Legislature(2011 - 2012)HOUSE FINANCE 519

04/21/2012 02:00 PM RESOURCES


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Audio Topic
02:05:38 PM Start
02:06:12 PM HB3001
06:16:56 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
In Participation with House ENE
+= HB3001 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
PFC Energy Presentation: "Overview of Oil & Gas
Companies' Capital Allocation Processes,
Investment Decision Making & Global Portfolios"
by Tony Reinsch, Senior Director, Upstream &
Gas Group
               HB 3001-OIL AND GAS PRODUCTION TAX                                                                           
                                                                                                                                
2:06:12 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of  business would                                                               
be HOUSE  BILL NO. 3001, "An  Act relating to adjustments  to oil                                                               
and  gas production  tax values  based on  a percentage  of gross                                                               
value at  the point of production  for oil and gas  produced from                                                               
leases  or  properties  north  of   68  degrees  North  latitude;                                                               
relating  to monthly  installment  payments of  the  oil and  gas                                                               
production tax;  relating to  the determinations  of oil  and gas                                                               
production tax  values; relating  to oil  and gas  production tax                                                               
credits  including  qualified  capital credits  for  exploration,                                                               
development,  or production;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
2:06:57 PM                                                                                                                    
                                                                                                                                
WILLIAM  BARRON, Director,  Central Office,  Division of  Oil and                                                               
Gas, Department of Natural Resources  (DNR), began his PowerPoint                                                               
presentation titled  "Potential for  increasing production."   He                                                               
stated he  thought that barriers  have been  thoroughly discussed                                                               
[slide 2].   He stated  that the next  slide shows the  length of                                                               
time  it would  take for  industry to  pull projects  together in                                                               
Alaska [slide 3].  He explained  that typically it takes from 10-                                                               
15  years from  the time  of initial  exploration to  production,                                                               
limited  to  the  North  Slope   and  new  exploration,  but  not                                                               
necessarily   Cook   Inlet,   seismic,  in-field   drilling,   or                                                               
development drilling within an existing  field.  Referring to the                                                               
graph timeline, he  said obviously a significant  number of years                                                               
could  be  shaved off  if  the  development  is occurring  in  an                                                               
existing field.   For example,  a lot of construction  time could                                                               
be  removed, and  a small  add-on to  a facility  would also  not                                                               
require  feasibility,  permitting,   financing,  exploration  and                                                               
seismic studies so the project  would begin with construction and                                                               
production.                                                                                                                     
                                                                                                                                
2:08:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI  referred  to   an  article  he  saw  in                                                               
Petroleum  News several  days  ago that  quotes  the governor  as                                                             
saying a meaningful change in  taxes could result in production a                                                               
year  or so  out;  however,  he compared  this  statement to  the                                                               
comment  Mr.  Barron made  regarding  tax  regime changes  and  a                                                               
significant time lag on projects.   He asked for clarification on                                                               
this.                                                                                                                           
                                                                                                                                
MR.  BARRON said  he didn't  think he  could answer  the question                                                               
since  he was  unsure  of  the specific  quote.    However, if  a                                                               
company is working in Prudhoe  Bay, Kuparuk, or Alpine - existing                                                               
fields on  the North Slope -  a company could go  to construction                                                               
almost immediately.   It also would depend on the  size and scope                                                               
of  the project  so the  construction phase  might only  span one                                                               
year or less.   He suggested that adding on  a small separator or                                                               
de-bottlenecking could  also be done  in a relatively  short time                                                               
frame,  so  new well  production  could  occur  right away.    He                                                               
related his  understanding if that  is the governor's  context it                                                               
is correct;  however if it  is something different the  lag could                                                               
occur   between  engineering   and   construction  before   first                                                               
production.                                                                                                                     
                                                                                                                                
2:10:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI  offered his understanding  that Governor                                                               
Parnell  said he  wants  to  see a  proposal  to incentivize  new                                                               
production  in   the  existing  fields   along  with   new  field                                                               
production and  he believes that  with significant tax  change in                                                               
existing  fields the  state  could  see as  much  as 100,000  new                                                               
barrels per day within a year and a half.                                                                                       
                                                                                                                                
MR. BARRON said that does mirror  his comment with respect to the                                                               
overarching  structure  in  the   existing  legacy  fields.    He                                                               
explained the  timeline on [slide 3].  If existing infrastructure                                                               
is already in  place, including roads, power,  and facilities and                                                               
the work  is limited to  adding new wells, then  production could                                                               
happen in  a very  short time  frame.   Further, work  can happen                                                               
year round if new facilities are being put on existing pads.                                                                    
                                                                                                                                
2:12:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI noted  that much  of the  discussion has                                                               
revolved  around how  to get  new  production out  of the  legacy                                                               
fields, including  more work and more  local hire.  He  asked for                                                               
comments with  respect to HB  3001 and  how the time  frame would                                                               
shrink and big  producers would want to produce.   He pointed out                                                               
that even  when the state had  a low tax rate  on existing fields                                                               
under the ELF, the state did not see additional investment.                                                                     
                                                                                                                                
MR. BARRON referred to a  graph from Commissioner Butcher's prior                                                               
presentation.   He said by going  across the graph one  can see a                                                               
tremendous amount of  work is being done in that  time frame.  He                                                               
characterized it  as a highly  capital-driven curve  that changed                                                               
the   production  profile   for  the   North  Slope,   especially                                                               
considering the  satellite fields, such as  Endicott, Alpine, and                                                               
Kuparuk.  Those  fields were brought on during  those same years,                                                               
which  represent  hundreds  of  millions  of  dollars'  worth  of                                                               
investment   that  stabilized   the  production   profile.     He                                                               
acknowledged it doesn't appear to be  stable, but a line could be                                                               
drawn that  would show  the state  would have  been at  1 million                                                               
barrels production  in 1995 if  it weren't  for all of  this work                                                               
and  if the  state  only  had Prudhoe  Bay.    However, in  1995,                                                               
production was  at 1.5  million barrels per  day.   He reiterated                                                               
that  while  100  percent  of   the  work  might  not  have  been                                                               
specifically directed  at Prudhoe  Bay, work was  associated with                                                               
fields they were finding in and  around that wonderful basin.  He                                                               
emphasized this  discussion must  be framed  in the  context that                                                               
the Prudhoe Bay  and North Slope area continues to  remain as one                                                               
of the great  oil basins of the  world.  He pointed  out there is                                                               
an old cliché that  says "If you are going to  look for oil, look                                                               
in  an oil  field."    This is  reflected  in the  aforementioned                                                               
graph.   The  industry  in total  said that  Prudhoe  Bay is  the                                                               
largest  oil  field  in  North America;  Kuparuk  is  the  second                                                               
largest oil  field in  North America;  and North  Star, Endicott,                                                               
Lisbourne, and West Sak are  all within the primary boundaries of                                                               
Prudhoe Bay  and Kuparuk.   As companies  continue to  work, they                                                               
continue  to   flatten  the  production  curve   and  change  the                                                               
production profile  with their investments.   Every well  that is                                                               
drilled has  an impact on  the decline  curve of the  Prudhoe Bay                                                               
field  itself.   Every time  the  company changes,  it goes  from                                                               
primary  development  -  drill  the  well and  produce  it  -  to                                                               
secondary  development,  in which  gas  or  water, or  separation                                                               
facilities  that change  the overall  draw down  will change  the                                                               
production profile.   This is  not a  "no work" case,  but rather                                                               
reflects the hundreds of millions,  if not billions of dollars in                                                               
investments  that   have  benefited   both  the  state   and  the                                                               
companies.   He said,  "They do  work; we  make money;  they make                                                               
money."                                                                                                                         
                                                                                                                                
MR. BARRON asked members to  consider, for example, that the cost                                                               
of an  exploration well is $20  million if not more.   He pointed                                                               
out that the Mukluk well [Beaufort  Sea] cost $80 million, but it                                                               
was a  dry hole.  Furthermore,  ConocoPhillips experienced trials                                                               
and tribulations to  try to get a  bridge on line at  Alpine.  He                                                               
concluded that this graph shows  a tremendous amount of effort to                                                               
continuously flatten the decline out of our major fields.                                                                       
                                                                                                                                
2:18:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE,  referring  to  the  graph  and  the  underlying                                                               
Prudhoe Bay production, said it  appears that in 2007 the decline                                                               
rate was reversed  for a brief time.  He  asked for clarification                                                               
on the change.                                                                                                                  
                                                                                                                                
MR. BARRON responded  that he will be able  to provide additional                                                               
information at the next meeting, but  at this point he is able to                                                               
say this represents a mathematical  aberration.  He explained the                                                               
Cartesian  plot  and  production curves  are  either  exponential                                                               
decline,  which most  of the  fields are;  however, part  of this                                                               
effort was work associated with gas  cap injection.  He noted one                                                               
piece of work had a  significant change in the production profile                                                               
in Prudhoe Bay.  He again  offered to address this further at the                                                               
next meeting.                                                                                                                   
                                                                                                                                
2:19:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER referred to slide  3 and asked whether the                                                               
permitting time frame holds regardless  of the type of oil field,                                                               
or if is there a significant variation.                                                                                         
                                                                                                                                
MR.  BARRON  responded  that  there would  be  variations.    For                                                               
example, if  work is  being done  in an  area which  is primarily                                                               
uplands the  permitting process will  be shorter since it  is not                                                               
necessary to obtain wetlands permits.   He stated that with shale                                                               
oil  development permitting  will  be  difficult and  complicated                                                               
unless it  is located  in high  and dry uplands  such as  in Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
2:20:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON offered her recollection  the ratio was                                                               
1:6.  She  noted that for every six wells  drilled only one would                                                               
be "wet."   She asked whether  that statistic has changed  due to                                                               
advanced technology.                                                                                                            
                                                                                                                                
MR. BARRON  explained the  ratio is  primarily driven  focused on                                                               
exploration, but not  for development.  He  suggested a geologist                                                               
wouldn't be  employed long  with that type  of ratio  of success.                                                               
He said  that with  exploration the ratio  can sometimes  be 1:10                                                               
for successful wells.                                                                                                           
                                                                                                                                
2:21:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  referred to  the decline  curve.   He questioned                                                               
whether  the  division disagrees  with  comments  offered by  the                                                               
division to  the U.S Senate  Energy Committee.   At the  time the                                                               
division stated  that with  the exception  of the  development of                                                               
heavy oil resources  known to exist around  Prudhoe Bay, Kuparuk,                                                               
and Milne Point and the  potential resource plays like the Bakken                                                               
Reserve  in North  Dakota  that  may exist  on  the North  Slope,                                                               
natural  field  declines cannot  be  replaced  without access  to                                                               
production from federal lands and  Outer Continental Shelf (OCS).                                                               
There are no known conventional  resources on the state or Native                                                               
lands that  are likely sufficient  to replace the decline  in the                                                               
existing  production rates.   He  reiterated that  this testimony                                                               
was given less than a year ago by the director, Kevin Banks.                                                                    
                                                                                                                                
