructure and                                                               
in states with very favorable fiscal policies.                                                                                  
                                                                                                                                
2:09:11 PM                                                                                                                    
                                                                                                                                
MR.  SHEFFIELD reviewed  the history  of  Alaska's severance  tax                                                               
over  the  past eight  years  (slide  14).    Prior to  2007  the                                                               
economic  limit factor  (ELF) was  in effect  and was  the regime                                                               
under which Pioneer  sanctioned the Oooguruk project.   Under ELF                                                               
low rate fields paid  low or next to no severance  tax.  In 2007,                                                               
during  the   construction  phase  of  Oooguruk,   the  petroleum                                                               
production profits tax  (PPT) became law.  The PPT  allowed for a                                                               
20 percent  tax credit on  the front end,  a 22.5 percent  tax on                                                               
the net  profits on  the back end,  and a  progressivity element.                                                               
In  2008, the  first  year of  production  at Oooguruk,  Alaska's                                                               
Clear and Equitable  Share (ACES) became law.  Under  ACES the 20                                                               
percent investment tax credit stayed  the same, the base tax rate                                                               
increased to 25 percent, the  progressivity became aggressive and                                                               
was not indexed, and the maximum tax rate became 75 percent.                                                                    
                                                                                                                                
2:10:56 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD addressed the issues  that Pioneer Alaska is facing                                                               
in the future  as it tries to grow its  business in Alaska (slide                                                               
15).   He  said the  reservoirs being  developed at  the Oooguruk                                                               
island drill site  are the Kuparuk and the Nuiqsut.   In the next                                                               
two  to three  years all  wells will  have been  drilled and  the                                                               
sanction  development completed.    Pioneer  Alaska is  therefore                                                               
trying to  build its next big  thing, which it hopes  will be the                                                               
Torok  Reservoir  -   a  very  low  quality,   but  fairly  large                                                               
reservoir.  One  well was drilled into the Torok  in 2009 and two                                                               
more  wells are  now being  drilled  from the  island to  further                                                               
evaluate  that  reservoir  and to  install  a  waterflood  pilot.                                                               
Based on  the results  of that  waterflood pilot,  Pioneer Alaska                                                               
hopes to develop  the reservoir by building a  gravel pad onshore                                                               
and directional  drilling into  the reservoir.   Whether  to take                                                               
this next step is a half-billion-dollar decision.                                                                               
                                                                                                                                
MR.  SHEFFIELD, in  response to  Representative  P. Wilson,  said                                                               
horizontal drilling  can reach  out as far  as 3  miles depending                                                               
upon how deep the reservoir is.                                                                                                 
                                                                                                                                
2:14:11 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD elaborated further  on the Torok development (slide                                                               
16).  Two onshore drill sites  will be tied into Pioneer Alaska's                                                               
existing infrastructure, and as many  as 25 development wells may                                                               
be drilled.   Moving forward with development of  this large, but                                                               
challenged,  oil  resource  is  contingent upon  success  of  the                                                               
waterflood  pilot  and  meeting   the  economic  and  competitive                                                               
hurdles.                                                                                                                        
                                                                                                                                
2:14:56 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD said his team  competes against other projects when                                                               
it goes  before Pioneer's management  and board (slide 17).   The                                                               
primary competition comes from the  Spraberry field in west Texas                                                               
in which Pioneer is the  largest operator, producing about 46,000                                                               
barrels equivalent per day.   Pioneer has over 20,000 development                                                               
locations in that  field and these will keep Pioneer  busy for 20                                                               
years or  more.   They are  high margin,  predictable wells  in a                                                               
fiscal environment  of low taxes  and no progressivity.   Pioneer                                                               
is  currently running  about 30  rigs in  this area  and will  be                                                               
ramping up to  40 rigs by 2013, the expectation  being a doubling                                                               
of production.   Also competing with Pioneer Alaska  is the Eagle                                                               
Ford  shale  development  in  south  Texas,  which  has  a  gross                                                               
resource potential of  about 150 trillion cubic  feet (slide 18).                                                               
Over  100 rigs,  of  which  7 belong  to  Pioneer, are  currently                                                               
running on  this huge, profitable, liquids-rich  play.  Pioneer's                                                               
production is  only a couple of  thousand barrels a day,  but the                                                               
hope  is to  be running  16 rigs  in that  play by  2013 and  the                                                               
forecast is for  40,000 barrels a day net, which  is almost eight                                                               
times as big  as what Pioneer Alaska has been  able to develop in                                                               
Alaska over the last eight years.                                                                                               
                                                                                                                                
2:17:07 PM                                                                                                                    
                                                                                                                                
MR. SHEFFIELD,  in response to Representative  Kawasaki, said the                                                               
Spraberry  wells  are  oil  wells  that produce  a  lot  of  gas,                                                               
although he does  not know the exact split since  that is not his                                                               
area.   Processing of that  gas produces natural gas  liquids and                                                               
he estimates that the barrel  of oil equivalents from those wells                                                               
is a little more than 50:50.   He offered to follow up further if                                                               
members desired.                                                                                                                
                                                                                                                                
MR. SHEFFIELD, returning to  his presentation, reviewed Pioneer's                                                               
scorecard for  Alaska today (slide  19), saying that  the greater                                                               
resource potential is  now in the Lower 48.   Additionally, given                                                               
Alaska's  permitting   challenges,  Pioneer  now   perceives  the                                                               
execution risk going  forward as being greater in  Alaska than it                                                               
was eight years ago.                                                                                                            
                                                                                                                                
2:19:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  asked whether  Pioneer Alaska is  an oil                                                               
company  that  is  developing  gas  or  a  gas  company  that  is                                                               
developing oil.   He said  his reason  for this question  is that                                                               
this would affect the scoring of the resource potential.                                                                        
                                                                                                                                
MR. SHEFFIELD replied, "We are an  oil and gas company."  He said                                                               
that Pioneer,  like most other  independents in the Lower  48, is                                                               
shifting investment  more toward the  oil side because  the price                                                               
differential for oil  on a British Thermal  Unit (BTU) equivalent                                                               
basis is  probably more than three  times the value of  gas.  Gas                                                               
is the  most abundant thing  in the Lower  48 and Pioneer  is not                                                               
moving  completing   away  from  gas,   but  in  the   near  term                                                               
investments are quickly moving toward liquids.                                                                                  
                                                                                                                                
2:20:53 PM                                                                                                                    
                                                                                                                                
MR.  SHEFFIELD closed  his presentation  (slide 20),  reiterating                                                               
that  Pioneer  Alaska  is  wrapping  up  its  original  plans  at                                                               
Oooguruk  and in  about two  years will  be facing  another major                                                               
investment decision.   He said  he is  hopeful the pilot  for the                                                               
Torok Formation  will be successful,  but that  if it is  it will                                                               
have  to  compete  against formidable  competition  for  funding.                                                               
Pioneer's vision  of the Oooguruk  expansion is that it  would be                                                               
in excess of 10,000 barrels a  day.  The new project would create                                                               
about 500 construction  jobs and about 100 development  jobs.  He                                                               
said HB  110 will have  a positive, material impact  on Pioneer's                                                               
decisions going forward.   The combination of  the increased well                                                               
credits  and  the indexing  of  progressivity  "really moves  the                                                               
needle" and  gets the  tax system  into what  Pioneer feels  is a                                                               
better balance.                                                                                                                 
                                                                                                                                
2:22:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE inquired whether  Mr. Sheffield has been contacted                                                               
by  the Department  of Labor  &  Workforce Development  regarding                                                               
which jobs on  the North Slope are for maintenance  and which are                                                               
for exploration.                                                                                                                
                                                                                                                                
MR. SHEFFIELD replied  that he personally has  not been contacted                                                               
and does not believe any of his staff has been contacted.                                                                       
                                                                                                                                
2:23:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER observed  that the  Oooguruk project  has                                                               
spanned the ELF,  PPT, and ACES tax regimes.   She asked how much                                                               
the state has  participated in that capital  expenditure in terms                                                               
of credits and  did Pioneer participate in  the transitional look                                                               
back when the state went from the PPT to ACES.                                                                                  
                                                                                                                                
MR. SHEFFIELD responded that Pioneer  has been the beneficiary of                                                               
the credits  from both  PPT and  ACES.   He estimated  that about                                                               
$180 million has  been received since the  beginning of Oooguruk.                                                               
He  offered  his  belief  that   some  credits  for  transitional                                                               
investment expenditures  (TIE) were  also received.   In response                                                               
to Co-Chair  Seaton, he  agreed to confirm  the exact  amounts of                                                               
the aforementioned and get back to members.                                                                                     
                                                                                                                                
2:25:10 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 2:25 p.m. to 2:29 p.m.                                                                       
                                                                                                                                
2:29:43 PM                                                                                                                    
                                                                                                                                
WENDY  KING,  Vice  President, External  Affairs,  ConocoPhillips                                                               
Alaska, Inc.,  said that by  way of HB  110 the governor  and his                                                               
team are choosing a brighter future  for the oil and gas industry                                                               
than   what   the  status   quo   would   lead  to   (slide   2).                                                               
ConocoPhillips Alaska agrees with  the administration that HB 110                                                               
would make  Alaska more competitive,  would create more  jobs for                                                               
Alaskans,   and  would   have  the   probability  of   increasing                                                               
production  into the  Trans-Alaska Pipeline  System (TAPS).   She                                                               
emphasized  that ConocoPhillips  Alaska sees  that there  is more                                                               
potential on  Alaska's North Slope.   The challenge faced  by the                                                               
industry is that  the costs are higher today to  produce a barrel                                                               
of oil,  the technology requirements are  greater, the reservoirs                                                               
are more complex,  and finding the remaining oil is  harder.  For                                                               
example, at  Kuparuk, a field operated  by ConocoPhillips Alaska,                                                               
the  publically  available  figure  is  that  about  six  billion                                                               
barrels of  oil are in place.   A 1 percent  increase in recovery                                                               
at Kuparuk is 60 million barrels  of oil, which would mean 10,000                                                               
more barrels  per day for  15 years.  This  is the kind  of prize                                                               
that ConocoPhillips  thinks is out there  and is why HB  110 is a                                                               
step in the right direction.                                                                                                    
                                                                                                                                
2:32:24 PM                                                                                                                    
                                                                                                                                
MS.  KING  allowed  there  are elements  of  Alaska's  Clear  and                                                               
Equitable Share (ACES) tax structure  that are working and should                                                               
remain.   The biggest  challenge with the  ACES tax  structure is                                                               
the progressivity  piece.   This is because  when oil  prices are                                                               
high companies  are generating a  significant cash flow  by where                                                               
they can reinvest.   But with the steep  progressivity, that cash                                                               
flow is paid out in taxes  rather than coming back to the parties                                                               
to  be able  to reinvest.    A look  at what  happened in  Alaska                                                               
during the  high oil prices of  2008 shows that what  happened in                                                               
the Lower 48 did not happen in Alaska.                                                                                          
                                                                                                                                
MS. KING  pointed out that there  is a lot of  capacity in Trans-                                                               
Alaska Pipeline  System (TAPS) due to  the substantial production                                                               
decline  (slide  3).    But  probably  more  significant  is  the                                                               
challenge  of  keeping  the  pipeline  operating  once  the  flow                                                               
decreases  to 500,000  or  300,000 barrels  of oil  a  day.   The                                                               
recent shutdown  of TAPS  showed that the  challenge of  moving a                                                               
low flow is real.   She said HB 110 would set  out a framework by                                                               
where those low flow challenges could get pushed to the future.                                                                 
                                                                                                                                
2:34:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  inquired whether the difference  should be                                                               
split between the  historical decline rate and  the Department of                                                               
Revenue's forecast, which some say is overly optimistic.                                                                        
                                                                                                                                
MS. KING  replied that  she will address  the uncertainty  of the                                                               
production  forecast later  in her  presentation.   However,  she                                                               
said there is  no doubt the production forecast over  the next 10                                                               
years is an uncertainty.   ConocoPhillips looks at ranges and can                                                               
only look at  its own asset base for forecasting.   For the North                                                               
Slope  asset   base,  ConocoPhillips  must  use   the  publically                                                               
available information in the DOR production forecast.                                                                           
                                                                                                                                
2:36:23 PM                                                                                                                    
                                                                                                                                
MS.  KING addressed  U.S. production  changes  between 2003  [and                                                               
2010]  using  data  from the  Energy  Information  Administration                                                               
(EIA) for those  states that produce more than  50,000 barrels of                                                               
oil per day  (slide 4).  North Dakota, Mississippi,  and Utah had                                                               
the greatest production increases over  the last eight years, she                                                               
related.   Texas is  still producing about  1 million  barrels of                                                               
oil a day,  which is roughly what it was  producing back in 2003.                                                               
Over that  same timeframe Alaska's production  declined more than                                                               
30  percent,  a  steeper  decline  than many  of  the  other  oil                                                               
producing states in the U.S.                                                                                                    
                                                                                                                                
2:37:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER observed  that  slide 4  does not  depict                                                               
production,  rather  it depicts  changes.    The slide  makes  it                                                               
appear  that  North  Dakota,  Mississippi,  and  Utah  have  huge                                                               
productions  when they  do not  compared to  Alaska, rather  they                                                               
just had a huge change in production.                                                                                           
                                                                                                                                
MS.  KING responded  that this  information is  available on  the                                                               
Energy Information  Administration's website.  She  recalled that                                                               
production in Texas was about 1.1  million barrels a day in 2003,                                                               
declining to about 1 million [in  2010].  In 2003 Alaska produced                                                               
1 million  barrels of oil  a day,  but declined to  about 650,000                                                               
barrels  over that  same timeframe.   She  further recalled  that                                                               
North Dakota is  predicted to surpass Alaska's  production in the                                                               
future.                                                                                                                         
                                                                                                                                
2:38:42 PM                                                                                                                    
                                                                                                                                
MS. KING  reported that oil  production in the Lower  48 declined                                                               
[between  2003]   and  2005,  stayed  steady   until  2008,  then                                                               
significantly increased  between 2008  and 2010  (slide 5).   Oil                                                               
prices spiked  in 2008, particularly  in the third  quarter, then                                                               
pulled back  in 2009, and  again picked up  in 2010.   The annual                                                               
average  number of  oil rigs  working in  the Lower  48 increased                                                               
from about 150  [in 2003] to over 500 [in  2010].  This increased                                                               
oil rig activity in the Lower  48 saw a corresponding increase in                                                               
production -  oil prices went up,  oil rig activity went  up, oil                                                               
production went up.  Right now  in the Lower 48, a combination of                                                               
different types  of liquid-rich plays  is driving  this increased                                                               
drilling activity with the high price environment.                                                                              
                                                                                                                                
2:40:28 PM                                                                                                                    
                                                                                                                                
MS.  KING compared  Alaska's oil  production for  this same  time                                                               
period  and pointed  out that  Alaska's production  declined from                                                               
about 1 million  barrels of oil a day [in  2003] to about 600,000                                                               
barrels a  day [in 2010].   Over this same timeframe,  the annual                                                               
average rig count in Alaska stayed  flat - rig activity in Alaska                                                               
did not  increase with the increase  in oil price like  it did in                                                               
the Lower 48.   Another disturbing trend is that  even though the                                                               
number of  oil rigs has  stayed flat, the production  decline has                                                               
not been offset.   This as a function of  the oil prospects being                                                               
more challenged.   It does not  mean that industry does  not want                                                               
to pursue them,  it just means that the zones  being targeted may                                                               
have more  water in them  or cross  multiple fault blocks  or the                                                               
sand quality  is not  as good or  the oil quality  may not  be as                                                               
good.  That challenged oil impact  is starting to show in how the                                                               
wells are being able to offset  what is happening in Alaska's oil                                                               
production decline.                                                                                                             
                                                                                                                                
2:41:39 PM                                                                                                                    
                                                                                                                                
MS. KING compared the forecast  for oil production in Alaska with                                                               
the forecast for  the Lower 48 using information  from the Energy                                                               
Information  Administration,  Annual  Energy Outlook  (AEO)  2011                                                               
Reference Case (slide 6).   She explained that onshore production                                                               
is the biggest portion of oil  production in the Lower 48, and it                                                               
is expected  to grow another  26 percent over the  12-year period                                                               
[of 2008 to  2020].  Lower 48 offshore production  is expected to                                                               
grow by  44 percent over this  same time period.   She noted that                                                               
this forecast  was put  together after the  Gulf of  Mexico spill                                                               
occurred.   The forecast for  Alaska is  a decline of  39 percent                                                               
over  the  next  10  years, which  calculates  to  about  400,000                                                               
barrels  of oil  a day  by  the turn  of  the next  decade.   She                                                               
reminded members  that Alyeska Pipeline Service  Company has said                                                               
that low flow  problems will start at 500,000  to 300,000 barrels                                                               
of  oil a  day.   Thus, the  EIA is  saying that  Alaska will  be                                                               
facing that low-flow problem in the next decade.                                                                                
                                                                                                                                
2:43:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   KAWASAKI   asked  whether   the   aforementioned                                                               
forecast includes new oil.                                                                                                      
                                                                                                                                
MS. KING answered that she  cannot make an assumption because the                                                               
EIA does  not outline in  the forecast where it  the information,                                                               
it just has a plot of Alaska production.                                                                                        
                                                                                                                                
REPRESENTATIVE KAWASAKI commented that  the Department of Revenue                                                               
forecast  in  the  AOGA  presentation shows  a  tapering  off  at                                                               
600,000 barrels  and not changing  from today, and  that forecast                                                               
includes new oil.                                                                                                               
                                                                                                                                
MS.  KING said  she  will be  further  discussing this  projected                                                               
decline later in her presentation.                                                                                              
                                                                                                                                
2:44:09 PM                                                                                                                    
                                                                                                                                
MS. KING, returning to her  presentation, directed attention to a                                                               
map  depicting the  most recent  status of  acreage on  the North                                                               
Slope  (slide 7).   She  noted that  exploration activity  is the                                                               
frontend  of  what the  industry  is;  it  is the  feedstock  for                                                               
finding new  fields.   The land  is studied,  acquired, explored,                                                               
and  if   successful  it  is   appraised,  and  if   economic  or                                                               
commercially  viable it  will be  developed.   ConocoPhillips has                                                               
been  the state's  largest explorer,  particularly over  the last                                                               
decade.   Since  1998 ConocoPhillips  has drilled  56 exploration                                                               
wells on  the North Slope, 20  of them in the  National Petroleum                                                               
Reserve-Alaska (NPR-A).   For many  years ConocoPhillips  was the                                                               
state's largest acreage holder.                                                                                                 
                                                                                                                                
2:45:50 PM                                                                                                                    
                                                                                                                                
MS. KING addressed  the amount of activity that  took place under                                                               
the  former  ELF  structure, saying  that  since  development  of                                                               
Alpine there have been a number  of exploration wells and lots of                                                               
activity trying  to find and  develop new prospects.   However, a                                                               
transition is now occurring.  When  a company acquires a lease it                                                               
must determine  whether it can  convert the lease  into something                                                               
that is commercially  viable in the term of that  lease.  At this                                                               
time, approximately  50 percent  of that  lease acreage  has been                                                               
dropped.   The conclusion that  could be  taken is that  there is                                                               
not potential  on the North  Slope; however, she said  she thinks                                                               
it  is combination  of factors  that affect  whether parties  are                                                               
moving forward with  those leases.  What draws  her attention are                                                               
the  active leases  that  are  still held,  such  as Prudhoe  and                                                               
Kuparuk, which  have potential and  are some of the  state's most                                                               
valuable barrels.   The publically  available figure  for Prudhoe                                                               
Bay is  30 billion barrels  in place  and 6 billion  for Kuparuk.                                                               
One percent additional  recovery at Prudhoe Bay  would be 300,000                                                               
million barrels.   Thus,  the potential  is there  and it  is the                                                               
state leases  where the  state has  royalties, not  federal lands                                                               
like the NPR-A.                                                                                                                 
                                                                                                                                
2:47:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  asked how much  of the dropped  acreage belonged                                                               
to ConocoPhillips.                                                                                                              
                                                                                                                                
MS. KING  replied that  she will  have to look  that up  and will                                                               
provide  the committee  with the  exact figure  immediately after                                                               
the hearing.   She added that ConocoPhillips went  from being one                                                               
of the  largest acreage holders on  the North Slope to  not, so a                                                               
sizeable portion of the dropped acreage was from her company.                                                                   
                                                                                                                                
2:48:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  presumed  that  plays were  not  there  in  the                                                               
dropped parcels.  He related that  the main thing being looked at                                                               
in a tax rate change is to get  production into TAPS.  If the tax                                                               
system is changed,  the dropped parcels would  not be developable                                                               
until  they go  through another  round of  acquisition, in  which                                                               
case the  state is  looking at  a very long  lead time  for those                                                               
dropped parcels to come into play.                                                                                              
                                                                                                                                
MS. KING concurred  that the highest probability  for getting oil                                                               
in the short  term is from existing  units; significant potential                                                               
is  left  in  Prudhoe,  Kuparuk,  and  Alpine,  but  it  is  more                                                               
challenged.   Given a  number of issues  there is  uncertainty in                                                               
NPR-A  leasing, but  there are  active leases  around the  Alpine                                                               
satellite areas (slide 7).                                                                                                      
                                                                                                                                
2:50:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI inquired how  much the Alpine West fields                                                               
played into ConocoPhillips's decision to drop acreage in NPR-A.                                                                 
                                                                                                                                
MS.  KING  responded that  since  approval  of the  environmental                                                               
impact statement (EIS) for Alpine  West CD-5 in October 2004, the                                                               
fiscal  regime  has  changed  three   times.    Most  exploration                                                               
companies  would   consider  [CD-5]  the  first   commercial  oil                                                               
development  in NPR-A,  and the  delays clearly  indicate a  risk                                                               
that all parties would consider  when deciding whether to explore                                                               
in NPR-A.   She said she believes that  the permitting challenges                                                               
of  CD-5 affect  what is  happening here.   Additionally,  in its                                                               
updated forecast for NPR-A the  U.S. Geological Survey downgraded                                                               
the  oil, saying  there is  more likelihood  of gas.   There  are                                                               
significant challenges on NPR-A  with respect to upside balancing                                                               
because under  the current  fiscal regime the  upside is  gone if                                                               
oil is found.                                                                                                                   
                                                                                                                                
2:52:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI asked  how oil  in NPR-A  is treated  in                                                               
regard to royalty.                                                                                                              
                                                                                                                                
MS. KING  answered that it  is a  mixture of federal  and private                                                               
royalties  in NPR-A.   Some  of ConocoPhillips's  satellites have                                                               
private royalties to  Native corporations and the  rest have U.S.                                                               
Bureau of Land  Management (BLM) royalties.   She understood that                                                               
a portion  of the  federal royalties  on NPR-A  come back  to the                                                               
state through revenue sharing.                                                                                                  
                                                                                                                                
REPRESENTATIVE  KAWASAKI surmised  that uncertainty  in royalties                                                               
and a  number of other  factors are  related to the  reduction in                                                               
lease holdings.                                                                                                                 
                                                                                                                                
MS.  KING replied  that there  is no  uncertainty in  the royalty                                                               
because when a  lease is acquired the federal  or private royalty                                                               
terms are known.   The challenge with [NPR-A]  is uncertainty and                                                               
downside;  the upside  is not  necessarily seen.   When  deciding                                                               
whether to  acquire a lease,  one more  step back creates  a real                                                               
challenge in  the balance of risk  and reward.  A  lot of factors                                                               
are in  play and a  fiscal structure  that takes away  the upside                                                               
really mitigates  how a company  views an investment  decision to                                                               
cover the downsides.                                                                                                            
                                                                                                                                