MR.  BARRON  explained  that sometimes  the  testimony  focus  is                                                               
obscured.  He said those comments  pertained to a plea to open up                                                               
OCS,  Arctic   National  Wildlife  Refuge  (ANWR),   and  federal                                                               
properties to  encourage that exploration  effort - to  open ANWR                                                               
up.   The key phrase  in his  testimony refers to  "known fields"                                                               
and just last year Brooks Range  Petroleum (BRPC) has found a new                                                               
discovery of about 40 million barrels.   When Mr. Banks made that                                                               
comment the  field was an  unknown field.   He predicted  that 40                                                               
million barrels will not reverse  the decline at Prudhoe Bay, but                                                               
it will be a  piece of the mix that will flatten  it and begin to                                                               
turn the curve.  He offered his  belief that a change can be made                                                               
in every field  by increasing investment to a certain  point.  He                                                               
suggested that  a one percent change  in Prudhoe Bay is  6,000 to                                                               
7,000 barrels  of oil  per day.   That will be  half of  what the                                                               
BRPC's production  will be.   He  related his  understanding what                                                               
Mr. Banks was trying to convey  to Alaska and the country is that                                                               
there is  a limited ability to  reverse and flatten the  curve of                                                               
the major  fields coming  off of  Prudhoe Bay and  get back  to 2                                                               
million  barrels  of  production  in  existing  fields;  however,                                                               
access to  ANWR and OCS  would change this  profile dramatically.                                                               
He agreed  with Mr.  Banks that  no known  field can  reverse the                                                               
decline  in  the  legacy  fields and  increase  production  to  1                                                               
million barrels  per day, but  it is  the unknown that  Mr. Banks                                                               
was trying to attack in his testimony.                                                                                          
                                                                                                                                
2:25:26 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON related  his understanding that a  tax change for                                                               
the known  fields of Prudhoe Bay  could reverse the decline.   He                                                               
pointed out this seems quite  different than Mr. Bank's testimony                                                               
in  May when  he said  it  will not  be possible  to reverse  the                                                               
legacy field  declines without federal  lands and OCS.   He asked                                                               
for clarification  as to whether  solely a tax rate  change could                                                               
reverse the  decline from legacy  production - not  incremental -                                                               
and provide a 10 percent increase in production.                                                                                
                                                                                                                                
MR. BARRON  attempted to clarify  that to reverse  the production                                                               
profile in a field is possible  with investment.  He related that                                                               
the  amount of  the  investment  is dependent  upon  the type  of                                                               
project and the  point in the timeline of the  life of the field,                                                               
since as  one advances in  time it  becomes harder to  change the                                                               
decline rate  as the  resource base  is more  limited.   He asked                                                               
whether the  producers can  begin to flatten  the curve  of their                                                               
existing fields with increased investment.   Technically, yes, it                                                               
is  possible, he  said.    He asked  whether  the  fields can  be                                                               
reversed and  become positive  and he answered,  yes, in  some of                                                               
the fields  it is possible  although he cannot be  specific since                                                               
he has  not done  calculations in terms  of the  total aggregate.                                                               
Further,  he  has  not  yet  researched  that  particular  issue;                                                               
however, all the  production profiles can be  flattened with more                                                               
investment.                                                                                                                     
                                                                                                                                
2:27:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  commented   that  is  the  crux   of  what  the                                                               
legislature is trying  to figure out, to decide  whether a fairly                                                               
simple change  in tax policy  will reverse and  incrementally add                                                               
ten  percent above  where  the state  is  currently producing  at                                                               
Prudhoe Bay.   He said it  seemed the division was  saying a year                                                               
ago  that incremental  production within  the known  fields would                                                               
not reverse the  decline and it would not be  possible to achieve                                                               
accelerated production without federal properties or OCS.                                                                       
                                                                                                                                
MR.  BARRON said  that  for  him to  say  one  percent change  in                                                               
profile  is  6,000  to  7,000  barrel per  day  translates  to  a                                                               
meaningful  change.   He  was uncertain  of  whether one  percent                                                               
increment is  possible without the investment  occurring to prove                                                               
it.    Further  technologies  are  available  and  new  reservoir                                                               
management  companies are  engaged with  could make  it possible.                                                               
Additionally, areas that can continue  to be developed can impact                                                               
production; however,  it must be  within the  economic boundaries                                                               
and parameters of the companies  to move forward with those kinds                                                               
of projects.   He asked whether one company can  stop the decline                                                               
and  answered  that  according  to   the  work  agreement  it  is                                                               
possible.  Therefore  the state's goal should be to  strive for a                                                               
collaborative  and competitive  basis so  companies will  want to                                                               
bring investment to the state and not send it somewhere else.                                                                   
                                                                                                                                
CO-CHAIR SEATON said  he appreciated this since  these are pieces                                                               
of the  puzzle the state needs.   He stated that  what drives the                                                               
state  is revenue.  He acknowledged  that  production, price  and                                                               
costs, and  tax rates are part  of the formula.   The legislature                                                               
must work on revenue to the  state.  The legislature is trying to                                                               
construct a scenario to move the  state to the right place in the                                                               
long term.   He did not  think there was a  disagreement, but the                                                               
state is trying to figure out  if the decline rate can't stop the                                                               
decline with in-field legacy drilling,  then the state cannot use                                                               
a  figure of  "positive  10  or positive  20"  on  top of  legacy                                                               
production  to  generate  revenue  curves.   He  summarized  this                                                               
committee is  trying to understand  if it is possible  to produce                                                               
10 to  20 percent  more out  of Prudhoe Bay  by a  meaningful tax                                                               
change.                                                                                                                         
                                                                                                                                
2:31:27 PM                                                                                                                    
                                                                                                                                
MR.  BARRON   acknowledged  that   point,  and   turned  members'                                                               
attention to the  next slide titled "Reasonably  expected time to                                                               
production" [slide 4].   He suggested that part of  what is being                                                               
discussed  is the  phasing of  developments and  exploration work                                                               
being  brought into  production.   He said  within the  next 5-10                                                               
years  -  noting  the  darker   the  shade  represents  the  more                                                               
likelihood of an  impact - three primary areas can  be brought in                                                               
to meaningful production.  First  and foremost, that can occur in                                                               
the legacy  fields and  some others  within the  geographic area.                                                               
This gets  back to the heavy  and viscous oil and  the importance                                                               
of  understanding the  dilutant needed  to produce  it.   Some of                                                               
that dilutant could be the  lighter oil being produced at Prudhoe                                                               
Bay and Kuparuk  today.  Therefore there must  be an orchestrated                                                               
effort between  heavy and viscous oil  and the light oil  that is                                                               
produced.    He  highlighted  that   the  industry  is  currently                                                               
examining how  much light  oil is needed  to produce  the viscous                                                               
oil so  the companies' development  plans have  sufficient amount                                                               
of lighter  crude to allow  them to  ship the heavier  crude down                                                               
the line.   He characterized  this as all  part of the  same mix.                                                               
He noted  the last  well BP  had running on  a test  produced 650                                                               
barrels per  day of viscous  crude, which is probably  double the                                                               
world  wide  number  for  viscous  crude.    He  said,  "That  is                                                               
incredibly  positive."   However, to  so companies  must have  an                                                               
equal  amount of  lighter crude.   He  cautioned this  process is                                                               
still in the pilot test phase,  but their pump failed when it had                                                               
a tubing  failure.  They are  working through that issue,  but if                                                               
this work plays  out, it represents a  significant potential step                                                               
change for  that area and  it lies  within the boundaries  of the                                                               
legacy  field.   This would  be a  new probable  development area                                                               
that is very robust, he stated.                                                                                                 
                                                                                                                                
2:34:29 PM                                                                                                                    
                                                                                                                                
MR. BARRON stated  the next potential is shale oil.   He reported                                                               
that Great  Bear Petroleum is on  the cutting edge of  shale work                                                               
and  plans to  drill three  to four  wells in  the next  quarter.                                                               
Thus the  state will find out  whether shale oil can  be produced                                                               
and what  kind of fracking must  be done to develop  those wells.                                                               
He stated  that within the  next five years  these aforementioned                                                               
projects  are the  three primary  areas  that can  be brought  to                                                               
bear.                                                                                                                           
                                                                                                                                
MR.  BARRON turned  to new  discoveries as  the next  phase.   He                                                               
pointed out  that Brooks Range  Petroleum Corporation  is working                                                               
on  viscous oil  and more  shale  oil, which  is not  to say  the                                                               
legacy fields are not important -  the bar on the graph continues                                                               
-   since they will  still produce and provide  infrastructure as                                                               
an advantage for some of the new discoveries.                                                                                   
                                                                                                                                
MR.  BARRON said  the  5-10  year plus  window  will produce  new                                                               
fields, more  viscous oil, and shale  oil.  Outside of  that, the                                                               
10 to 15  plus years, will be the Outer  Continental Shelf (OCS),                                                               
Beaufort,  OCS Chukchi,  Arctic National  Wildlife Refuge  (ANWR)                                                               
and the National Petroleum Reserve-Alaska  (NPR-A).  He suggested                                                               
this  in terms  of  how  the industry  and  developments will  be                                                               
staged, and in terms of  the legislature's discussion relative to                                                               
tax  policy.    He  summarized that  this  slide  represents  the                                                               
natural staging of impact to the production profiles.                                                                           
                                                                                                                                
REPRESENTATIVE KAWASAKI  commented that  despite the  changes the                                                               
legislature  makes,  companies will  make  decisions  based on  a                                                               
grand plan,  for example,  companies will  likely be  using light                                                               
oil for heavy oil production in  the future.  He emphasized, from                                                               
a policy  standpoint, the  legislature wants  to ensure  that the                                                               
incentives  are directed  to provide  more jobs,  construction on                                                               
the North Slope, reduction on  the decline curve, and local hire.                                                               
However,  the   recent  testimony  indicates  the   oil  and  gas                                                               
companies aren't considering  those issues.  He  wanted to ensure                                                               
that the policy group will focus on the state's interests.                                                                      
                                                                                                                                
2:37:48 PM                                                                                                                    
                                                                                                                                
MR.  BARRON attempted  to  clarify that  his  testimony could  be                                                               
misconstrued.  He  related his discussions with  the project team                                                               
for heavy  oil indicated  the companies  are cognizant  that they                                                               
will  need the  lighter oil  production as  a dilutant  for their                                                               
production. This isn't to say  that the industry is not producing                                                               
what   they  can   produce  today,   but  rather   that  industry                                                               
understands  some of  their mechanical  limitations will  require                                                               
additional  production.    He   related  his  understanding  that                                                               
industry wants to  ensure as the work is  staged and orchestrated                                                               
with existing development  - as it moves forward -  to ensure the                                                               
product  can  be  produced  in   a  timely  manner.    Again,  he                                                               
emphasized that industry is not  withholding production or simply                                                               
not developing.   The team  he met with  was saying was,  "I need                                                               
that to  be able to  do what I  need to  do."  He  suggested that                                                               
waiting 15 years  to produce heavy oil and staging  it instead of                                                               
doing it concurrently  might mean viscous oil  production may not                                                               
happen.  In  fact, it's actually just the opposite  of what might                                                               
be inferred since  the team has been trying to  figure out how to                                                               
accelerate their work  to increase production in  a timely manner                                                               
by  pushing   the  technology  and  marrying   the  two  projects                                                               
together.                                                                                                                       
                                                                                                                                