2:54:17 PM                                                                                                                    
                                                                                                                                
MS.  KING,  turning  back to  her  presentation,  explained  that                                                               
ConocoPhillips  compiled its  capital and  operating expenditures                                                               
for  Prudhoe, Kuparuk,  and Alpine  [from 2005  to 2009].   These                                                               
expenditures were  divided into  a maintenance/replacement/repair                                                               
category and  a development category  that would add  new barrels                                                               
(slide 8).   The increase in  investment over these years  is not                                                               
attributable  to ACES;  rather,  it  is substantially  associated                                                               
with maintenance/replacement/repair  activity.   This maintenance                                                               
activity  is very  important  for  keeping oil  in  TAPS and  for                                                               
keeping base  oil production, otherwise a  much larger production                                                               
decline would  occur than what is  being seen now.   The drop off                                                               
in development  investment from  2008 to 2009  is because  of the                                                               
risk/reward balance.                                                                                                            
                                                                                                                                
MS.  KING  referenced  a  slide  that  the  committee  previously                                                               
received  from  the Department  of  Revenue  outlining the  total                                                               
capital  expenditures going  to  new fields  and  those going  to                                                               
already-producing fields.  She said  coupling that DOR slide with                                                               
slide  8 really  outlines  what is  happening  to investment  and                                                               
where that  investment is  going in the  three major  North Slope                                                               
fields.                                                                                                                         
                                                                                                                                
2:56:14 PM                                                                                                                    
                                                                                                                                
MS. KING  discussed the impact  of progressivity on  a discounted                                                               
cash  flow  basis  for  a  $1 billion  investment  on  a  federal                                                               
offshore lease [in  the outer continental shelf]  compared with a                                                               
State of Alaska onshore lease (slide  9).  She explained that the                                                               
only variable in the two comparison  graphs is the oil price; all                                                               
other  possible variables  remain the  same.   Under the  federal                                                               
offshore environment,  both the  investor's and  the government's                                                               
returns  increase as  oil  prices increase.    Under the  federal                                                               
fixed   percentage   system,    neither   party's   increase   is                                                               
disproportionately  bigger than  the other's.   However,  this is                                                               
not the  case under the Alaska  onshore environment.  At  a price                                                               
of $25, the investor loses money  due to gross taxes and royalty.                                                               
At $50 the state receives revenue  but the investor is still in a                                                               
negative position.   At $75 and above the  investor's increase in                                                               
revenue  is  disproportionately  smaller  than  the  government's                                                               
increase.  When  total government take is factored in  at the one                                                               
peak spot,  the marginal tax  rate is $.92  on the dollar.   This                                                               
dramatic  shift  in  government  and  investor  take  is  because                                                               
progressivity applies to every dollar that is earned.                                                                           
                                                                                                                                
2:59:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON surmised  the figures would be different                                                               
if  the federal  example  was  for onshore,  such  as the  NPR-A,                                                               
rather than offshore.                                                                                                           
                                                                                                                                
MS.  KING  explained  that  the federal  example  for  the  outer                                                               
continental  shelf  means  it  is  beyond  the  three-mile  zone.                                                               
Anything  within  the three-mile  zone  is  subject to  the  ACES                                                               
production tax.   The difference for the state  is significant if                                                               
that  $1  billion  investment  is on  NPR-A  versus  state  lands                                                               
because the state would get  royalty; for industry, however, both                                                               
onshore NPR-A leases and onshore  state leases are subject to the                                                               
same production  tax.  In  further response, Ms.  King reiterated                                                               
that NPR-A leases are subject  to the ACES production tax because                                                               
the reserve is within the  state's taxing jurisdiction, therefore                                                               
the NPR-A is subject to the bottom graph depicted on slide 9.                                                                   
                                                                                                                                
3:00:44 PM                                                                                                                    
                                                                                                                                
MS. KING, continuing her presentation,  noted that the source for                                                               
the estimated number of barrels  remaining on the North Slope, as                                                               
depicted on  slide 10,  is the 2009  DOR production  forecast and                                                               
the graph  represents the  accumulated production  from 2010-2050                                                               
for various  fields.   When the sum  of expected  production from                                                               
the core  fields of Kuparuk,  Prudhoe, and Alpine is  compared to                                                               
the sum of  the Point Thomson, Nikaitchuq,  Liberty, and Oooguruk                                                               
fields,  it can  be seen  that even  though the  core fields  are                                                               
declining they will still have a  lot of production.  This is not                                                               
to say that developing the other  fields is unimportant, it is to                                                               
show  that  the  big  prize  is within  the  core  fields.    She                                                               
recollected a saying she heard as  a young engineer:  "Big fields                                                               
get bigger."  Another way of  saying this is, "You find oil where                                                               
you already found oil."   That is why ConocoPhillips thinks there                                                               
is a prize to be had at  Kuparuk, Prudhoe, and Alpine; it is just                                                               
that it will be more costly and challenging to do so.                                                                           
                                                                                                                                
3:02:35 PM                                                                                                                    
                                                                                                                                
MS. KING  noted that  Alaska North  Slope (ANS)  gas and  the OCS                                                               
Chukchi are  significant prizes to  be had (slide 11).   However,                                                               
she continued,  they have limited  ability to  influence Alaska's                                                               
production curve  over the  next 10  years.   Alaska's production                                                               
changes will therefore come from  the current fields and from the                                                               
more  recent  developments.   The  natural  decline rate  of  the                                                               
Kuparuk,  Prudhoe Bay,  and Alpine  fields is  between 10  and 16                                                               
percent, meaning  that in 10  years the daily production  will be                                                               
down  to  200,000  barrels.   ConocoPhillips  projects  that  the                                                               
decline  rate can  be reduced  to 6  percent through  significant                                                               
investment, which ConocoPhillips estimates to  be in excess of $3                                                               
billion per  year.  A 6  percent decline rate would  mean a daily                                                               
production  of  400,000  barrels  at  the  turn  of  the  decade.                                                               
However, the Department  of Revenue's latest forecast is  for a 2                                                               
percent  decline rate  over that  timeframe.   These  differences                                                               
illustrate  that  there   is  a  level  of   uncertainty  in  the                                                               
production  forecast for  the  next 10  years.   All  of this  is                                                               
significant  because  [HB 110]  is  a  critical bridge  to  these                                                               
growth projects.   If  the unit  cost per barrel  goes up  or the                                                               
North Slope  costs must be  borne by these  incremental projects,                                                               
the  economic threshold  for ANS  gas and  OCS will  go up.   The                                                               
governor's  bill would  provide steps  to work  with industry  to                                                               
change the decline basis.   The fiscal improvement outlined in HB                                                               
110  would lead  to  increased investment,  which  in turn  would                                                               
increase production and  extend the life of  TAPS, increase jobs,                                                               
and lay  a foundation for future  growth through ANS gas  and OCS                                                               
development.                                                                                                                    
                                                                                                                                
3:06:12 PM                                                                                                                    
                                                                                                                                
MS.  KING related  her company's  reasons for  supporting HB  110                                                               
(slide  12).   She said  that within  ConocoPhillips's portfolio,                                                               
most  everything on  which a  discovery  has been  made has  been                                                               
unitized, including  leases in NPR-A.   Therefore, ConocoPhillips                                                               
sees the bracketing  of progressivity as a  critical component of                                                               
HB  110 because  it is  one of  the most  significant impacts  on                                                               
investment  decisions.     Bracketing  is  a   critical  step  in                                                               
supporting some  of those longer-term growth  projects within the                                                               
core fields  and existing units  that would help to  mitigate the                                                               
production decline.   The improved  well credits in HB  110 would                                                               
help with  the short-term push  by stimulating  workover activity                                                               
on  the North  Slope.   She  offered ConocoPhillips's  suggestion                                                               
that the language for well credits  be clarified to say that well                                                               
workover  activities are  included.   The bill's  changes to  the                                                               
audit   period,  interest   rate,  and   monthly  versus   annual                                                               
progressivity  are  administrative   improvements.    A  concern,                                                               
however,  is that  an effective  date for  progressivity of  2013                                                               
will delay  the effect of the  whole bill as industry  will delay                                                               
decisions  accordingly, given  that the  effective date  could be                                                               
changed   in   the   next  legislative   session.      Therefore,                                                               
ConocoPhillips suggests  that the  effective date  be accelerated                                                               
by  a year.    She added  that  HB 110  is a  step  in the  right                                                               
direction.   Alaska is at  the point  of making a  choice between                                                               
figuring  out   how  fast  production  will   decline  versus  an                                                               
investment  policy   that  encourages  moving   new  developments                                                               
forward.    A balanced  fiscal  policy  can achieve  a  different                                                               
future and create a bridge to bigger projects.                                                                                  
                                                                                                                                
3:09:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  inquired  as  to how  much  ConocoPhillips  has                                                               
invested in the federal OCS off of Alaska.                                                                                      
                                                                                                                                
MS. KING replied  that right now her company's  only portfolio is                                                               
in the Chukchi  Sea where $506 million was invested  in the lease                                                               
round  in 2008.   Since  then  ConocoPhillips has  spent tens  of                                                               
millions  of  dollars  on gathering  baseline  science  data  and                                                               
engaging local stakeholders.                                                                                                    
                                                                                                                                
3:10:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  asked whether  ConocoPhillips has  been contacted                                                               
by  the  Department of  Labor  &  Workforce Development  about  a                                                               
breakdown on  which jobs  are going to  maintenance and  which to                                                               
exploration and construction.                                                                                                   
                                                                                                                                
MS. KING  responded that  she has  spoken to  Commissioner Bishop                                                               
several times over  the past few weeks and has  provided him with                                                               
the maintenance/replacement/repair information  shown on slide 8.                                                               
ConocoPhillips does  not necessarily  have a  good handle  on how                                                               
much  of  the jobs,  but  it  will  provide  a breakdown  of  the                                                               
spending that is going between those buckets.                                                                                   
                                                                                                                                
3:11:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  inquired   whether  the  chairman/CEO  of                                                               
ConocoPhillips  said  anything  about  Alaska when  he  spoke  at                                                               
yesterday's conference in New York.   He further inquired whether                                                               
this  dialog  will be  part  of  ConocoPhillips's annual  analyst                                                               
meeting in mid-March.                                                                                                           
                                                                                                                                
MS. KING answered that she  did not see yesterday's presentation.                                                               
She added that one of  the company's senior vice president's gave                                                               
a  presentation recently  and she  does not  remember a  specific                                                               
reference to Alaska in that  presentation.  Much of the company's                                                               
focus has been on growing its  liquid-rich plays in the Lower 48.                                                               
From her  meetings with  senior management she  can say  that the                                                               
marginal tax rate definitely has  an impact on how ConocoPhillips                                                               
views the investment climate,  particularly when Alaska's project                                                               
risks are seen.   While Alaska is a key  part of ConocoPhillips's                                                               
portfolio, it  is not necessarily  where the company  is focusing                                                               
in  the short  term as  far as  growth in  production.   However,                                                               
Alaska is something the company would  like to see grow if a more                                                               
balanced fiscal structure can be had.                                                                                           
                                                                                                                                
3:13:21 PM                                                                                                                    
                                                                                                                                
MS.  KING, in  response to  Representative Munoz,  confirmed that                                                               
ConocoPhillips holds U.S. Bureau  of Land Management (BLM) leases                                                               
within NPR-A;  additionally some  are private  Native corporation                                                               
leases on NPR-A.                                                                                                                
                                                                                                                                
REPRESENTATIVE MUNOZ  asked whether  those lands will  be subject                                                               
to the  federal inventorying for  possible wild  land designation                                                               
[in NPR-A] that is currently happening through the BLM.                                                                         
                                                                                                                                
MS. KING  replied that it  appears a wild land  designation could                                                               
affect  the leases  that ConocoPhillips  already holds,  although                                                               
she cannot  yet draw conclusions.   ConocoPhillips is  looking at                                                               
this  right  now  and  discussions  are  planned  with  the  U.S.                                                               
Department of Interior.                                                                                                         
                                                                                                                                
REPRESENTATIVE  MUNOZ, referencing  the  U.S. production  changes                                                               
depicted on slide 4, inquired  whether ConocoPhillips is invested                                                               
in the states that are  shown as having large production changes,                                                               
those  states being  North Dakota,  Mississippi, Utah,  Colorado,                                                               
Kansas, and Montana.                                                                                                            
                                                                                                                                
MS. KING responded  she has been out of the  Lower 48 for awhile,                                                               
but she  can definitely say  she has colleagues working  in North                                                               
Dakota on the  Bakken shale play and in offshore  Gulf of Mexico.                                                               
Additionally,  she is  confident that  ConocoPhillips has  people                                                               
working in Oklahoma, Texas, Utah, and Louisiana.                                                                                
                                                                                                                                
3:15:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON inquired  whether the  committee co-chairs                                                               
should ask the Department of  Revenue to carefully reconsider its                                                               
predictions on the rate of oil production decline.                                                                              
                                                                                                                                
MS. KING  answered it is  difficult for  her to speak  about what                                                               
the Department  of Revenue should  do on its  production forecast                                                               
because the department  has access to more  information than does                                                               
ConocoPhillips.    In  its production  forecasts,  ConocoPhillips                                                               
tends to  at a range -  the probability of different  outcomes is                                                               
looked  at and  weighed.   She  said she  does not  know how  the                                                               
department weighted and risked its production profiles.                                                                         
                                                                                                                                
3:16:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FOSTER  understood ConocoPhillips  Alaska competes                                                               
for  investment dollars  with other  worldwide opportunities  and                                                               
that altering ACES  would make its position  more competitive for                                                               
those dollars.   He asked  whether a summary  of ConocoPhillips's                                                               
worldwide portfolio could be provided to members.                                                                               
                                                                                                                                
MS. KING replied that ConocoPhillips  has put a number of reports                                                               
into the public domain, and  the analyst's presentations are some                                                               
of  the most  helpful  ways to  get an  indication  of where  the                                                               
company  is   investing  in  a   particular  year.     Last  week                                                               
ConocoPhillips  announced  a   significantly  strong  budget  for                                                               
investment  for exploration  and  production, and  next week  the                                                               
company will disclose  what portion of that is Alaska.   Once the                                                               
2010 actuals  and the 2011 figure  are in the public  domain, she                                                               
will  prepare  an  update to  the  maintenance/replacement/repair                                                               
graph  (slide  8).    The company  is  increasing  investment  in                                                               
exploration and  production activity in  a diverse set  of assets                                                               
around the world.  When  making an investment decision in Alaska,                                                               
the  most  important  thing  being  looked  at  is  whether  that                                                               
investment decision stands  on its own.  Downside  risks, such as                                                               
producing more water from a  well than was anticipated or hitting                                                               
gas instead  of oil,  are balanced against  knowing that  if they                                                               
occur there is also an upside.   That risk/reward balance is what                                                               
the industry is built on, but if  the upside cannot be seen it is                                                               
difficult for  those to  be attractive  investment opportunities.                                                               
She reiterated  that ConocoPhillips is spending  money on growing                                                               
its liquids portfolio around the world.                                                                                         
                                                                                                                                
3:19:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FOSTER   inquired  where  Alaska  falls   in  the                                                               
spectrum of competitiveness for ConocoPhillips.                                                                                 
                                                                                                                                
MS. KING  responded that Alaska  has one of the  highest marginal                                                               
tax rates in ConocoPhillips's worldwide  portfolio.  If oil price                                                               
goes  up a  dollar,  and 90  cents  on that  dollar  goes to  pay                                                               
governments,  it  affects how  the  company  makes an  investment                                                               
decision.                                                                                                                       
                                                                                                                                
BOB  HEINRICH, Vice  President,  Finance, ConocoPhillips  Alaska,                                                               
Inc., offered  to provide members  with a recent  graph depicting                                                               
that information.                                                                                                               
                                                                                                                                
3:20:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON,  referencing  a  Department  of  Revenue  graph                                                               
presented at an earlier hearing, related  that at a price of $120                                                               
[per barrel]  the effective tax rates  are about 34 percent.   He                                                               
asked whether  ConocoPhillips agrees  that that is  the effective                                                               
tax rate when the whole system is melded together.                                                                              
                                                                                                                                
MS. KING  said she  thinks the  graph that  is being  referred to                                                               
plots only the  effective rate of production tax.   There are two                                                               
differences -  the total government  take and the  marginal piece                                                               
of that.  While  she has seen a marginal tax  rate quoted as only                                                               
87 percent,  she calculates that at  the peak it is  closer to 92                                                               
or 93  percent because  federal income  tax was  not incorporated                                                               
into that.  She said she  is unaware of ConocoPhillips looking at                                                               
the  analysis  from  the  state   and  seeing  the  numbers  very                                                               
differently from the Department of Revenue.                                                                                     
                                                                                                                                
MR. HEINRICH added  that taking the credits  into account reduces                                                               
the total line down, which impacts  where the endpoint is, but it                                                               
does not change the shape of the curve.                                                                                         
                                                                                                                                
3:21:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON directed  attention to  the effective  tax rates                                                               
reported  on page  2 of  the ConocoPhillips  [Consolidated Income                                                               
Statement for  2009 and 2010].   He noted that the  effective tax                                                               
rate depicted  for exploration  and production  (E&P) for  all of                                                               
2009  was  34.4  percent  for  the  U.S.  and  66.6  percent  for                                                               
international; the  effective tax rate  depicted for E&P  for all                                                               
of  2010 was  36.2  percent for  the U.S.  and  48.6 percent  for                                                               
international.  He  asked why it is being said  that Alaska needs                                                               
to  change its  tax regime  to be  more competitive  with regimes                                                               
that are taxing ConocoPhillips at twice the rate of Alaska.                                                                     
                                                                                                                                
MS. KING answered  that 2008 is the year that  sticks out because                                                               
in that  year ConocoPhillips  did not see  the benefit  of higher                                                               
oil prices  within the state of  Alaska.  The oil  price in third                                                               
quarter 2008 was about $115 and  in fourth quarter 2009 the price                                                               
was  $69,  yet  both  quarters generated  exactly  the  same  net                                                               
income.  That  is the challenge when ConocoPhillips  looks at its                                                               
financials.    In  2008  ConocoPhillips   paid  $3.4  billion  in                                                               
production taxes alone to the State of Alaska.                                                                                  
                                                                                                                                
3:24:52 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON reiterated his previous question.                                                                               
                                                                                                                                
MR. HEINRICH said  he believes the line items in  this report are                                                               
the federal  taxes and do  not include the production  taxes paid                                                               
in states.                                                                                                                      
                                                                                                                                
MS. KING  added that royalty is  also not included in  those line                                                               
items.                                                                                                                          
                                                                                                                                
MR. HEINRICH interjected that it would have to be broken apart.                                                                 
                                                                                                                                
CO-CHAIR SEATON requested  that an explanation of  the line items                                                               
be provided to the committee.                                                                                                   
                                                                                                                                
3:26:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  recalled  an earlier  hearing  at  which                                                               
members  heard that  the information  the  Department of  Revenue                                                               
receives  on  the  returns  from companies  does  not  allow  the                                                               
department to  reach firm  conclusions as  to whether  the credit                                                               
claims  fall under  maintenance/replacement/repair investment  or                                                               
development projects.   She  asked whether  ConocoPhillips Alaska                                                               
concurs with that.                                                                                                              
                                                                                                                                
MR. HEINRICH  replied that ConocoPhillips  does provide a  lot of                                                               
information to  the Department of Revenue.   He said he  does not                                                               
believe that in  the forecast basis the capital is  broken out in                                                               
categories  that separate  maintenance from  development capital.                                                               
As well,  he said he  does not  believe that information  for the                                                               
actual  filings  is built  up  in  a  way  that would  allow  the                                                               
department to do  that for the actuals.  In  response to Co-Chair                                                               
Seaton he agreed to confirm this in writing.                                                                                    
                                                                                                                                
3:28:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER expressed her  concern about the provision                                                               
that  reduces the  audit period  to four  years.   She understood                                                               
that under the  petroleum production profits tax  (PPT) the audit                                                               
period took  longer than that  because of accommodating  that tax                                                               
change and  a shortage of auditors.   She asked how  long the ELF                                                               
tax audits took on average.                                                                                                     
                                                                                                                                
MS. KING offered  her belief that the audit period  under ELF was                                                               
three years and she is confident  that the audits would have been                                                               
completed within that time period.                                                                                              
                                                                                                                                
CO-CHAIR SEATON interjected  that under ELF it was just  a tax on                                                               
per barrel, so there was no net and no costs.                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER clarified that  her question is whether it                                                               
actually took three years to do those audits.                                                                                   
                                                                                                                                
MR. HEINRICH explained  that the audits did not  occur during the                                                               
full  three-year period;  they  tended to  begin sometime  during                                                               
that period and end prior to the three years.                                                                                   
                                                                                                                                
CO-CHAIR SEATON  suggested that DOR  be asked this  question when                                                               
it is before the committee next week.                                                                                           
                                                                                                                                
REPRESENTATIVE GARDNER said  this does not give her  a great deal                                                               
of confidence  that a  four-year audit  period can  be met.   She                                                               
noted that  because many  of the auditors  at the  department are                                                               
new it has been hard to get definitive answers in this regard.                                                                  
                                                                                                                                
3:30:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER posited  that what the state  is trying to                                                               
do with  its tax  structure is  encourage reinvestment  in Alaska                                                               
when oil prices are high.  For  example, if the price of oil goes                                                               
up and puts  ConocoPhillips into a higher marginal  tax rate, the                                                               
company could reinvest that extra  dollar of value into a capital                                                               
project in Alaska to lower its tax rate.                                                                                        
                                                                                                                                
MR. HEINRICH responded that capital  expenditures are part of the                                                               
calculation  that  determines  a company's  petroleum  production                                                               
profits tax (PPT) value.  So, in  effect it is a reduction of PPT                                                               
value which sets  where a company is on  the progressivity curve.                                                               
He  agreed that  those dollars  spent  would have  the effect  of                                                               
reducing the current year or current month progressivity rate.                                                                  
                                                                                                                                
MS. KING  added that just prior  to this hearing she  looked at a                                                               
plot  showing  the  effect  of  and  the  increasing  of  capital                                                               
expenditure credits on that.   However, the progressivity portion                                                               
of this curve  is so steep at those higher  ends that even though                                                               
the capital expenditure  credit provides an element,  it does not                                                               
change the shape of the curve  and does not balance that risk and                                                               
reward.   It  a valuable  component during  lower prices,  but at                                                               
high  prices the  progressivity really  drives the  shape of  the                                                               
government take.                                                                                                                
                                                                                                                                
3:32:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER noted that because  the North Slope is not                                                               
ring-fenced  the cost  of  development for  other  fields can  be                                                               
applied  against the  taxes  that  might come  out  of the  North                                                               
Slope.  She  asked whether this means that a  major investment in                                                               
a  challenged field  could effectively  cut ConocoPhillips's  tax                                                               
bill to the state.  She  further asked how much that factors into                                                               
investment decisions.                                                                                                           
                                                                                                                                
MS. KING agreed  there is no ring-fencing across  the North Slope                                                               
and that  ConocoPhillips is a net  taxpayer.  There is  a benefit                                                               
in  that,  she   said.    It  is  motivating   in  helping  other                                                               
developments move forward  whether or not they are  in the fields                                                               
themselves, so challenged oil could  be within Kuparuk; therefore                                                               
all of  those are projects that  would be valuable if  they could                                                               
compete for the investment.                                                                                                     
                                                                                                                                