2:39:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  DICK  referred to  fracking  and  asked how  that                                                               
technology could impact Alaska.   He asked whether new technology                                                               
to extract  viscous oil would  ultimately have a  negative impact                                                               
on Alaska  if the technology is  used globally since it  might be                                                               
easier to  use heavy oil in  other places.  He  said he struggled                                                               
to understand the impact.                                                                                                       
                                                                                                                                
MR. BARRON explained that new  technologies happen every day.  He                                                               
highlighted  that fracking  is not  new technology  and has  been                                                               
used by  industry for  over 100  years.  He  pointed out  over 25                                                               
percent of  Alaska's wells have  been fracked, which  most people                                                               
don't  know; however  it is  the combining  of technologies  that                                                               
continues  to advance  the  industry.   He said  he  has been  an                                                               
engineer and has worked in the field  for over 35 years.  This is                                                               
the third  time the Bakken fields  have come up as  a development                                                               
play.   Each time, it has  stopped because of low  production and                                                               
product price - primarily due to  those two drivers.  He said low                                                               
production   was  also   due  to   technology  since   long-reach                                                               
horizontal drilling  had not  been invented  nor did  the company                                                               
have the  ability to stage 20  or 30 fracks.   He emphasized that                                                               
multi-stage  fracks have  been used  in Alaska;  however, in  his                                                               
personal experience five  or six fracks were all  that was needed                                                               
and not 20-30 in a horizontal  section.  He asked whether it will                                                               
it  ever be  detrimental to  the state  to gain  the foothold  of                                                               
knowledge and  he offered his  belief that  it is probably  not a                                                               
disadvantage.   He predicted  that if  the state's  fiscal system                                                               
and the  infrastructure in Alaska  are competitive,  the industry                                                               
will participate  in the  competitive environment.   He  has held                                                               
discussions with one  company who came to Alaska due  to the huge                                                               
resource  basin, existing  facilities  and  infrastructure.   The                                                               
operators  struggle with  the  cost of  production,  the cost  of                                                               
labor, and  product price.  If  one were to put  aside the fiscal                                                               
regime, one would still have  the three obstacles just mentioned.                                                               
He pointed out  that the economic limit for shale  oil wells will                                                               
be  a key  driver  in the  overall development  and  how much  is                                                               
developed.   For  example,  he stated  the  economic impact  will                                                               
affect whether it will  be economic to put on rod  pumps.  He was                                                               
unsure whether it  would be possible in Prudhoe Bay  due to cost.                                                               
He  concluded  that cost  of  operation  is  one of  the  biggest                                                               
hurdles in Alaska.                                                                                                              
                                                                                                                                
MR. BARRON related that the Permian  Basin in West Texas has been                                                               
around for  hundreds of years  and it  is still a  prolific basin                                                               
with  hundreds  of  rigs  running.    This  is  possible  because                                                               
operating costs are significantly lower  in Texas than in Alaska.                                                               
So, again,  from a technology standpoint  it would not ever  be a                                                               
disadvantage  and  he   predicted  companies  would  aggressively                                                               
pursue  viscous oil  if Alaska  developed advanced  technology in                                                               
coordination with the development of the rest of the field.                                                                     
                                                                                                                                
2:44:40 PM                                                                                                                    
                                                                                                                                
MR. BARRON  referred to an  exhibit from Bakken field  passed out                                                               
previously by Co-Chair Seaton indicating  a production profile of                                                               
a typical  well in the  Bakken field.   He pointed out  that this                                                               
profile  represents one  producer's average.   He  turned to  the                                                               
Eagle  Ford analog  in  the  oil zone  of  Eagle  Ford shale  for                                                               
comparison  [slide  5].    He  said  the  graphs  look  a  little                                                               
different, but if  you take off the first part  and compare it to                                                               
the  curve of  the Bakken  field the  curves are  similar.   It's                                                               
important to  consider the scale on  the bottom is in  months and                                                               
not in  years.  He stated  this is information received  from the                                                               
Texas Oil  Commission, which is  his counterpart in the  state of                                                               
Texas.  He noted  the scale on the bottom of  the slide is months                                                               
not years.   He predicted that the Eagle Ford  basin is closer to                                                               
production  than the  Bakken field.    He projected  that in  ten                                                               
months  the Eagle  Ford  will be  at  100 barrels  per  day.   He                                                               
emphasized this  goes back to  Representative Dick's  comments on                                                               
technology and  his response relative to  cost.  In a  very short                                                               
order those wells will be producing at 100 barrels per day.                                                                     
                                                                                                                                
MR. BARRON  referred to several  comments that people  have made.                                                               
He  explained  the  assumptions  of   the  graph,  which  is  the                                                               
potential for  Shublik.  The  Eagle Ford  analog is based  on six                                                               
rigs drilling six wells  per month or 30 days per  well.  He said                                                               
"drill, frack, complete, put on  line.  That's doable, but that's                                                               
six  rigs -  so six  new wells  - a  month." He  said this  graph                                                               
assumes that  every well has  a 20 year  life.  This  graph shows                                                               
the potential  of 2,000  wells being  drilled in  that formation.                                                               
The initial production  (IP) is 500 barrels per day.   He pointed                                                               
to the  graph, noting  he has  been a  bit conservative  with his                                                               
estimation; however, the  final production at 30  barrels per day                                                               
and  is  projected at  that  rate  for  20  years.   However,  he                                                               
cautioned that no one knows whether  the wells will be around for                                                               
20 years.   Eagle Ford  and Bakken basins haven't  been producing                                                               
horizontal  fracked wells  for 20  years.   He  asked members  to                                                               
consider carefully  what occurs when  drilling is ceased  and the                                                               
precipitous decline  that ensues, which goes  from 65,000 barrels                                                               
per day to 10,000 barrels in a matter  of 20 years [slide 6].  He                                                               
said,  "All  of  these  wells  are crashing  -  one  right  after                                                               
another."   Of course, this  is what  one would expect  to happen                                                               
based on the  decline curve; however, by changing it  just a bit,                                                               
based on  five years of life,  the red curve represents  20 years                                                               
whereas  the blue  curve reflects  the  change if  the well  only                                                               
lasts  for five  years  and  continues to  drop  and becomes  un-                                                               
economic.   Thus the profile  would be even more  dramatic [slide                                                               
7].   He said while  shale oil is a  very robust potential  - and                                                               
Eagle Ford basin is  only one of three zones -  in the context of                                                               
impact, these wells are not  highly prolific for very long, which                                                               
is important to understand as a state.                                                                                          
                                                                                                                                
2:50:09 PM                                                                                                                    
                                                                                                                                
MR. BARRON  turned to slide  8 as  his final slide,  titled "What                                                               
will  it take  to  reach the  goal?"   First,  he emphasized  the                                                               
importance  of a  collaborative  and  competitive environment  to                                                               
reach  the state's  goal,  noting the  industry  will respond  to                                                               
environments that are collaborative  and competitive.  Second, he                                                               
stressed  the  importance to  minimize  barriers  as much  as  is                                                               
possible especially  within the  agencies.  Third,  he emphasized                                                               
the  importance to  access all  fields and  recover all  types of                                                               
oil.    He highlighted  that  an  integrated  mix of  fields  and                                                               
developments will reverse and change  the decline - whether it is                                                               
existing  legacy  fields  or  new discoveries  in  some  form  or                                                               
fashion.   He concluded that technology  will play a part  in the                                                               
role.                                                                                                                           
                                                                                                                                
REPRESENTATIVE GARDNER  related he  discussed things  that Alaska                                                               
offers.   She asked what role  water would play since  the use of                                                               
water  and growing  concern about  disposal of  waste has  been a                                                               
critical issue.   She asked  whether water  would be an  issue of                                                               
concern.                                                                                                                        
                                                                                                                                
MR. BARRON  responded that at  this juncture  interesting changes                                                               
have occurred,  with respect  to the  chemistry that  would allow                                                               
using brackish  water, and if so,  he did not think  water source                                                               
should  not be  a  problem  since even  using  sea water  becomes                                                               
technically  possible.   The disposal  of that  water would  then                                                               
fall under  the purview  of the Alaska  Oil and  Gas Conservation                                                               
Commission  (AOGCC)   and  injecting  and   disposing  wastewater                                                               
becomes their responsibility.   He offered his belief  that it is                                                               
technically doable,  and in fact, many  companies are considering                                                               
technologies  to  reuse   a  lot  of  that   water  for  re-frack                                                               
operations.                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARDNER  referred to slide  4.  She  described the                                                               
significance of the  color fade and she wondered if  there is any                                                               
significance to the different color text also.                                                                                  
                                                                                                                                
MR. BARRON  explained that he  was attempting to  illustrate that                                                               
it's not possible to estimate  when gas infrastructure will be in                                                               
place.   He acknowledged  the gold  band darkens  over time.   He                                                               
referred to  the first  green band  on slide  4, which  shows the                                                               
primary areas of  impact as legacy fields, followed  by heavy and                                                               
viscous oil,  and shale  oil, but still  not necessarily  a prime                                                               
drive.  He highlighted that the coloration fades over time.                                                                     
                                                                                                                                
REPRESENTATIVE  GARDNER  surmised,  therefore,  that  the  legacy                                                               
fields would  be the  biggest expectation for  new oil  in Trans-                                                               
Alaska Pipeline System (TAPS).                                                                                                  
                                                                                                                                
MR. BARRON concurred.                                                                                                           
                                                                                                                                
2:54:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI asked whether a  legacy field the size of                                                               
Prudhoe Bay  and Kuparuk  has ever increased  or if  the straight                                                               
line curve is to be anticipated.                                                                                                
                                                                                                                                
MR. BARRON  pointed out that  Prudhoe Bay  is unique since  it is                                                               
the largest  field in  North America.   He questioned  finding an                                                               
equivalent analog.  However, in  terms of whether the field could                                                               
flatten or reverse  the decline of the field, the  answer is yes,                                                               
but it  is very difficult.   He mentioned that he  will have some                                                               
exhibits  at  a  later  hearing that  will  demonstrate  how  the                                                               
primary  producing area  of  Prudhoe Bay  has  been changed  with                                                               
development and  activity.  He  further suggested the  team hopes                                                               
to provide similar examples from  other areas to show the effects                                                               
of continuous work and technology.                                                                                              
                                                                                                                                
2:56:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER  referred  to   slide  7  and  noted  the                                                               
estimated 5 or 20 year life; however  he also noticed a 32 and 47                                                               
year production  life.   He asked  whether the  change is  due to                                                               
drilling ceasing after 5 or 20 years.                                                                                           
                                                                                                                                