3:33:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  asked  whether  ConocoPhillips  would  consider                                                               
challenged oil that  is not currently developed in  Kuparuk to be                                                               
new  oil  from a  new  reservoir  and  therefore subject  to  the                                                               
proposed new oil tax rate or  would the company say that that oil                                                               
would be under the existing tax regime.                                                                                         
                                                                                                                                
MS. KING answered that the statute  as drafted in HB 110 is clear                                                               
that  that  is  within  an   existing  unit  and  would  get  the                                                               
provisions of an existing unit.   From a practical point of view,                                                               
ConocoPhillips would not want to  complicate the tax by trying to                                                               
do that if the oil is going through the same facilities.                                                                        
                                                                                                                                
3:35:11 PM                                                                                                                    
                                                                                                                                
CLAIRE FITZPATRICK, Senior Vice  President for Alaska Operations,                                                               
Chief  Financial  Officer,  BP  Exploration  (Alaska),  Inc.  (BP                                                               
Alaska), stated  that the passage  of ACES increased  BP Alaska's                                                               
overall  tax   burden  and   from  her   perspective  it   is  an                                                               
unsustainable  level  if her  company  wants  to access  Alaska's                                                               
resources.   The ACES production  tax is BP Alaska's  largest tax                                                               
and  not its  only tax  as it  also pays  state royalties,  state                                                               
income  tax,   state  property  tax,  and   various  other  state                                                               
assessments.   Thus,  when making  investment decisions  BP looks                                                               
through the lens of  all of the taxes not just a  single tax.  BP                                                               
Alaska competes  for investments and competes  against other U.S.                                                               
and  worldwide  projects  inside  BP.   Those  other  people  are                                                               
equally  passionate about  getting funding  for developing  their                                                               
resources  and progressing  their projects.   From  where she  is                                                               
sitting,   Alaska  is   not  winning   that  competition.     The                                                               
risk/reward  balance  is not  helping  as  there is  insufficient                                                               
upside.  There has not  been a constructive dialogue around being                                                               
in partnership  for the common  goal of developing  the resources                                                               
and getting barrels  in the pipe.  Additionally,  ACES limits the                                                               
commercial viability when compared  to other opportunities around                                                               
the  world.   She  further pointed  out that  as  an operator  at                                                               
Prudhoe she  only owns  26 percent, so  when she  is enthusiastic                                                               
about something she  must ensure that the  other working interest                                                               
owners are also equally enthusiastic about that the same item.                                                                  
                                                                                                                                
3:38:16 PM                                                                                                                    
                                                                                                                                
MS. FITZPATRICK  related that  independent evidence  shows Alaska                                                               
is uncompetitive  (slide 1).   The 2007 Wood  Mackenzie Petroleum                                                               
Fiscal Index Report ranked Alaska  at 97 out of 103 jurisdictions                                                               
around the world.  The 2010  report ranked Alaska 117 out of 129.                                                               
She said  her focus is not  on Alaska's specific ranking,  but on                                                               
whether she can  get the amount of investment  needed to progress                                                               
the opportunities in  Alaska.  If the answer to  that is no, then                                                               
the key for her is how to  make Alaska more competitive so she is                                                               
more  successful  in getting  the  funds  to get  those  projects                                                               
moving.   A lot  of factors  go into  investment decisions:   the                                                               
price cannot be controlled, the  geology of the reservoirs cannot                                                               
be  controlled,  and costs  cannot  be  controlled, although  she                                                               
works hard to influence that.                                                                                                   
                                                                                                                                
3:40:54 PM                                                                                                                    
                                                                                                                                
MS.  FITZPATRICK   said  this  is   about  how  to   make  Alaska                                                               
competitive.   There are variables within  the legislature's gift                                                               
to decide whether  to move Alaska to a  more competitive position                                                               
(slide 3).  She said her colleagues  in BP around the U.S. can be                                                               
dismissive, saying  Alaska will never  produce all the  things it                                                               
thinks it  is going to.   When taking forward activities  to seek                                                               
investment,  she  is competing  with  other  projects and  is  at                                                               
disadvantage  because the  Alaska  projects are  always going  to                                                               
underperform  relative  to the  other  Lower  48 states.    Given                                                               
Alaska's location  and its high  costs, she is not  as successful                                                               
in  getting investment  dollars as  she wants  to be  and she  is                                                               
confident that she  is not as successful  as Alaska's legislators                                                               
want her to be.                                                                                                                 
                                                                                                                                
MS.  FITZPATRICK pointed  out that  production is  rising in  the                                                               
Lower 48, but declining inside [Alaska]  (slide 4).  Some of that                                                               
is being driven  by price and that  wells in the Lower  48 can be                                                               
brought on line  faster than can most wells in  Alaska.  There is                                                               
a steady  uptick in  activity in  the Lower  48, yet  BP Alaska's                                                               
operated footage in Alaska is  steadily declining (slide 5).  She                                                               
related that  during testimony on  ACES in 2007, she  stated that                                                               
BP Alaska  would not  stop its activity,  but she  clearly stated                                                               
that  ACES would  impact  her  ability to  attract  the level  of                                                               
investment to actually make a difference in the decline curve.                                                                  
                                                                                                                                
3:42:05 PM                                                                                                                    
                                                                                                                                
MS. FITZPATRICK pointed  out that it is not just  the value of an                                                               
isolated well;  the revenue generated  from a well or  wells must                                                               
also fund  the cost  of actually  running the  North Slope.   The                                                               
facilities on  the slope  are old  and she  must keep  looking at                                                               
when  and  how to  upgrade  the  facilities  as  the mix  of  oil                                                               
changes.   The  camps, roads,  and large  infrastructure must  be                                                               
maintained.   Putting all  of those things  together is  when she                                                               
starts to look at Alaska's  competitiveness relative to the other                                                               
opportunities within BP's portfolio.                                                                                            
                                                                                                                                
3:43:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI, regarding the  return BP receives on its                                                               
Alaska investments as  compared to its returns  from other states                                                               
(slide  3), surmised  that  BP  does not  make  a decision  based                                                               
specifically on  Alaska versus  the U.S. because  BP is  a global                                                               
company.                                                                                                                        
                                                                                                                                
MS. FITZPATRICK replied that the  decisions are made on a variety                                                               
of bases.   As a global  company BP wants a  global portfolio and                                                               
will look to keep its activities  in Alaska going.  Decisions are                                                               
also made  on a strategic basis  regarding where to move  some of                                                               
its investments,  in which case it  looks at both a  global and a                                                               
U.S. portfolio and  the mix across the two.   So, when bringing a                                                               
project forward she may be  competing against something in Angola                                                               
and  also  something  in  any  of  the  other  Lower  48  states.                                                               
Decisions are  made on two  levels:  one  is the totality  of her                                                               
business and its health and the other is the individual project.                                                                
                                                                                                                                
3:44:24 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON   requested  Ms.  Fitzpatrick  to   provide  the                                                               
committee with a  slide that depicts her  company's Alaska return                                                               
compared to  the returns  on its  international investments.   He                                                               
said  such   a  slide  would   help  in   understanding  Alaska's                                                               
competitiveness on both a U.S. and international basis.                                                                         
                                                                                                                                
MS. FITZPATRICK  responded that she  can provide details  of BP's                                                               
global portfolio.   In regard  to fiscal terms around  the world,                                                               
she related  that the Wood  Mackenzie database gives  the details                                                               
of the  fiscal regimes in every  location around the world.   She                                                               
noted   that  some   investments   are  individually   negotiated                                                               
contracts with  commercially sensitive terms  that she is  not in                                                               
the position to share.                                                                                                          
                                                                                                                                
CO-CHAIR SEATON  clarified that  it would  be acceptable  for the                                                               
slide  to depict  company share  data in  the same  format as  on                                                               
slide 3.  He  said he is aware that Indonesia  has an 85:15 split                                                               
and Iraq has a 98:2 split.                                                                                                      
                                                                                                                                
3:46:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  understood  that the  terms  of  earlier                                                               
leases do not have deadlines but  they do have a duty to develop.                                                               
She asked  how this  duty to develop  is factored  into decisions                                                               
when BP is weighing international opportunities.                                                                                
                                                                                                                                
MS. FITZPATRICK,  answering specifically  to Alaska,  offered her                                                               
belief  that  the  duty  to   develop  is  for  things  that  are                                                               
commercially  viable, and  this  is the  development  that BP  is                                                               
continuing.  Regarding obligations under  the lease to do certain                                                               
activities, BP  does factor those in,  but does this in  terms of                                                               
what the  consequences would be if  they were not done,  what the                                                               
value is  of that in terms  of commercial viability.   There will                                                               
be  times   when  it   is  determined   that  something   is  not                                                               
commercially viable for BP and  BP will choose to relinquish that                                                               
particular  lease,  and this  could  be  in Alaska  or  elsewhere                                                               
internationally.                                                                                                                
                                                                                                                                
3:47:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI   noted  that   ConocoPhillips  provides                                                               
consolidated reports and  breaks out its level  of investments in                                                               
Alaska  versus other  provinces, but  BP does  not do  that.   He                                                               
inquired whether  BP could  show a limited  number of  people the                                                               
numbers to prove the case of the level of investment in Alaska.                                                                 
                                                                                                                                
MS.  FITZPATRICK replied  that BP  does not  provide the  details                                                               
publically  about Alaska  because it  is  not required  to do  so                                                               
under U.S. Securities and  Exchange Commission (SEC) regulations.                                                               
However,  ConocoPhillips is  required  under  SEC regulations  to                                                               
release  this  information because  of  the  size of  its  Alaska                                                               
business relative to its global  portfolio.  Regarding whether BP                                                               
would be willing  to release some information, she  said it would                                                               
depend on what information is specifically requested.                                                                           
                                                                                                                                
3:48:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE, in  relation  to the  duty  to develop  economic                                                               
projects, asked  whether a  lowering of the  tax rate  would make                                                               
more of BP Alaska's existing reservoir economic to develop.                                                                     
                                                                                                                                
MS. FITZPATRICK responded that specific  projects were pushed off                                                               
as  being no  longer  viable once  ACES  passed.   If  HB 110  is                                                               
passed, she  would go back to  look at their viability  and would                                                               
then see  whether her  own internal organization  as well  as the                                                               
other  working interest  owners are  willing to  get on  board to                                                               
progress them.                                                                                                                  
                                                                                                                                
3:49:32 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  recalled that in  2005 Mr. [David] Van  Tuyl was                                                               
asked   how  things   could  be   changed  to   incentivize  more                                                               
development and his  response was that BP was  fully investing in                                                               
every  project that  made sense  at  the time.   Co-Chair  Seaton                                                               
surmised  that Ms.  Fitzpatrick  is  saying that  BP  is now  not                                                               
investing in those projects or that  there are projects BP is not                                                               
investing in  because of  ACES.   He inquired  whether it  is the                                                               
aspect of  ACES that at  high oil  prices the marginal  profit is                                                               
not high  enough, because obviously  projects are  profitable and                                                               
economic to  do.  He requested  an explanation of how  it is that                                                               
BP  is saying  it is  not going  to invest  in economic  projects                                                               
unless there is a tax change to make them more economical.                                                                      
                                                                                                                                