2:56:26 PM                                                                                                                    
                                                                                                                                
MR. BARRON  explained that slides  6-7 illustrate the  time frame                                                               
based on  an assumption of  six rigs  with each rig  drilling one                                                               
well every  month:   drill, frack,  complete, put  on line  in 30                                                               
days.   He said he built  the exhibit assuming 2,000  wells would                                                               
be  drilled  so  once  the  2,000 wells  have  been  reached  the                                                               
drilling  would  stop.    He  explained  the  production  profile                                                               
existing from the curve.   Thus as the individual wells producing                                                               
on this curve  are cumulative, at the end of  the day 2,000 wells                                                               
may not  be producing, since some  of the wells may  have reached                                                               
their 20-year life  and dropped off.  The goal  is to continue to                                                               
drill to reach the production  profile; to reach the 2,000 wells;                                                               
stop; and  finally achieve the  natural decline.   He highlighted                                                               
this would  be an excellent  example after drilling ceases  of "a                                                               
no work case - for shale,  not for conventional."  He pointed out                                                               
that the graph shows the  profile if the company stopped drilling                                                               
at  year 28;  however,  if  the company  drilled  more wells  the                                                               
cumulative profile would change again.                                                                                          
                                                                                                                                
2:58:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER asked whether high  taxes cause a field to                                                               
stop  producing  at  a  certain point  that  otherwise  would  be                                                               
considered economic.                                                                                                            
                                                                                                                                
MR. BARRON  suggested the  commissioner said  it best,  that high                                                               
taxes, and high costs change the  economic limit for a well.  The                                                               
higher costs, including  taxes, tend to drive the  point when the                                                               
well  is shut  down  since the  company will  not  be making  any                                                               
money.   He agreed it  can very easily  change the value  of when                                                               
the well is shut in.                                                                                                            
                                                                                                                                
2:59:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PETERSEN  referred to  slide 4,  to the  heavy and                                                               
viscous oil with  shale oil right below it.   He highlighted that                                                               
shale oil  is a lighter type  of oil so the  development of those                                                               
two types  of oil together  could help  solve the problem  of oil                                                               
flowing  down  the  pipeline.     He  asked  whether  that  is  a                                                               
possibility.                                                                                                                    
                                                                                                                                
MR. BARRON agreed  that is a possibility.  He  added that when he                                                               
met  with  the viscous  team,  the  team  was excited  about  the                                                               
prospects, but  also recognized some of  the technical challenges                                                               
-  ensuring adequate  dilutants.   He recalled  the ratio  needed                                                               
would be 1:1.  He related the  team is still studying it and they                                                               
need latitude  for continued  research; however, if  it is  a 1:1                                                               
ratio, if  the shale crude  is of the  right quality it  could be                                                               
used to produce the viscous oil.                                                                                                
                                                                                                                                
CO-CHAIR FEIGE announced that the  final testifier would be a PFC                                                               
Energy presentation  "Overview of oil and  gas companies' Capital                                                               
Allocation  Processes,   Investment  Decision  Making   &  Global                                                               
Portfolios" by Tony Reinsch.                                                                                                    
                                                                                                                                
3:02:00 PM                                                                                                                    
                                                                                                                                
TONY  REINSCH,  Senior  Director,  Upstream &  Gas,  PFC  Energy,                                                               
stated that PFC  Energy is an independent  consultant and advisor                                                               
to the oil  and gas industry, exclusively.   The company counsels                                                               
and   discusses   strategy,   planning,  and   development   with                                                               
governments, regulators, industries,  national oil companies, and                                                               
oil and gas  producers on a global basis, and  through the entire                                                               
value chain  from upstream oil  and gas development  to refining,                                                               
distribution product markets, and the  service industry.  He said                                                               
he  has been  asked to  share thoughts  around company  decision-                                                               
making  as  it  pertains  to  budgeting,  planning,  and  capital                                                               
allocation in  order to  shed light  on how  companies internally                                                               
make their decisions about  capital allocation within portfolios.                                                               
This could extend to global  comparisons of basins and investment                                                               
opportunities.    He offered  to  discuss  the metrics  used  for                                                               
capital allocation and de-integration  to significant oil and gas                                                               
producers,  such  as   Marathon  and  ConocoPhillips  Corporation                                                               
(ConocoPhillips)   separating  their   upstream  and   downstream                                                               
operations, including identifying drivers,  pros and cons to that                                                               
fairly significant change in  corporate structure.  Additionally,                                                               
he  said he  will discuss  capital  allocation over  the life  of                                                               
basins and  fields and net  free cash  flow moving from  basin to                                                               
basin as  the industry moves  forward over  time [slide 2].   The                                                               
second part of his PowerPoint  presentation will cover the global                                                               
portfolios of the  three large integrated major  oil producers in                                                               
Alaska:   BP Global,  ExxonMobil Corporation,  and ConocoPhillips                                                               
Company.                                                                                                                        
                                                                                                                                
3:06:00 PM                                                                                                                    
                                                                                                                                
MR. REINSCH discussed the "Annual  Planning Cycle" [slide 3].  He                                                               
referred to  the annual  process that all  oil and  gas companies                                                               
follow  in their  annual budget  cycle process.   He  pointed out                                                               
this slide  illustrates that  in the first  quarter of  each year                                                               
companies  will undertake  a review  of their  strategy vis-à-vis                                                               
the  world.   He related  that  in the  second quarter  companies                                                               
review  the  new things  they  might  begin, followed  by  budget                                                               
preparation  in  the third  quarter,  and  lastly by  the  budget                                                               
approval process.                                                                                                               
                                                                                                                                
3:07:33 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH referred  to  "Strategy,  Planning, and  Positioning                                                               
[slide 4].   The strategy begins  with an outlook for  the future                                                               
of the world,  usually covering a 15-20 year  outlook taking into                                                               
account  the global  economic performance  and impacts  on energy                                                               
demand,  competitor  analysis,  and  geopolitical  considerations                                                               
that may  impact oil and  gas global  markets.  Each  company has                                                               
preferences for basins and jurisdictions  they work in and review                                                               
these options with an eye  towards above ground risks, changes in                                                               
the  operating environment,  and potentially  defining new  no-go                                                               
geographical areas where  companies will not do  business or open                                                               
basins  in  which companies  were  not  previously interested  in                                                               
engaging such as  the shale oil gas plays in  North America.  The                                                               
companies  will   consider  the  operating   environment  issues,                                                               
including  discussions  of  any  blockers,  enablers,  gaps,  and                                                               
logjams that  could get  in the  way of  their plans.   Companies                                                               
will  review  the   environmental,  including  taxation  systems,                                                               
market outlooks and what competitors  are doing, which is an area                                                               
that PFC Energy  engages in to a considerable  extent.  Companies                                                               
are interested in knowing who else  is doing what they are trying                                                               
to do and where they might  run into competition.  Companies will                                                               
assess information and  come up with options and  plans for where                                                               
they will move next and what they will engage in.                                                                               
                                                                                                                                
MR. REINSCH  referred to the  "Annual Planning Cycle"  [slide 5].                                                               
He stated this information would  be transferred into dollars and                                                               
cents in  the budget preparation.   He referred to  the "Planning                                                               
Cycle   and  Capital   Allocation"  Corporate   Input:     Common                                                               
Assumptions  on External  Environment" [slide  6].   He indicated                                                               
each  business unit  will update  its long-range  plan, five-year                                                               
plan,  and ultimately  the  budget preparation  on  the basis  of                                                               
common  assumptions.   He related  that  this capital  allocation                                                               
competition  begins  this  process  since  each  unit  highlights                                                               
opportunities  they believe  are in  the best  interest of  their                                                               
company and are best able to  impact and deliver the strategy and                                                               
objective for the  company.  The corporate section  rolls it into                                                               
discretionary and non-discretionary  capital expenditure (Capex),                                                               
and  it is  recycled until  the  figures are  appropriate and  it                                                               
moves to  the board for  approval, to allocation of  capital, and                                                               
project approval  and execution.   In response  to Representative                                                               
Saddler, Mr. Reinsch answered that  no importance should be given                                                               
to the color gradations on slide 6.                                                                                             
                                                                                                                                
3:11:54 PM                                                                                                                    
                                                                                                                                
MR. REINSCH related the final  piece of the annual planning cycle                                                               
is the budget approval and  allocation of capital in November and                                                               
December of each year and then  the cycle begins again [slide 7].                                                               
The  question, within  that cycle  then becomes  how a  project -                                                               
large  or small  -  attracts  capital within  that  process.   He                                                               
stated a  number of considerations  come into play:   materiality                                                               
to the company, full-cycle economic  performance metrics, and all                                                               
of the  considerations of  whether an oil  and gas  company "IOC"                                                               
will  position  or continue  to  invest  in a  particular  asset,                                                               
basin,  or  country  [slide  8].   He  identified  the  types  of                                                               
projects  that  Alaska is  accustomed  to  seeing are  multi-year                                                               
duration projects and long-term production.   He pointed out that                                                               
all projects can be broken  into discrete investment decisions or                                                               
stages.   This creates a  stage-gate that the board  of directors                                                               
and  senior management  can stop,  amend, or  accelerate for  the                                                               
ongoing activity.                                                                                                               
                                                                                                                                
MR.   REINSCH  related   the  buckets   of  discrete   investment                                                               
activities   are  considered   project   approval  requests   and                                                               
companies  will  take  those  forward   for  approval  by  senior                                                               
management.    Clearly,  if  the  issue  is  drilling  a  set  of                                                               
technically  difficult wells,  the project  approval request  can                                                               
extend beyond  a given  budget year.   He  said what  defines the                                                               
activities is  that they are  discrete in  a larger body  of work                                                               
with  a beginning  and an  end.   Each  project approval  request                                                               
(PRA)  has  an approval  for  expenditure  attached to  them  for                                                               
specific activities.   These stage-gates are points  in which the                                                               
company will make a determination  regarding whether to continue,                                                               
amend,  or suspend  activities on  a given  project and  field or                                                               
basin.   This  allocation  level represents  the  point at  which                                                               
Alaska competes within  the portfolios of all  other companies to                                                               
attract capital -  not in the absolute sense -  but in a relative                                                               
sense in competition with all other parts of the world.                                                                         
                                                                                                                                
3:15:38 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  discussed the "Business Control  Architecture" which                                                               
illustrates six budgets laid out on  the center of the charts and                                                               
three competing  streams of activities  over time [slide 9].   He                                                               
pointed out the green bars, and  noted this company is looking at                                                               
a new  basin in year two  and at the  end of that work  the board                                                               
makes a  decision regarding whether  to continue  to exploration.                                                               
In this  instance, they  decided to move  on to  exploration with                                                               
the  Approval for  Expenditure (AFE).   He  clarified one  way to                                                               
consider their  process is that  the finances lie in  the project                                                               
approval process and  the approval for expenditure  (AFE) is just                                                               
presenting the  paperwork for payment  and no decisions  are made                                                               
during the AFE process.                                                                                                         
                                                                                                                                