MS.  FITZPATRICK answered  that  she  would not  say  that BP  is                                                               
saying  that it  is not  investing in  things that  are economic.                                                               
Rather,  it is  the  definition of  economic,  the definition  of                                                               
commercially  viable.   If  1  cent is  made  is  that worth  the                                                               
investment and  the risk?  For  some of the projects  deferred in                                                               
2007 and 2008,  BP was not yet  at the stage in  2005 of actually                                                               
saying it was ready to invest in  them.  Some of that is going to                                                               
be around  technology evolved; also,  when doing  planning, there                                                               
is the  long lead time  in activities.   Oil prices in  the 10-15                                                               
years prior  to 2005  probably averaged  $20-$25.   She estimated                                                               
that future prices will be in the  ranges of $60 and $80 and said                                                               
things that  were marginal  at that time  might now  be economic.                                                               
She  must  look  at  the  totality  of  an  investment  plus  the                                                               
potential upside  for doing that  investment, and if that  is not                                                               
competitive  relative to  other  opportunities then  she will  be                                                               
unable to compete to get the  money to progress the project.  She                                                               
said there are  projects that she would like to  get the money to                                                               
progress  if she  can have  the opportunity  to demonstrate  that                                                               
they are more competitive relative to other opportunities.                                                                      
                                                                                                                                
3:52:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON said  he still does not understand  why a company                                                               
would not go  forward with an economic project because  it is not                                                               
as competitive with  someplace else in the world,  given that the                                                               
20 percent  credit and 80  percent tax deduction in  Alaska would                                                               
equal the full cost of the project.                                                                                             
                                                                                                                                
MS. FITZPATRICK replied that there are  two aspects.  One is that                                                               
the  marginal  tax  rate  applies  to  revenue,  not  investment.                                                               
Therefore,  the  tax  shield  from   an  investment  is  actually                                                               
considerably lower than  that.  There is still a  tax shield that                                                               
would be based  off the base rate, the progressivity  at the time                                                               
of making the  investment, plus the tax credit -  and it could be                                                               
45, 50, or  55 percent depending on the price.   The other aspect                                                               
is  the  full   life  cycle.    When  making   an  investment,  a                                                               
consideration is the revenue stream  once the investment actually                                                               
turns into production.  If that  revenue is taxed at the marginal                                                               
tax  rate   the  totality  of   the  life  cycle  might   not  be                                                               
commercially viable  relative to  something else.   Thus,  on the                                                               
pure  investment,  she  said  she   does  not  actually  get  the                                                               
aforementioned 80 percent scenario.                                                                                             
                                                                                                                                
3:54:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  surmised   that  Ms.  Fitzpatrick's  commercial                                                               
liability  is based  on relative  value versus  elsewhere in  the                                                               
world,  instead  of  whether  she is  actually  making  money  in                                                               
Alaska.                                                                                                                         
                                                                                                                                
MS. FITZPATRICK responded that it  is both, depending on the size                                                               
of the  project, the risk, the  time scale, and a  range of other                                                               
factors.   She  will be  able to  progress a  project that  has a                                                               
short  life  cycle  and  that   looks  good.    However,  a  more                                                               
challenged  project that  requires  investment  in technology  to                                                               
progress it  must have the  whole life cycle taken  into account,                                                               
and that may not be commercially viable.                                                                                        
                                                                                                                                
3:55:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER asked  how  much  exploratory acreage  BP                                                               
holds in  Alaska.   She requested a  history of  BP's exploratory                                                               
wells for  the last two  years of  ELF and any  exploratory wells                                                               
under PPT and  ACES.  She further asked whether  BP's interest in                                                               
holding  exploratory acreage  or drilling  wells would  change if                                                               
the fiscal regime changed dramatically.                                                                                         
                                                                                                                                
MS. FITZPATRICK agreed  to get back to members  with the specific                                                               
data items,  but said the general  answer is that BP  does not do                                                               
traditional  exploration wells.   Within  its existing  units, BP                                                               
believes  there are  significant resources  and prefers  to focus                                                               
its attention on how to access  them rather than focusing on what                                                               
BP believes would be smaller  pockets of resource elsewhere.  She                                                               
said she  thinks that would be  a better option for  getting more                                                               
barrels into the pipe, particularly within a shorter timeframe.                                                                 
                                                                                                                                
3:56:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI requested that  a slide similar to [slide                                                               
5] be provided  that shows the number of  wells drilled worldwide                                                               
and in  Alaska.   He said the  point [in slide  5] appears  to be                                                               
that there is less drilling in the fields operated by BP Alaska.                                                                
                                                                                                                                
MS.  FITZPATRICK  answered  that  the trend  is  generally  less,                                                               
although  it was  up a  bit in  2010 depending  on the  amount of                                                               
multi-laterals  that  BP  had  to  drill to  try  to  access  the                                                               
targeted volumes.                                                                                                               
                                                                                                                                
3:57:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI, [regarding  slide  5],  noted that  for                                                               
[the footage  drilled] in  2006, the tax  season would  have been                                                               
2005 in  which the  decisions were made  and would  probably have                                                               
been under ELF.   In 2006 it would have been  under PPT, and ACES                                                               
is 2009.   He observed that there was an  increase in the footage                                                               
drilled in 2010 and asked the reason for that increase.                                                                         
                                                                                                                                
MS. FITZPATRICK  replied that the  footage depicted  includes all                                                               
of the  footage associated with multi-laterals,  and when several                                                               
sidetracks must  be done to  access the targeted  hydrocarbons it                                                               
increases the footage drilled  without necessarily increasing the                                                               
barrels in  the pipe.  She  said she will make  a valiant attempt                                                               
at getting the worldwide wells  drilled, but she cannot commit to                                                               
actually achieving it.                                                                                                          
                                                                                                                                
3:58:49 PM                                                                                                                    
                                                                                                                                
MS. FITZPATRICK,  turning back to  her presentation,  pointed out                                                               
that BP  Alaska's actual spend  on revenue generating,  i.e. that                                                               
which  would directly  put barrels  into  the pipe  in the  short                                                               
term, is flat  to declining (slide 6, top graph).   When adjusted                                                               
for  price  inflation based  upon  the  producer price  inflation                                                               
index, the  spend on  a real  basis is  actually going  down even                                                               
though in  real terms  it is  looking like it  is flat  (slide 6,                                                               
bottom  graph).   That reflects  the basis  that there  are still                                                               
good  wells to  be drilled.   However,  investment decisions  are                                                               
made ahead of time:   in 2005 the average price  was about $30 or                                                               
$32 and that was  the amount of money she was  spending.  In 2010                                                               
the price  was near $65 or  $70.  Logic would  tell her, however,                                                               
that  if there  was a  lot of  good opportunities  and they  were                                                               
competitive, that would have been a substantially higher number.                                                                
                                                                                                                                
4:00:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON inquired  whether the  committee co-chairs                                                               
should ask the Department of  Revenue to carefully reconsider its                                                               
projections.                                                                                                                    
                                                                                                                                
MS.  FITZPATRICK  responded  that  she has  not  personally  gone                                                               
through the  study in detail.   She said  she does not  know what                                                               
assumptions  were   used  in   the  department's   decline  curve                                                               
regarding  existing fields  versus  new activities,  and that  is                                                               
where the  committee's questions would  be better addressed.   In                                                               
further response, she said she  could not encourage or discourage                                                               
whether  the  co-chairs  ask the  department  to  reconsider  its                                                               
projections.                                                                                                                    
                                                                                                                                
4:01:59 PM                                                                                                                    
                                                                                                                                
MS. FITZPATRICK, continuing her  presentation, offered her belief                                                               
that there  is a  lot of  opportunity in  Alaska if  something is                                                               
done to  make the state  more competitive  (slide 7).   She noted                                                               
that there is a  lot of challenged oil as well as  a lot of light                                                               
oil.  The  question is how projects in Alaska  stand out relative                                                               
to other  locations.  Last year  BP committed $20 billion  of net                                                               
investment and not a single one  was an Alaska project.  She said                                                               
it is  not from  lack of  trying that  she is  unable to  get the                                                               
dollars needed for Alaska.                                                                                                      
                                                                                                                                
4:02:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FOSTER  asked how  long  it  might be  before  an                                                               
increase  in exploration  investments  would be  seen if  changes                                                               
were  made to  ACES with  an  effective date  in two  years.   He                                                               
further asked  Ms. Fitzpatrick's  opinion about  a sunset  of the                                                               
changes and  going back  to ACES  if in four  years there  was no                                                               
activity.                                                                                                                       
                                                                                                                                
MS. FITZPATRICK,  regarding a timeline, answered  that it depends                                                               
on the  type of  activity, so  there would  be things  across the                                                               
entire  timeframe.   Drilling activities,  subject  to access  to                                                               
risk,  could be  progressed faster,  and there  could be  some of                                                               
those opportunities.   Projects on  which work was done  but then                                                               
they were deferred might not be  as long.  Projects starting from                                                               
pure exploration  could be  5-7 years.   Regarding a  sunset, she                                                               
explained that  she must make  investment decisions based  on the                                                               
tax regime that is  in place at the time.  If  there is a sunset,                                                               
then she would have to assume  in her entire economics that it is                                                               
going  to sunset.   Therefore,  a sunset  provision would  hamper                                                               
investment decisions in the short term.                                                                                         
                                                                                                                                
4:05:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI inquired  what the lead time  was for the                                                               
sanctioned projects  listed on  slide 7  [Gulf of  Mexico, Egypt,                                                               
North Sea, Azerbaijan, Canada, North Africa, Angola, TNK BP].                                                                   
                                                                                                                                
MS. FITZPATRICK replied that from  discovery to sanction the time                                                               
will vary, but based on the  industry average it would range from                                                               
three to six years depending on the size, scale, and complexity.                                                                
                                                                                                                                
REPRESENTATIVE KAWASAKI understood that  the Gulf of Mexico would                                                               
be a favorable place; however,  Angola, North Africa, Azerbaijan,                                                               
Russia, and  Egypt would not at  all be favorable.   He asked how                                                               
Ms. Fitzpatrick would justify $20  billion in sanctioned projects                                                               
in those  unfavorable areas  while at the  same time  saying that                                                               
Alaska is uncompetitive.                                                                                                        
                                                                                                                                
MS. FITZPATRICK responded that many,  many factors go into making                                                               
an investment  decision.   "It is not  a straight  on-off switch,                                                               
nor is it a case  of if the answer is 42 it is  yes."  It depends                                                               
on  the size  of the  resource, the  quality of  the resource  in                                                               
terms  of  any  price  differential,  its  location  relative  to                                                               
infrastructure, the cost of doing  business in that location, and                                                               
the  quality of  the  rocks.   While nothing  can  be done  about                                                               
Alaska's  location   from  market   or  the  complexity   of  the                                                               
hydrocarbon structures on the North  Slope, which of the numerous                                                               
factors  can be  influenced if  the objective  is to  make Alaska                                                               
more attractive for investment?                                                                                                 
                                                                                                                                
4:08:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI inquired  where  Alaska  would stand  in                                                               
overall competitiveness with BP if  its tax regime was changed to                                                               
be one of the most competitive in the world.                                                                                    
                                                                                                                                
MS. FITZPATRICK  answered that it  is only going to  be relative,                                                               
how far up  the curve Alaska wants to go.   From her perspective,                                                               
HB 110 will make a positive  step in the right direction and will                                                               
give opportunities to  bring new and more  activities into Alaska                                                               
and get  more barrels in  the pipe.   She allowed that  she would                                                               
like the bill  to go further.   It is whether the  state wants to                                                               
take the step to  see if it is actually going to  get some of the                                                               
things  it wants,  and if  that has  not made  Alaska competitive                                                               
enough, further changes  can be made to make the  state even more                                                               
competitive.                                                                                                                    
                                                                                                                                
4:09:09 PM                                                                                                                    
                                                                                                                                
MS. FITZPATRICK,  concluding her presentation, noted  that due to                                                               
the  limited  time left  in  the  hearing  she will  address  the                                                               
technicalities of the bill in a  letter to members.  However, she                                                               
said that, overall,  HB 110 will make a difference  and is a step                                                               
in the right direction.  Some  of the things that she thinks will                                                               
come back in as a result of the  bill and will be helpful to both                                                               
BP Alaska  and the state  include drilling, increased  well work,                                                               
and the  gas partial  processing plant, which  is a  $1.7 billion                                                               
project with  50 wells and  new pad.   The sooner the  bill takes                                                               
effect the sooner  she can get an answer from  the head corporate                                                               
office in terms of getting  more funds.  Alaska is uncompetitive.                                                               
It  has lots  of  resource, but  the resource  is  high cost  and                                                               
challenged.   It is a choice  of whether the state  wants to work                                                               
together to get more barrels in the  pipe, and if so, then HB 110                                                               
is a step that will help get there.                                                                                             
                                                                                                                                
4:10:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON asked whether BP  Alaska has a position on moving                                                               
the tax floor.   In response to Ms. Fitzpatrick,  he confirmed he                                                               
is meaning the point at which the minimum tax takes effect.                                                                     
                                                                                                                                
MS. FITZPATRICK replied  that BP Alaska recognizes  that if there                                                               
is  going  to  be  a  risk/reward  switch,  which  BP  Alaska  is                                                               
supportive of  at one end, she  would like there to  be no floor;                                                               
however, she appreciates from the  state's perspective the desire                                                               
to have one.                                                                                                                    
                                                                                                                                
4:11:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI expressed  his  desire  to see  Alaskans                                                               
hired.   He cited  a 2009  report on  oil industry  top employers                                                               
which  states  that  26  percent   of  BP  Alaska's  workers  are                                                               
nonresidents.  The report also  states that the average quarterly                                                               
wages for  nonresidents in oil  and gas extraction is  roughly 30                                                               
percent more  than for residents.   The report's  appendix states                                                               
that 48  percent of new  hires for  oil and gas  are nonresidents                                                               
and  42 percent  for oil  field  services.   He said  he will  be                                                               
providing further data that shows Alaskans are not being hired.                                                                 
                                                                                                                                
MS. FITZPATRICK agreed to provide a response in writing.                                                                        
                                                                                                                                
4:13:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE inquired  whether BP Alaska has  been contacted by                                                               
the  Department of  Labor &  Workforce Development  regarding the                                                               
number  of jobs  in  the various  categories  of maintenance  and                                                               
construction.                                                                                                                   
                                                                                                                                
MS. FITZPATRICK responded that she will check and get back to                                                                   
the committee in this regard.                                                                                                   
                                                                                                                                
4:14:23 PM                                                                                                                    
                                                                                                                                
DALE PITTMAN, Alaska Production Manager, ExxonMobil, paraphrased                                                                
from the following written statement [original punctuation                                                                      
provided]:                                                                                                                      
                                                                                                                                
     Let  me  start  by  saying that  Alaska  has  been  and                                                                    
     continues to be an  important component of ExxonMobil's                                                                    
     world-wide  investment  portfolio.     We  have  had  a                                                                    
     presence in  Alaska for over  50 years and have  been a                                                                    
     key  player  in   Alaska's  oil  industry  development,                                                                    
     investing over  $12 billion  dollars to  date.   We are                                                                    
     the  operator  of  Point   Thomson,  hold  the  largest                                                                    
     working  interest  at  Prudhoe   Bay  (36.4%)  and  the                                                                    
     largest   lease  holder   of   discovered  Alaska   gas                                                                    
     resources.   We  expect to  be involved  in Alaska  for                                                                    
     many  years  to  come  and will  continue  to  evaluate                                                                    
     potential development opportunities.                                                                                       
                                                                                                                                
     At the  outset, so  our position is  clear, let  me say                                                                    
     that  ExxonMobil supports  the  presentation you  heard                                                                    
     today from  the Alaska Oil  and Gas Association.   I do                                                                    
     not intend  to repeat  the thorough  technical comments                                                                    
     from that testimony.                                                                                                       
                                                                                                                                
     As for  our specific comments,  I would like  to state,                                                                    
     consistent   with  our   prior  testimony   during  the                                                                    
     hearings on both the PPT  and ACES, and on the proposed                                                                    
     tax  reform legislation  last session,  that ExxonMobil                                                                    
     believes  the  changes made  to  Alaska's  oil and  gas                                                                    
     production tax  since 2005 have  had a  negative impact                                                                    
     on  business activity  in Alaska  and Alaska's  overall                                                                    
     investment climate.   Alaska's current production taxes                                                                    
     are  simply  too  high   to  stimulate  the  additional                                                                    
     investment required  to fully develop Alaska's  oil and                                                                    
     gas resources.                                                                                                             
                                                                                                                                
     It  is for  this reason  ExxonMobil is  pleased to  see                                                                    
     that  the   Administration  recognizes  the   need  for                                                                    
     material  change  to  Alaska's   current  oil  and  gas                                                                    
     production tax  system.  We are  encouraged by Governor                                                                    
     Parnell's  desire  to  see  increased  investments  and                                                                    
     further  oil  and  gas development.    We  support  his                                                                    
     efforts to  reform ACES  and believe HB  110 is  a good                                                                    
     first step  towards what we  hope is a  thorough review                                                                    
     and  revision  of  Alaska's production  tax  regime  to                                                                    
     allow the state to fully develop its vast resources.                                                                       
                                                                                                                                
     ExxonMobil  supports  HB 110,  and  if  enacted in  its                                                                    
     current form,  we would  expect investment  activity in                                                                    
     Alaska  to  increase,   resulting  in  a  corresponding                                                                    
     benefit of  more work  for Alaskans.   With  passage of                                                                    
     the Governor's proposed changes  to ACES in its current                                                                    
     form, we  anticipate that  industry will  reexamine the                                                                    
     inventory of Alaska North  Slope opportunities and move                                                                    
     forward with  those projects that are  made competitive                                                                    
     by  the reduced  production tax  burden.   For example,                                                                    
     the  proposed enhanced  in-field  drilling tax  credits                                                                    
     and reduction  to the progressivity tax  would allow us                                                                    
     to consider additional drilling  and well work activity                                                                    
     at the  Prudhoe Bay Unit.   This kind  of developmental                                                                    
     drilling  in  the core  field  on  the North  Slope  is                                                                    
     critical  to  Alaska's  future, particularly  over  the                                                                    
     next five  to ten  years.   Production decline  must be                                                                    
     stemmed  until  new  developments  can  be  discovered,                                                                    
     progressed and brought on production.                                                                                      
                                                                                                                                
4:17:56 PM                                                                                                                    
                                                                                                                                
     While the  enhanced in-field  drilling tax  credits and                                                                    
     reduction  to the  progressivity  tax  are much  needed                                                                    
     revisions  to ACES,  we  would  urge earlier  effective                                                                    
     dates   to  accelerate   the  resulting   ramp  up   in                                                                    
     investment  activity,  Alaskan  jobs and  future  state                                                                    
     revenues.                                                                                                                  
                                                                                                                                
     However, merely providing  additional tax credits while                                                                    
     keeping the overall effective rate  of the ACES tax too                                                                    
     high  is  not  the  long  term  solution  to  improving                                                                    
     Alaska's investment  climate.  While the  system of tax                                                                    
     credits under ACES  does provide significant incentives                                                                    
     for  investing  in  capital   assets  to  explore  for,                                                                    
     develop, and  produce more oil  and gas,  the deduction                                                                    
     of lease expenditures or the  allowance of a tax credit                                                                    
     is simply part of the  calculation about how much tax a                                                                    
     producer owes.   The bottom  line is that,  between PPT                                                                    
     and  ACES, the  industry's  production tax  obligations                                                                    
     have more than tripled over the past five years.                                                                           
                                                                                                                                
     ExxonMobil  supports  the  Governor's  proposal  as  an                                                                    
     important first step, but additional  reform of ACES is                                                                    
     needed.                                                                                                                    
                                                                                                                                
     Additional  reforms  are  needed  to  improve  Alaska's                                                                    
     overall   investment  climate   over  the   long  term.                                                                    
     Evaluation  of a  further reduction  in the  production                                                                    
     tax rates  should also  be considered.   Even  with the                                                                    
     Governor's  proposal,  Alaska's  production  taxes  are                                                                    
     high  in comparison  to other  investment alternatives,                                                                    
     making  Alaska  one of  the  most  expensive states  in                                                                    
     which the oil and gas industry does business.                                                                              
                                                                                                                                
     As you have  heard in prior testimony or  may have read                                                                    
     in  recent newspaper  articles, spending  on the  North                                                                    
     Slope has remained relatively  flat since the enactment                                                                    
     of ACES.   But what needs  to be clarified is  that the                                                                    
     majority of  that investment  has been  for maintenance                                                                    
     or   production   enhancement  efforts   for   existing                                                                    
     operations,  not for  new  exploration and  development                                                                    
     opportunities that  would bring on new  production.  It                                                                    
     is  also worth  noting that  costs for  this investment                                                                    
     activity have  gone up, so  while some may  argue there                                                                    
     has been additional  investment, it doesn't necessarily                                                                    
     translate  into more  activity.   For example  costs to                                                                    
     drill a well  have increased over the  years, so higher                                                                    
     spend on drilling does not  necessarily mean more wells                                                                    
     are being drilled.                                                                                                         
                                                                                                                                
4:20:06 PM                                                                                                                    
                                                                                                                                
     Alaska  is  currently producing  approximately  600,000                                                                    
     barrels of oil per day  from the North Slope.  Industry                                                                    
     currently invests  more than  $1 billion per  year just                                                                    
     to maintain current North  Slope oil production decline                                                                    
     at  six  to  seven  percent.   Without  that  continued                                                                    
     investment, the  annual production decline would  be in                                                                    
     the range of 12 to 15 percent annually.                                                                                    
                                                                                                                                
     The  Alaska Department  of Revenue  is forecasting  the                                                                    
     production from Alaska's  currently producing fields to                                                                    
     decline by  60,000 barrels  of oil  per day  this year.                                                                    
     It  goes on  to predict  that current  field production                                                                    
     will decline to half of  its current 600,000 barrels of                                                                    
     oil  per day  in just  seven years,  a decline  of over                                                                    
     300,000 barrels  of oil per day.   Allow me to  put the                                                                    
     challenge of stemming that decline in perspective.                                                                         
                                                                                                                                
     Alaska's newest  development, the Nikaitchuq  field, is                                                                    
     scheduled to  produce first oil  early this year.   The                                                                    
     field  has  been  more  than  six  years  in  planning,                                                                    
     development and  construction and carries a  total cost                                                                    
     of over  $2 billion dollars.   The field  is forecasted                                                                    
     to  reach production  of about  25,000 barrels  per day                                                                    
     four years from  now.  So using this as  an example, it                                                                    
     would  take  the startup  of  two  to three  Nikaitchuq                                                                    
     equivalent  fields every  year  in  perpetuity just  to                                                                    
     hold North  Slope production at 600,000  barrels of oil                                                                    
     per day.  Pioneer's  Oooguruk field is another example.                                                                    
     It  would  take  three  to  four  fields  the  size  of                                                                    
     Oooguruk  every  year  to match  the  forecasted  North                                                                    
     Slope  production   decline.    Clearly,   the  current                                                                    
     outlook  for  development  falls  far  short,  and  new                                                                    
     fields are urgently needed to stem this decline.                                                                           
                                                                                                                                
     Such  development  will  only  occur  if  there  is  an                                                                    
     improvement in  the Alaska investment climate.   Alaska                                                                    
     production tax  policy is key to  fostering a favorable                                                                    
     investment climate.                                                                                                        
                                                                                                                                
4:21:52 PM                                                                                                                    
                                                                                                                                
     Alaska's overall  high production tax  rates discourage                                                                    
     investment.   Companies like ExxonMobil are  willing to                                                                    
     accept  the  risks   of  long-term,  capital  intensive                                                                    
     investments when there is a  stable and competitive tax                                                                    
     structure  that  encourages  investment and  ensures  a                                                                    
     corresponding opportunity  for upside potential.   When                                                                    
     you  take  away the  upside  potential  through a  high                                                                    
     progressivity    tax    you    reduce    the    overall                                                                    
     attractiveness of those  capital intensive investments,                                                                    
     which  in turn  could  lead to  reduced investment  and                                                                    
     resource  recovery and,  in  the long-term,  diminished                                                                    
     state revenues.   Let me reemphasize  this point, while                                                                    
     higher  taxes  may  bring additional  revenues  in  the                                                                    
     short-term,  it's  reasonable  to anticipate  that  any                                                                    
     reduction  in investment  will decrease  production and                                                                    
     significantly  reduce  those  revenues  in  the  longer                                                                    
     term.                                                                                                                      
                                                                                                                                