3:17:23 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH referred  to  the  beige bars  on  the slide  titled                                                               
"Appraisal  PAR"   and  "Development   PAR"  which   move  beyond                                                               
exploration  to  appraisal  [slide  9].   Fields  will  often  be                                                               
appraised  and  a  decision  will  be made  not  to  develop  the                                                               
project, but  instead to divest  or "park" the project  and await                                                               
infrastructure maturation.  For example,  the McKenzie Delta is a                                                               
classic example  in which ample  resource was discovered,  but it                                                               
stopped  at the  appraisal stage.   The  top bars  on this  slide                                                               
indicate  "Exploration  PAR",  "Appraisal PAR"  and  "Development                                                               
PAR."  He  pointed to the vertical capital slices  in year three,                                                               
shown by  the dotted line.   He indicated  that adding up  all of                                                               
the AFE approvals  represents the capital budget  for the project                                                               
and this  process is the  process used within these  companies to                                                               
develop their budget.                                                                                                           
                                                                                                                                
MR.  REINSCH highlighted  that some  activity  "bleeds" into  the                                                               
fourth  year,  which  becomes non-discretionary  capital  to  the                                                               
"Year Four"  budget.  He  noted a  certain amount of  the capital                                                               
budget that has already been  approved and committed will show up                                                               
in subsequent years.                                                                                                            
                                                                                                                                
3:19:49 PM                                                                                                                    
                                                                                                                                
MR.   REINSCH   discussed   the  "Upstream   Financial   Metrics:                                                               
Measuring Performance"  [slide 10].   He noted this  slide shifts                                                               
to assets, how asset performance  is measured, and how attraction                                                               
is  determined  when  securing  capital  within  a  budget.    He                                                               
highlighted  that  performance  is measured  in  different  ways,                                                               
including  growth,  profitability,  efficiency,  cash  flow,  and                                                               
risk.  He  defined growth as the ability to  manage the top line,                                                               
or increasing the volume of  production.  He identified the first                                                               
measure  of  performance  as growth,  and  the  compound  average                                                               
growth rate (CAGR) relative to  target, or the measure of whether                                                               
the project has been able to  deliver according to the plan.  The                                                               
quality of  the growth  includes the  ability to  maintain growth                                                               
and whether  the acreage is  inadequate to maintain growth.   The                                                               
plowback rate  would really  be a  measure of  how much  is being                                                               
reinvested back  into the  assets and  shows the  relative growth                                                               
intentions   between   different   regions.  Second,   would   be                                                               
profitability  or the  ability to  manage  the bottom  line.   He                                                               
stated  that  upstream  cash  flows,  upstream  net  income,  and                                                               
upstream  production  costs are  all  measures  of how  well  the                                                               
company is  doing in a  bottom line sense  or the revenue  net of                                                               
cost.   Third,  he defined  efficiency as  the ability  to manage                                                               
capital with the  most common metric being the  return on capital                                                               
employed (ROCE).   He highlighted  that finding costs  - resource                                                               
found  relative   to  exploration   dollars  -  is   finding  and                                                               
development  costs (F&D)  to  bring the  resource  to market  and                                                               
replacement costs,  such as how much  it costs just to  stay even                                                               
or  the per  barrel cost  of production.   Fourth,  he identified                                                               
cash flow  measures as  the ability to  manage investment  or re-                                                               
investment in the  company's portfolio.  Issues  such as debt-to-                                                               
capital ratio  and dividend  requirements also  become important,                                                               
too.   He  pointed out  some companies  are focused  on dividends                                                               
whereas  others -  particularly smaller  independent companies  -                                                               
are mandated to  reinvest all of their net revenue.   In response                                                               
to Co-Chair Feige, he clarified several acronyms.                                                                               
                                                                                                                                
3:23:01 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  identified the compound  average growth  rate (CAGR)                                                               
as  a  measure of  compounded  growth  over  time as  opposed  to                                                               
average growth,  which is  taking the end  year and  initial year                                                               
and  simply dividing  it.   He  explained  that compound  average                                                               
growth  provides more  of a  rate  or acceleration  measure.   He                                                               
stated  that  the  return  on capital  employed  (ROCE)  will  be                                                               
discussed  in more  detail, but  is used  to determine  whether a                                                               
company will undertake  an activity using a  number of benchmarks                                                               
or metrics.   He  discussed the  "Project Selection  and Decision                                                               
Metrics  [slide 11].    He  highlighted a  few  metrics that  are                                                               
common in the  industry and defined them:  Pay-out  period is the                                                               
length  of time  required for  capital return,  which is  a major                                                               
consideration  for   smaller  oil  and  gas   companies,  but  is                                                               
important for  all companies; the  internal rate of  return (IRR)                                                               
is one  of the most  common measures  used to rank  projects; and                                                               
the net present value (NPV) is  the measure of how much value the                                                               
investment activity  is bringing to  the company.  He  noted that                                                               
the present  value of  cost minus the  present value  of revenues                                                               
should be greater than zero.   He pointed out this as another way                                                               
in which a hurdle rate can come into play.                                                                                      
                                                                                                                                
3:25:24 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH   highlighted  that  net  present   value  is  often                                                               
expressed  relative to  production  or barrel  of oil  equivalent                                                               
(BOE) to  obtain the  present value per  barrel of  oil produced,                                                               
which provides a different measure  of investment efficiency.  He                                                               
said  the net  present value  (NPV)  is what  would be  generated                                                               
relative to the amount of  investment or dollar of investment for                                                               
a  project.   He clarified  that  it is  often referred  to as  a                                                               
present value per investment (PVPI) dollar measure, as well.                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER asked whether  the assessment of return to                                                               
the investment  dollar incorporates  various internal  goals that                                                               
companies may have.                                                                                                             
                                                                                                                                
MR. REINSCH  answered that  a particular asset  may fit  within a                                                               
portfolio in  a different  way between  companies.   For example,                                                               
ExxonMobil  may  review  the long  investment  strategy  and  may                                                               
notice a  hole in  the company's  portfolio in  ten years  that a                                                               
particular  technology  could  fill.    Thus  investing  in  that                                                               
technology  may  help  acquire  a  wall of  cash  flow  that  the                                                               
technology  would generate.   He  acknowledged some  technologies                                                               
may  have a  place in  one  portfolio, but  not in  another.   In                                                               
further response  to Representative  Gardner, Mr.  Reinsch agreed                                                               
metrics  must be  taken in  context and  must fit  together in  a                                                               
certain  way.    He  was   unaware  of  any  company  that  makes                                                               
investment  decisions based  on one  measure of  performance, but                                                               
rather  will decide  how these  different  measures fit  together                                                               
vis-à-vis the  rest of the assets  in the portfolio.   He related                                                               
that some of  it depends on timing, but also  depends on when the                                                               
company  can  undertake  large   scale  or  capital  projects  or                                                               
development.                                                                                                                    
                                                                                                                                
3:29:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  asked whether any average  expectations are held                                                               
by industry for infield drilling  on the payback or payout period                                                               
or return on  capital versus new development or if  it is company                                                               
specific.                                                                                                                       
                                                                                                                                
MR.  REINSCH answered  that it  is very  much asset  and activity                                                               
specific decision.   He related  that reviewing  capital projects                                                               
with  six-year investment  cycles would  typically have  a longer                                                               
payout.  For  example, one of the  reasons deepwater developments                                                               
are  currently  sized  rather  than sized  to  have  an  extended                                                               
production plateau is  to generate the return to  that capital as                                                               
fast as  possible.  He  suggested that one  would need to  make a                                                               
strong case  to industry if the  capital is exposed for  three or                                                               
more years.                                                                                                                     
                                                                                                                                
CO-CHAIR  SEATON related  the  legislature  has been  considering                                                               
legacy fields  versus non-legacy  fields.  He  questioned whether                                                               
90  days  is the  typical  payout  period  or  if that  would  be                                                               
considered a  short time frame.   He reiterated he  is interested                                                               
in  the  payout period  and  what  it  would mean  to  investment                                                               
decisions.                                                                                                                      
                                                                                                                                
MR. REINSCH offered that if  he saw a capital investment activity                                                               
with a 90-day  payout period he would want to  check the IRR, the                                                               
NPV,  mature  reality,  and  PVPI  to  determine  how  the  other                                                               
measures  line  up.    He   suggested  that  the  payout  periods                                                               
represent the simplest and least  instructive of the many hurdles                                                               
a  project will  need  to  go through  to  attract  capital.   He                                                               
concluded  that if  the payout  period  is over  three years  for                                                               
almost any investment that management  will look hard at what the                                                               
project is attempting to accomplish.                                                                                            
                                                                                                                                
3:32:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE sought  clarification regarding  the factors  and                                                               
subjectivity for which projects go forward and which don't.                                                                     
                                                                                                                                
MR. REINSCH answered  that he has been describing  the science of                                                               
the decision-making  process.  He  agreed all of the  metrics are                                                               
assessed for  available projects, which  are put into  the models                                                               
and ranked  in many different ways.   The science has  been taken                                                               
to  the extent  of  creating efficiency  frontiers and  portfolio                                                               
analysis, but generally speaking what is  missing is the art.  He                                                               
said that  solely modeling has not  been found to be  optimal for                                                               
the  company's strategy.   Furthermore,  what  is being  invested                                                               
will  impact what  the company  will be  in three,  five, or  ten                                                               
years  from now,  which  needs  to be  taken  into  account.   He                                                               
characterized the  process as a  combination of science  and art.                                                               
He  suggested that  if one  can't overcome  the hurdles  then the                                                               
project isn't considered.  He  highlighted that a certain minimum                                                               
requirement exists for assets to  compete for capital and passing                                                               
all  the  hurdles  doesn't  necessarily   mean  capital  will  be                                                               
attracted;  however,  at  least  the  project  would  be  in  the                                                               
running.                                                                                                                        
                                                                                                                                
3:34:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON related her understanding  that any tax                                                               
regime must  be fair since  it is up  to the companies  to decide                                                               
which project fits into their portfolio best.                                                                                   
                                                                                                                                
MR.  REINSCH  answered  that  one  of  the  challenges  faced  by                                                               
resource owners  is that  assets compete  with each  other within                                                               
their  portfolios and  with basins  around the  world; similarly,                                                               
the fiscal  system in  Alaska competes  against all  other fiscal                                                               
systems  in which  these  companies  are engaged.    He said  the                                                               
presentation will  cover what  each of  these three  companies is                                                               
looking   for  with   respect  to   growth  by   examining  their                                                               
portfolios.   He  noted in  some cases,  companies will  focus on                                                               
North America  and for others  the focus  is somewhere else.   He                                                               
described this as part of  the challenge that the business owners                                                               
face.  For example, an asset may  be a great asset, but it may be                                                               
located  in Iraq  so  that  specific asset  will  compete with  a                                                               
deepwater  well in  the lower  tertiary  of the  Gulf of  Mexico.                                                               
Clearly,  this   example  represents  an  "apples   and  oranges"                                                               
comparison,  but that  is what  is involved.   He  responded that                                                               
there  is an  onus which  increases  depending on  how reliant  a                                                               
jurisdiction is on oil and gas  revenue for its budget and future                                                               
to ensure they have the ability  to have a dialogue with industry                                                               
- financial  and technical - to  arrive at comfort on  both sides                                                               
of  the table.   He  emphasized the  importance of  understanding                                                               
these assets, such as an  enhanced oil recovery program or terms,                                                               
such as ultra-heavy oil to  fully understand where the challenges                                                               
lie and  to be able to  determine when the challenges  are not as                                                               
severe as  being represented.   He  characterized the  process as                                                               
client-contractor negotiations.                                                                                                 
                                                                                                                                