     As many of you heard me  testify last year, time in the                                                                    
     oil  and  gas  industry  is not  measured  in  business                                                                    
     cycles.  It is measured  in decades and in generations.                                                                    
     Today's production rates are  the product of government                                                                    
     policies,  technical  work,  and  investment  decisions                                                                    
     made  years ago.   Increasing  production rates  in the                                                                    
     decades  to come  will be  a direct  result from  sound                                                                    
     policies,  decisions,  and  commitments that  are  made                                                                    
     today.    The  Governor's  proposed  ACES  changes  are                                                                    
     clearly  a  significant  step in  the  right  direction                                                                    
     towards  much needed  reform of  Alaska's high  oil and                                                                    
     gas production tax system.                                                                                                 
                                                                                                                                
4:23:16 PM                                                                                                                    
                                                                                                                                
     Alaska  needs a  long-term resource  development policy                                                                    
     that will  encourage increasing investment  to maximize                                                                    
     its resource potential while receiving  a fair share of                                                                    
     the  resource revenues;  addressing its  high level  of                                                                    
     government take is  a start.  The reform  of ACES needs                                                                    
     to  result in  a  competitive,  stable and  predictable                                                                    
     fiscal  environment  that  will  encourage  investment,                                                                    
     recognize    that   the    remaining   resources    are                                                                    
     economically challenged, including  both new fields and                                                                    
     resource development opportunities  in existing fields.                                                                    
     The  primary  driver  of  Alaska's  long-term  resource                                                                    
     development   policy   should   be  to   maximize   the                                                                    
     development  of its  resource base,  not just  maximize                                                                    
     short-term state revenues.                                                                                                 
                                                                                                                                
     Let me conclude my  testimony by reiterating that while                                                                    
     we hope to continue  to pursue investment opportunities                                                                    
     in  Alaska  in  the   future,  the  resource  and  cost                                                                    
     structure   in   Alaska    is   becoming   increasingly                                                                    
     challenging.   Governor  Parnell's proposed  changes to                                                                    
     ACES are  a good  start to needed  fiscal reform  - but                                                                    
     more is still needed.                                                                                                      
                                                                                                                                
     ExxonMobil   looks   forward   to  working   with   the                                                                    
     Administration,  the  legislators,   industry  and  the                                                                    
     people of Alaska in the  future pursuit and development                                                                    
     of Alaska's oil and gas resources.                                                                                         
                                                                                                                                
4:24:32 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON referenced the upside  potential mentioned in Mr.                                                               
Pittman's  testimony and  inquired  whether ExxonMobil  considers                                                               
the  provision  in  HB  110  to reduce  the  floor  for  downside                                                               
potential to be a significant factor.                                                                                           
                                                                                                                                
MR.  PITTMAN replied  that ExxonMobil  has not  considered it  at                                                               
this point to  be significant, but he will check  and get back to                                                               
the committee with a specific answer.                                                                                           
                                                                                                                                
4:25:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  related that some people  believe there is                                                               
time until 2018 to fill the pipe.   However, he said he thinks it                                                               
is much  earlier.  He  asked whether  2013 is more  realistic for                                                               
the state to do something.                                                                                                      
                                                                                                                                
MR. PITTMAN  responded that 2013  would be appropriate as  far as                                                               
to  act.   He  said  he  finds  the  suggestions that  TAPS  will                                                               
continue  to produce  through the  mid-2020s  with no  additional                                                               
investment to be optimistic.   There are some downside cases that                                                               
suggest that may be only 7-8 years away.                                                                                        
                                                                                                                                
4:26:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  recalled testimony by a  consultant to the                                                               
governor,  saying he  thought the  consultant was  knowledgeable.                                                               
He related  that a question  asked of the consultant  was whether                                                               
HB  110 as  currently  written would  effectively translate  into                                                               
guaranteed exploration  and the consultant's  answer was no.   He                                                               
asked whether Mr. Pittman agrees with this answer of no.                                                                        
                                                                                                                                
MR.  PITTMAN replied  that he  would not  agree with  no, but  he                                                               
would agree  that it  may not directly  correlate because  of the                                                               
other factors  that have been  discussed today.   Cost, commodity                                                               
prices, and  supply and demand in  other areas of the  world make                                                               
it hard to say that  HB 110 will guarantee increased exploration.                                                               
One of the various factors  impacting those decisions that cannot                                                               
be controlled  is the Mother  Nature aspect, such as  not finding                                                               
the  quality of  rock that  was expected.   However,  between the                                                               
state  and producers  there are  four prime  factors that  can be                                                               
controlled:    technology,  state and  federal  government  take,                                                               
development  cost,  and  operating  cost.    He  said  he  thinks                                                               
industry and the  state should be aligned to  help minimize those                                                               
to improve the opportunity for Alaska resources.                                                                                
                                                                                                                                
4:28:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI commented  that he has not  yet heard any                                                               
convincing  evidence from  any speaker  that the  investment will                                                               
come back  to Alaska, that  there will  be more Alaska  jobs, and                                                               
that industry will  explore more.  He noted that  a graph put out                                                               
by the  Department of Revenue  shows that the  production decline                                                               
started  in  1987, and  between  1987  and  2005, when  the  very                                                               
favorable  ELF gross  production  tax was  in  effect, there  was                                                               
still not the  production required to fill the  pipe.  Therefore,                                                               
in  substantive  terms,  how will  industry's  investment  change                                                               
should HB 110 pass and ACES is rewritten.                                                                                       
                                                                                                                                
MR.  PITTMAN responded  that the  decline curve  is currently  as                                                               
flat as  it has  ever been  since peak  production; Alaska  has a                                                               
world class  resource capable of  immense volumes  of production.                                                               
To answer the  question about continuing to  invest or increasing                                                               
the need to invest, he said  he is convinced that [ExxonMobil] is                                                               
clearly aligned  to keep the  pipeline flowing; that is  good for                                                               
the state  and good for  future resource  recovery.  The  kind of                                                               
volume increases that are possible  on the scales that ExxonMobil                                                               
is currently  working are pretty  challenging to affect  the kind                                                               
of slopes  that are  seen when  starting at  2 million  barrels a                                                               
day.   However, it  is possible today  to affect  100,000 barrels                                                               
over a year.   Some of it is going to take things  that we do not                                                               
yet know  how to do, and  more interest needs to  be attracted in                                                               
making those investments.                                                                                                       
                                                                                                                                
4:31:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON noted that the  percent decline in production was                                                               
steeper when  Alaska had lower tax  rates.  The slope  of decline                                                               
was  greater under  the lower  PPT rate  than it  has been  since                                                               
instituting ACES.   According to  information the  committee just                                                               
received  from the  Alaska Oil  and  Gas Conservation  Commission                                                               
(AOGCC), the  decline in production/developmental  wells occurred                                                               
in 2004  and then leveled off,  so that drop occurred  before the                                                               
PPT.  He  allowed that there are other factors  as well, but said                                                               
he is having a hard time  making the link with ACES, as portrayed                                                               
by industry,  when the  number of  developmental wells  went down                                                               
prior to  the enactment of PPT  and ACES.  He  requested that the                                                               
companies submit a written explanation of this to the committee.                                                                
                                                                                                                                
4:34:30 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE,  regarding the changing numbers  of developmental                                                               
wells and  when they occurred,  inquired whether  the correlation                                                               
was with the price of oil.                                                                                                      
                                                                                                                                
MR. PITTMAN answered that there are  so many variables it will be                                                               
difficult  to  draw  a  direct   correlation  to  any  individual                                                               
variable,  but ExxonMobil  will  do  its best  not  to have  just                                                               
supposition and will look at the  data.  He agreed that the price                                                               
of oil is a factor.                                                                                                             
                                                                                                                                
CO-CHAIR SEATON pointed  out that the AOGCC data  does include in                                                               
the  background the  price of  oil, so  the price  of oil  can be                                                               
directly looked at.                                                                                                             
                                                                                                                                
4:35:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  asked  whether  the  committee  co-chairs                                                               
should request  the Department  of Revenue  to conduct  a careful                                                               
reconsideration of its production rate decline graph.                                                                           
                                                                                                                                
MR. PITTMAN  replied that  he cannot tell  the co-chairs  what to                                                               
tell  the  commissioner,  but  when  he looks  at  the  data  the                                                               
questions that  come to  his mind are  what the  assumptions were                                                               
that went  into that  data and what  are the  current assumptions                                                               
that would add to that data.                                                                                                    
                                                                                                                                
4:36:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  inquired whether ExxonMobil has  an exit                                                               
strategy for the North Slope.                                                                                                   
                                                                                                                                
MR. PITTMAN responded no, ExxonMobil  intends to be in Alaska and                                                               
intends to find  ways to work with its  colleagues, industry, and                                                               
Alyeska Pipeline Service  Company, but that is  tempered with his                                                               
knowledge and  experience of  how long it  takes to  effect those                                                               
changes.                                                                                                                        
                                                                                                                                
4:37:32 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON,  regarding  Mr. Pittman's  testimony  that  the                                                               
remaining resources  are economically challenged, noted  that the                                                               
current tax regime is a companywide  regime.  No tax occurs below                                                               
all costs rolled out and then  the base rate applies for the next                                                               
$30.   For  an economically  challenged field  that takes  $60 to                                                               
produce, the  base tax rate is  25 percent on the  next $30 above                                                               
that, so  there is no  progressivity for Alaska North  Slope $90.                                                               
Regarding   economically    challenged   oil,   he    asked   how                                                               
progressivity becomes the crucial  factor in decision making when                                                               
it does not start until $30 after all expenses are rolled out.                                                                  
                                                                                                                                
MR.   PITTMAN  answered   that  when   looking  at   investments,                                                               
ExxonMobil runs a  full suite of possibilities and  many of those                                                               
will be  at the  higher-end prices, which  will only  occur 15-20                                                               
percent  of the  time.   Coupled  with the  downside prices  that                                                               
occur 15-20 percent of the time,  it does impede the viability of                                                               
future projects.   Many  of them  could be on  the edge  and that                                                               
could be enough to push them  over, and the aforementioned is one                                                               
of those types of projects.                                                                                                     
                                                                                                                                
4:39:38 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON offered his appreciation  to all of the witnesses                                                               
for their testimony.                                                                                                            

Document Name Date/Time Subjects
02 16 11 AOGA Presentation to House Resources (2).pdf HRES 2/16/2011 1:00:00 PM
(H)RES_Testimony_HB110 Final.pdf HRES 2/16/2011 1:00:00 PM
Drilling Activity North Slope.pdf HRES 2/16/2011 1:00:00 PM
Alaska Industry Acreage Reduction Slide CP.docx HRES 2/16/2011 1:00:00 PM
ADN and Petroleum News articles.pdf HRES 2/16/2011 1:00:00 PM
House Resources Testimony Final (2).pdf HRES 2/16/2011 1:00:00 PM
ConocoPhillips 4Q1020Supplemental Information.pdf HRES 2/16/2011 1:00:00 PM
Microsoft PowerPoint - BP Alaska testimony HRes Feb 2011.pdf HRES 2/16/2011 1:00:00 PM
S45C-211021609000 (2).pdf HRES 2/16/2011 1:00:00 PM
Testimony of Dale Pittman ExxonMobil HB 110.pdf HRES 2/16/2011 1:00:00 PM
HRES 2.16.11 AOGA Notes.pdf HRES 2/16/2011 1:00:00 PM