3:38:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON asked  where on  the  chart the  net income  per                                                               
barrel  of  oil equivalent  (BOE)  comes  in terms  of  comparing                                                               
regions or projects.                                                                                                            
                                                                                                                                
MR. REINSCH  asked for clarification  on whether the  question is                                                               
if the number could be compared between basins or projects.                                                                     
                                                                                                                                
CO-CHAIR SEATON answered  yes.  He said the state  has reports of                                                               
net income per BOE from  Alaska versus other jurisdictions in the                                                               
U.S.  The  legislature has been making judgments  on tax systems.                                                               
He asked  which relationship the legislature  should examine with                                                               
respect to net income barrel  of oil equivalent (BOE) on Alaska's                                                               
projects  versus other  projects  and whether  that  should be  a                                                               
metric that is considered.                                                                                                      
                                                                                                                                
MR. REINSCH answered it is not  an either-or metric such that the                                                               
highest net income  per barrel of oil equivalent (BOE)  wins.  He                                                               
highlighted that the materiality element  is one in which the net                                                               
income per BOE  doesn't really shed any light  on. Further, small                                                               
fields  with substantial  infrastructure  can  generate good  net                                                               
income for  BOE numbers  since they  may only  need to  bring the                                                               
product  to surface  since pipelines  and  the processing  plants                                                               
already exist.   He said the infrastructure has been  paid for by                                                               
prior  activity based  on tariff  so it  is difficult  to compare                                                               
that  scenario  against  development   that  brings  fields  into                                                               
production  without any  infrastructure.   The first  development                                                               
may have  net income  per BOE numbers  that are  not particularly                                                               
attractive, but  every subsequent  development will  benefit from                                                               
the  infrastructure.   He also  said this  is almost  a "more  is                                                               
better" argument, but  it doesn't necessarily make  the project a                                                               
better one from  the company's perspective.   In further response                                                               
to  Co-Chair  Seaton,  he  agreed  it  could  be  due  to  scale,                                                               
materiality,  or growth  issues and  if a  project can  be turned                                                               
into something core and material to the company.                                                                                
                                                                                                                                
The committee took an at-ease from 3:41 p.m. to 3:59 p.m.                                                                       
                                                                                                                                
3:59:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE called the meeting back to order.                                                                                
                                                                                                                                
MR.  REINSCH referred  to the  term "maximum  negative cash  flow                                                               
exposure," which he defined as  really a measurement of financial                                                               
capital  requirement.   Clearly, major  capital projects  such as                                                               
LNG  developments  or  integrated  mined oil  sands  can  involve                                                               
billions  of dollars  of capital  exposure prior  to any  revenue                                                               
being  generated.   The question  of the  maximum exposure  for a                                                               
company  and  how much  the  company  can  afford to  undergo  is                                                               
critical.   He emphasized two  major companies have  almost "come                                                               
to  the  wall"  by  having   major  capital  programs  that  were                                                               
exhausting their  ability to finance -  Chevron [Corporation] and                                                               
Shell  [Global]- and  in both  cases  high oil  prices saved  the                                                               
moment.  He  stated that net book reserves  are important because                                                               
bookable reserves determine the value  of an oil and gas company.                                                               
One of  the reasons companies  are not  willing to engage  in fee                                                               
for service contracts  such as Mexico offers -  where the company                                                               
is not  allowed to book  barrels to  take ownership -  is because                                                               
without that ownership  there isn't an increment of  value to the                                                               
company.   Finally,  the capital  expenditure per  barrel of  oil                                                               
equivalent  (Capex/BOE)  or the  cost  per  barrel of  production                                                               
capacity burdens  the project by  the cost of  infrastructure and                                                               
facility  requirements necessary  to get  the product  to market.                                                               
He concluded this tends to  favor projects that are less complex,                                                               
being  undertaken  in  well-established  geographic  environments                                                               
with ready access to infrastructure.                                                                                            
                                                                                                                                
4:02:18 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  focused on "Net  Present Value (NPV)"  and "Internal                                                               
Rate of  Return (IRR)" [slides 12-13].   He explained NPV  as the                                                               
value of a project when all  future net cash flows are discounted                                                               
to the present at an appropriate  rate or discount factor such as                                                               
cost of capital to the company.   It may be the company's cost of                                                               
equity  or debt,  which  is  the difference  between  all of  the                                                               
revenues  anticipated from  a  project and  all  costs that  will                                                               
burden a project  are discounted to a single point  in time.  For                                                               
example, he stated that if an  NPV is greater than zero, arguably                                                               
the project  is worth  undertaking in  an economic  or commercial                                                               
sense.  That  means the specific project is expected  to at least                                                               
generate a  competitive return to  the capital being  invested or                                                               
what it will  cost to invest in that project.   Clearly, NPV that                                                               
is less  than zero  would represent a  project the  company would                                                               
not even  consider, but NPV in  and of itself is  not a selection                                                               
criterion.                                                                                                                      
                                                                                                                                
MR. REINSCH related the advantages  of NPV, including that it can                                                               
be calculated exactly, risk can  be accommodated, for example, to                                                               
enable a comparison  between an investment in Alaska  with one in                                                               
Angola,  Uganda, or  Russia.   This  is done  by "risking"  those                                                               
flows of  capital and revenue,  or to discount the  revenue flows                                                               
to  reflect  likelihood of  interruption.    He stated  that  the                                                               
discount rate  allows a  company to  identify cost  of investment                                                               
capital  to undertake  the projects,  such as  using the  cost of                                                               
equity,  raising funds  in the  capital market,  and the  cost of                                                               
debt or  a weighted  average of  the two to  use as  the discount                                                               
factor.                                                                                                                         
                                                                                                                                
4:05:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  asked whether the discount  factor or appropriate                                                               
rates are interest rates.                                                                                                       
                                                                                                                                
MR. REINSCH  answered not necessarily,  and in fact,  very seldom                                                               
would it refer to the interest rate.   While it is reflected in a                                                               
formula as  an interest rate,  normally a company would  use some                                                               
representation of the cost of capital.   It could be the interest                                                               
rate to  borrow or it  could be the difference  between long-term                                                               
versus short  term borrowing.   Further,  it could  represent the                                                               
cost of equity to the firm.   He suggested that if a company must                                                               
raise  capital as  opposed to  borrowing, it  would be  much more                                                               
expensive.   Companies want to  reflect when an  undertaking will                                                               
require the company to go to  capital markets and raise equity to                                                               
undertake the development.   Thus, the discount  factor will vary                                                               
pretty  significantly from  company  to company.    The one  most                                                               
often used  in the literature around  the industry is an  NPV 10,                                                               
which means a 10 percent discount  factor.  He noted each company                                                               
would have its own representation for the NPV.                                                                                  
                                                                                                                                
4:06:35 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON said  he was struggling with  the discount rates.                                                               
He  related his  understanding that  if one  area was  secure the                                                               
company wouldn't  use an  NPV 10,  but if  there are  problems or                                                               
insecurities that  a company might use  an NPV 12-15, but  he was                                                               
unsure how  to incorporate  discounting the  cost or  the revenue                                                               
flows.                                                                                                                          
                                                                                                                                
MR.  REINSCH  explained  that  this   is  being  debated  in  the                                                               
industry.   There are situations  in which  a company will  use a                                                               
discount factor of 10 for North  America and 15 for Uganda and 22                                                               
for Mozambique.   The  problem with taking  that approach  is the                                                               
discount  rate  has such  a  huge  impact  - since  it  discounts                                                               
present  value.     He  characterized  it  like   using  a  blunt                                                               
instrument when  looking at the  portfolio of opportunities.   He                                                               
noted  that  as  soon  as  the  discount  rates  are  changed  it                                                               
basically  takes away  the  ability to  compare  projects.   More                                                               
appropriately, it would be better  to use a single discount rate.                                                               
He pointed  out that in  a risky environment  what is at  risk is                                                               
the  revenue flow.   He  suggested discounting  that or  adding a                                                               
factor which would still allow an "apples to apples" comparison.                                                                
                                                                                                                                
4:08:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FOSTER  asked  whether   the  profit  premium  is                                                               
included.   For  example, if  you are  using the  NPV 10  percent                                                               
since the shareholders  are requiring as a return,  the effect is                                                               
to back it  up to zero, which  would be the breakeven  point.  He                                                               
asked  whether  the profit  premium  is  built into  the  revenue                                                               
stream or the NPV figure.   He suggested that operating in Angola                                                               
would  require including  a risk  premium.   He reiterated  he is                                                               
trying to figure  out where the profit premium is  built into the                                                               
NPV.                                                                                                                            
                                                                                                                                
MR.  REINSCH answered  that the  NPV is  the amount  greater than                                                               
zero.   Ideally, a company would  not want any profit  margins or                                                               
add-factors built  into the base  cost and revenue stream.   Thus                                                               
the  revenue should  strictly be  the price  times the  quantity,                                                               
with costs being  the operating costs estimated over  the life of                                                               
the project.   The interest rate would be applied  to that and if                                                               
the NPV is greater than zero  this project is generating a profit                                                               
margin;  then it  would depend  on  the NPV  amount greater  than                                                               
zero.  Then the company would start comparing projects.                                                                         
                                                                                                                                
REPRESENTATIVE FOSTER  clarified his understanding is  the profit                                                               
is built into the revenue stream that is being discounted.                                                                      
                                                                                                                                
MR. REINSCH responded that profit is  built in to the extent that                                                               
those  discounted  streams  represent  revenue  and  cost.    For                                                               
example,  if the  NPV exceeds  the NPV  of cost,  the company  is                                                               
generating  a profit.    He stated  that if  the  discount is  an                                                               
appropriate discount  rate representing the cost  of capital, the                                                               
returning  capital would  already  be accounted  for a  returning                                                               
capital  -  normal  or  competitor  return -  which  is  why  the                                                               
appropriate  discount factor  would  be the  cost  of capital  so                                                               
companies  make sure  that  is in  the analysis  as  part of  the                                                               
calculation.                                                                                                                    
                                                                                                                                
4:10:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  asked where  lease clauses  and mandatory                                                               
development  time  lines  would  be factored  into  the  decision                                                               
matrix.                                                                                                                         
                                                                                                                                
MR. REINSCH  said he  would expect  them to  be reflected  in the                                                               
revenue stream.  In the  particular NPV calculation this would be                                                               
part of  how to determine the  quantity number by which  price is                                                               
multiplied.    He explained  that  if  a requirement  to  develop                                                               
within  a  certain time  frame  existed  then, presumably,  those                                                               
volumetrics   being   modeled   represent   adhering   to   those                                                               
requirements  so those  types of  restrictions would  help define                                                               
the project as its being modeled.                                                                                               
                                                                                                                                
REPRESENTATIVE  GARDNER  surmised, then,  that  if  by this  date                                                               
there is not a flow then  the leases would be pulled; however she                                                               
asked  whether  something  more nebulous  like  a  commitment  or                                                               
obligation to  develop - a  duty to develop  - have any  place in                                                               
these calculations.                                                                                                             
                                                                                                                                
MR. REINSCH  said it wouldn't  have such a  place and to  model a                                                               
project  somehow violating  that wouldn't  make sense.   He  said                                                               
that any  project being considered  would presumably  be adhering                                                               
to the regulatory  or legislative requirements for  pace or scale                                                               
of  development.  For  example,   if  the  government  imposed  a                                                               
unilateral  adjustment  in  government  take in  Israel  from  35                                                               
percent up  to 60  percent, basically, this  would be  saying the                                                               
company found the  resources so now the take  will increase since                                                               
the  basin  is  de-risked.    He  suggested  that  that  type  of                                                               
unilateral move  is very difficult  for companies  to accommodate                                                               
since  it wasn't  in  their  modeling in  the  first  place.   He                                                               
offered  his belief  that  changing the  rules  part way  through                                                               
without grandfathering in the terms  creates a real challenge for                                                               
this industry on a global scale.                                                                                                
                                                                                                                                
REPRESENTATIVE GARDNER  surmised that  risk was also  factored in                                                               
the modeling.                                                                                                                   
                                                                                                                                
MR. REINSCH  responded no,  not in that  case; however,  he noted                                                               
the quid pro quo for that is  if the fiscal terms change to allow                                                               
for  another  avenue of  commercialization.    In that  case  the                                                               
company in question  is arguably in a much  stronger position for                                                               
export.   He said,  "Yes, we've discovered  all of  this resource                                                               
and  yes,  we've  built  up  35 years  of  domestic  coverage  at                                                               
projected growth  rates for your  country, now let us  export the                                                               
rest - so there's give and take in this."                                                                                       
                                                                                                                                
4:14:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON questioned  what the ideal NPV  would be if                                                               
an NPV greater than zero is the minimum result in the formula.                                                                  
                                                                                                                                
MR. REINSCH answered that NPV is  a dollar measure so it would be                                                               
in the  millions or billions of  dollars.  He explained  that you                                                               
can't rank with the NPV since it's  not a hurdle in that way, but                                                               
it  gets  the  company  on  the  table.    A  large  NPV  doesn't                                                               
necessarily  mean   that  this   is  the  best   project  either.                                                               
Sometimes revenue streams  can be so far in the  future that they                                                               
are  heavily discounted  so looking  at one  metric in  isolation                                                               
would  lead a  company not  to  undertake a  project that  really                                                               
should be undertaken  from the perspective of  the treasury, such                                                               
as an LNG development in Qatar being a case in point.                                                                           
                                                                                                                                
4:15:47 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  moved to  the second metric,  which is  the internal                                                               
rate of  return (IRR) [slide 13].   He explained to  reflect back                                                               
on  NPV as  the amount  greater than  zero, or  the net  positive                                                               
contribution of a project using  a given discount rate across all                                                               
projects, that  the IRR  calculates what  discount rate  it would                                                               
take in  order to equate all  revenue flows to all  capital costs                                                               
or costs incurred.  The higher  the rate at which those two flows                                                               
are equal, the more valuable is  a given project.  He highlighted                                                               
that IRR lends itself to a  comparison across projects and is one                                                               
of  the  hurdle  rates  often  used in  industry.    The  biggest                                                               
disadvantage  to the  IRR is  that multiple  rates of  return are                                                               
possible for  any project  when volatility  in cash  flow exists.                                                               
He noted that large positive  and negative swings in revenue over                                                               
the  life of  a  given project  - decision  makers  like to  have                                                               
unique decisions -  and IRR does have that  weakness, but clearly                                                               
it is  for an exceptional type  of project.  He  highlighted that                                                               
for the majority of project the IRR  is a metric that can be used                                                               
for project comparison.                                                                                                         
                                                                                                                                
4:17:54 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH gave  an example  of a  project moving  through this                                                               
process, with a  number of metrics brought to  bear, including an                                                               
NPV 10  greater than zero, a  PVPI greater than 1.3,  and payback                                                               
less than  three years.   This appears to  be a good  project and                                                               
looks  like  a project  that  should  be undertaken  [slide  14].                                                               
However, a  common situation may arise  - as is often  the case -                                                               
that the company has more projects  than capital.  He pointed out                                                               
even with  $100-$130 per barrel  oil that a good  chief financial                                                               
officer will  impose discipline  on a company  by setting  an IRR                                                               
level as  one of  the thresholds  that the  project will  need to                                                               
succeed.   Projects which  don't meet  that would  become capital                                                               
returned to shareholders.   He suggested it isn't  just about the                                                               
projects, but that at some point  it makes more sense to buy back                                                               
shares or  give the money  back to  shareholders than it  does to                                                               
invest  in   new  project  developments.     He  emphasized  that                                                               
ExxonMobil is  very disciplined and aggressive  about this vis-à-                                                               
vis its shareholders and division policies.                                                                                     
                                                                                                                                
MR.  REINSCH suggested  that whether  you are  a smaller  company                                                               
where capital constraint  is a reality of life, or  a much larger                                                               
company  where  capital  constraint   is  being  created  through                                                               
financial discipline,  every company has more  opportunities than                                                               
available  capital.    To  bring that  discipline  to  bear,  the                                                               
company  subjects   its  portfolio  to  different   financial  or                                                               
performance   metrics,   for   example,  showing   IRR   with   a                                                               
hypothetical  hurdle rate  at $60  per  barrel.   He pointed  out                                                               
higher  IRR  is better.    Thus  by  aligning all  projects  from                                                               
highest  IRR hurdle  rate to  lowest,  and applying  a metric  or                                                               
cutoff such as  using $60 per barrel as the  IRR hurdle rate will                                                               
determine which  projects receive  funding.   He pointed  out the                                                               
little  green bracket  shows the  subset of  projects which  will                                                               
receive funding and all other projects below that rate will not.                                                                
                                                                                                                                
4:20:54 PM                                                                                                                    
                                                                                                                                
MR. REINSCH discussed  issues with the IRR hurdle rate.   He said                                                               
that an increase in  cash flow due to a rise  in energy prices in                                                               
turn increases  the capital  budget and leads  to a  lower hurdle                                                               
rate  in  order  to  undertake additional  projects.    Thus  the                                                               
company would be increasing its  financial capability.  Generally                                                               
speaking  that will  in turn  lower  the overall  quality of  the                                                               
portfolio.    He  explained  the  company  would  be  undertaking                                                               
projects the  company wouldn't  otherwise have  undertaken simply                                                               
because  the  company  has  more  money  at  its  disposal.    He                                                               
suggested that  at some point  the company  will have a  floor to                                                               
reach or  the project will  not be funded.   He pointed  out that                                                               
cycles of  value destruction  within the  industry do  occur when                                                               
companies have  a lot of money  and "go out looking  for the next                                                               
big  thing"  such  as  the  six wells  drilled  by  Cairn  Energy                                                               
offshore Greenland.  He asked  members to consider how many times                                                               
wells have  been drilled offshore  Greenland.  He surmised  it is                                                               
in the  geologists' minds that  something is there  so geologists                                                               
continue to look,  but examining periods with high  prices with a                                                               
lot of  surplus available allows  companies to chase some  of the                                                               
higher-risk potentially higher-return opportunities.                                                                            
                                                                                                                                
4:22:34 PM                                                                                                                    
                                                                                                                                
MR. REINSCH pointed  out that IRR is a measure  which if used too                                                               
exclusively can lead to "gaming"  within the internal competition                                                               
for  capital.    Project  managers would  have  an  incentive  to                                                               
overstate the "size  of the prize" to  attract investment capital                                                               
to a  proposed project,  which could  boost the  IRR.   He stated                                                               
this as  one of the reasons  industry in the past  5-10 years has                                                               
been  increasing the  degrees  of  discipline within  exploration                                                               
analysis to try to minimize this  from happening.  He said one of                                                               
the many elements that IRR does  not speak to is materiality.  He                                                               
stated  that   projects  can  have  equivalent   IRR's  but  much                                                               
different  Capex  or  revenue  profiles.    Thus  a  small  Capex                                                               
development  with a  relatively  small revenue  stream can  quite                                                               
easily have  the same  IRR as  a very large  project with  a very                                                               
large  revenue stream,  but  those two  projects  will have  very                                                               
different meanings to the treasury.                                                                                             
                                                                                                                                
4:24:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  asked whether the companies  decide to set                                                               
a specific percentage.                                                                                                          
                                                                                                                                
MR.  REINSCH answered  yes.   He suggested  that a  few companies                                                               
have been  using a domestic  versus an international  IRR hurdle,                                                               
such  as   15  percent  for   domestic  and  20-25   percent  for                                                               
international  projects.   He  described this  as  arriving at  a                                                               
level  of  corporate  comfort  or  a  different  way  to  reflect                                                               
differences in  the aboveground  environment.   Additionally, for                                                               
many  companies, such  as  TransCanada, it  may  result in  never                                                               
receiving  any   share  value  of   an  enviable   portfolio  for                                                               
international pipelines  since its  shareholder base  didn't care                                                               
about it  at all.   For example, at  one time TransCanada  was in                                                               
Argentina, Chile, and Australia, but  it didn't bring the company                                                               
any  value.     He  agreed   that  discipline  will   be  imposed                                                               
differently by companies when setting the hurdles.                                                                              
                                                                                                                                
4:26:31 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH  referred  to  "Portfolio  Efficiency:    Return  on                                                               
Capital  Employed (ROCE)"  [slide  15].   He  explained that  the                                                               
return on  capital employed (ROCE)  is what the  company receives                                                               
from capital  it is exposing.   He defined  it as the  net profit                                                               
divided by  gross capital  times 100 to  arrive at  a percentage.                                                               
He explained  that ROCE is positively  correlated with production                                                               
and  commodity prices.    These two  elements  will increase  the                                                               
numerator, all else being equal,  and it is negatively correlated                                                               
with capital  spending.   If a  company spends  a lot  of capital                                                               
without  positively  impacting production,  it  will  show up  as                                                               
deterioration in the  ROCE - and companies are  very sensitive to                                                               
this.  He characterized ROCE as  a measure of how well management                                                               
uses  the capital  that has  been put  at their  disposal by  the                                                               
owners and creditors.                                                                                                           
                                                                                                                                
MR. REINSCH  said over time, the  ROCE will develop a  pattern of                                                               
time series that  will give investors insights  into whether this                                                               
company  is becoming  more  profitable or  less  profitable.   He                                                               
suggested analysts would question  whether management is creating                                                               
value or if it is it destroying  value.  He pointed out that ROCE                                                               
on  an  annual  year-by-year  basis isn't  an  overly  meaningful                                                               
variable, but  the implications are inescapable  when viewed over                                                               
time.                                                                                                                           
                                                                                                                                
MR.  REINSCH  referred  to  the  chart  on  slide  16  "Portfolio                                                               
Efficiency:   Return  on  Capital  Employed (ROCE)    One of  the                                                               
issues arises  when a company has  been investing a lot  of money                                                               
in a  development that  has yet  to return  production -  a major                                                               
capital  project -  the ROCE  will  penalize the  company.   This                                                               
measure penalizes  companies for that type  of undertaking, which                                                               
is why  it is seldom to  see companies with high  growth rates in                                                               
terms of  production and high  capital efficiency.  He  said with                                                               
the exception  of a very few  types of assets, such  as oil sands                                                               
or LNG  development of  a large  scale gas  resource development,                                                               
nearly  all other  development  assets have  decline  rates.   He                                                               
pointed out that a significant amount  of money is spent to bring                                                               
these  projects into  production,  but as  soon after  production                                                               
they fall  away in terms  of production volumes.   He highlighted                                                               
that companies will  move in and out of  the high-growth quadrant                                                               
versus high-efficiency  quadrant, it  is pretty  hard to  live on                                                               
the upper right hand side of this chart.                                                                                        
                                                                                                                                
4:30:36 PM                                                                                                                    
                                                                                                                                
MR. REINSCH said large capital  project developments that deliver                                                               
lots of  production for a year  or two are projects  that provide                                                               
ROCE.   Thus ROCE is  biased against major  capital undertakings,                                                               
but it has  a bias towards large assets.   This puts companies in                                                               
a  bit  of   a  dilemma.    Finally,  anything   that  makes  the                                                               
denominator smaller while  the numerator is unaffected  will be a                                                               
positive   so  depreciation   creates  a   bias  towards   mature                                                               
portfolios.    Generally  speaking,  the more  mature  the  asset                                                               
portfolio, the higher the return on capital employed numbers.                                                                   
                                                                                                                                
4:32:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON referred  to  the graph  on  slide 15  and                                                               
asked whether the best place would  be at the intersection of the                                                               
two graph lines.                                                                                                                
                                                                                                                                
MR.  REINSCH answered  that  best place  to be  is  in the  upper                                                               
right-hand  quadrant as  far  as possible.    In this  particular                                                               
analysis, the  axis is the average  of growth and the  average of                                                               
return on capital  employed.  Each year the axis  moves, but high                                                               
growth and  high return  on capital  employed is  where companies                                                               
want  to be  so,  referring  to the  graph  "Global Players  Peer                                                               
Group:   Growth  v. Efficiency,"  where Petrobras  and ExxonMobil                                                               
live versus where ConocoPhillips has been for a period of time.                                                                 
                                                                                                                                
REPRESENTATIVE  HERRON asked  whether ideally,  for stability,  a                                                               
company should be located close to the intersection of the axis.                                                                
                                                                                                                                
MR. REINSCH  explained if a  company has a very  large portfolio,                                                               
producing 4  million BOE  that it  is very hard  to grow.   These                                                               
companies do  not pay a lot  of attention to growth,  but instead                                                               
pay  more  attention  to  the  ROCE.   He  suggested  with  large                                                               
portfolios  that  are difficult  to  grow,  the company  is  just                                                               
trying  to  keep  up  with   declines  in  an  efficient  manner;                                                               
otherwise shareholders will walk.                                                                                               
                                                                                                                                
MR. REINSCH  suggested that a  chart describing  Apache, Anadarko                                                               
Petroleum Corporation  and others  of that  size would  show much                                                               
lower  ROCE  numbers, but  much  higher  growth numbers.    Those                                                               
companies tend to focus on growth.   The objective is to grow the                                                               
portfolio more  efficiently, but  at a  rate competitive  with or                                                               
superior to  their peers, which  is how they  attract shareholder                                                               
loyalty and capital.                                                                                                            
                                                                                                                                
REPRESENTATIVE  GARDNER referred  to the  net profits  tax.   She                                                               
asked  whether that  would make  the state  stronger in  terms of                                                               
ROCE.                                                                                                                           
                                                                                                                                
4:35:20 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH answered  if  a  company is  involved  in new  field                                                               
development and is placing capital  at risk and the government is                                                               
supporting the company  by reducing that denominator  - return on                                                               
the  capital and  capital in  the  denominator, the  ROCE -  once                                                               
producing  -   will  be  better  than   without  that  incentive.                                                               
However,  the impact  of this  type of  government engagement  in                                                               
asset development  will be  better measured in  IRR, and  NPV for                                                               
specific projects than it will in  ROCE only because ROCE is more                                                               
of a portfolio-wide  measure.  Even in the context  of the Alaska                                                               
business unit for one of  these companies the measureable impacts                                                               
will be on a project-by-project basis.                                                                                          
                                                                                                                                
4:36:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON asked whether the  credits would be calculated in                                                               
the denominator, or whether the  total project cost will be shown                                                               
no matter whether a credit exists or not.                                                                                       
                                                                                                                                
MR. REINSCH related  his understanding the question  is whether a                                                               
company will incorporate government  exploration credits or other                                                               
incentives in its  project analysis.  He answered  that that good                                                               
companies will  conduct their project analysis  "clean" using 100                                                               
Capex and  100 percent  revenue flows as  a stand-alone  and then                                                               
consider government incentives.   If a project  passes muster and                                                               
is economic  without incentives, clearly incentives  will improve                                                               
the  economics.   If  a  project  only  becomes economic  due  to                                                               
government  incentives, then  it  becomes  a management  decision                                                               
because government  incentives are more or  less stable depending                                                               
on the regime involved.  So at  a minimum there would be an alert                                                               
that the  project is  not economic  without the  incentives being                                                               
offered.  This  "flag" would be attached to  a project regardless                                                               
of the location.                                                                                                                
                                                                                                                                
CO-CHAIR SEATON asked for clarification  on the ROCE calculation.                                                               
He asked  whether the  ROCE is  put forward  by the  companies or                                                               
whether  the companies  will consider  the total  capital of  the                                                               
projects and therefore it will not show up as credits.                                                                          
                                                                                                                                
4:39:01 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH answered  that the  ROCE is  a measure  of portfolio                                                               
performance  so  the capital  employed  is  the exposed  capital.                                                               
Further, ROCE represents a data point  not a forecast; so what is                                                               
being  measured  is actually  corporate  capital  expended.   The                                                               
denominator  will consist  of  the  company's capital  commitment                                                               
relative to the returns being  generated from the investment.  To                                                               
the  extent that  incentives mean  the company  has been  able to                                                               
leverage its  capital, they  will enhance  the portfolio  from an                                                               
efficiency of capital perspective.   He said, "Absolutely, if the                                                               
government  is  going to  assist  with  project development  that                                                               
should improve the  performance of that portfolio  from a company                                                               
perspective."                                                                                                                   
                                                                                                                                
REPRESENTATIVE MUNOZ asked  whether PFC Energy is  able to assess                                                               
the impact  that Alaska's  Clear and  Equitable Share  (ACES) has                                                               
had on the capital allocation decisions for Alaska.                                                                             
                                                                                                                                
MR.  REINSCH deferred  to  his colleague,  Janak  Mayer, who  can                                                               
better address that question.                                                                                                   
                                                                                                                                
4:40:43 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  noted that PFC Energy  was asked for insight  on the                                                               
issue of  integration versus de-integration within  the major oil                                                               
and  gas companies.   He  asked to  layout the  context for  this                                                               
discussion.   He reported that  in 2010 Marathon  Oil Corporation                                                               
(Marathon)  and  in  2011  ConocoPhillips   both  took  steps  to                                                               
separate  the  downstream  operations -  refining  and  marketing                                                               
operations - from  the upstream.  The result  was to de-integrate                                                               
their upstream  operations from the downstream  operations, which                                                               
was  a  significant   move  for  any  company  to   make.    This                                                               
essentially  created  two  stand-alone  trading  entities,  which                                                               
raised questions  on whether this would  be the next move  by all                                                               
of the  major integrated companies  like Shell  [Global], Chevron                                                               
[Corporation],  BP,  and  ExxonMobil.    Further,  he  was  asked                                                               
whether  de-integration would  have an  impact on  ConocoPhillips                                                               
and Marathon's  decision-making process and the  potential impact                                                               
on the dialogue between Alaska  and these companies.  He answered                                                               
that  several   slides  illustrate  arguments  for   and  against                                                               
integration and  provide reasons  for the companies'  actions and                                                               
if this  will become widespread  [slides 17-18].  He  stated that                                                               
companies  have integrated  and asked  whether the  arguments are                                                               
still in place.                                                                                                                 
                                                                                                                                
4:42:25 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH discussed  the "Special  issue:   Integration versus                                                               
De-Integration."   One of the founding  arguments for integration                                                               
is that  over the  course of  the commodity  cycle as  oil prices                                                               
fluctuate product  cycles can move  counter or provide  a buffer.                                                               
In  other  words as  oil  prices  decline, product  prices  don't                                                               
respond as quickly so if products,  sales, and oil sales within a                                                               
company's portfolio, the company has a  bit of a buffer for those                                                               
cycles.   The  counter argument  is that  even though  downstream                                                               
profitability  has collapsed,  there have  also been  "pure play"                                                               
refining companies that  have been quite capable  of operating in                                                               
this environment.   So it  doesn't appear  to be an  argument any                                                               
longer for integration.                                                                                                         
                                                                                                                                
MR. REINSCH  highlighted that molecule  management has  long been                                                               
another argument.  He explained  that molecule management ensures                                                               
sophisticated  refining  capacity  is  in  place  for  particular                                                               
crudes  - very  waxy,  very  acidic requires  a  certain type  of                                                               
refinery  feedstock -  so integration  allows companies  to build                                                               
refineries  for the  specific  crude.   The  counter argument  is                                                               
independent   energy  producers   have   not   had  any   problem                                                               
interacting with  the refining sector  so that doesn't  appear to                                                               
be an issue,  as well.  Additionally, there are  specific oils in                                                               
which molecule  management seems  to be necessary,  but companies                                                               
are  addressing the  issues through  contract  and joint  venture                                                               
rather than through integration.                                                                                                
                                                                                                                                
MR. REINSCH  related another argument  has been  that integration                                                               
is  a  technical  differentiator   amongst  energy  companies  to                                                               
enhance  their   ability  to  secure  projects.     For  example,                                                               
companies  could  build  a  large refinery  so  they  are  viewed                                                               
differently by  national oil companies  or stewards of  the large                                                               
non-equity accessible  resources globally.  The  counter argument                                                               
is that the ability to build  a refinery doesn't have a whole lot                                                               
to do with the ability to  efficiently operate in the upstream so                                                               
what  credit  would integrated  companies  obtain  versus a  pure                                                               
refining  company who  only performs  refinery development.   The                                                               
most recent argument is that  integration allows participation in                                                               
the  downstream  [Organisation   for  Economic  Co-operation  and                                                               
Development]  (OECD)  growth   story.    He  said   that  in  the                                                               
developing economies of China, the  Middle East, and India, being                                                               
able  to operate  in the  downstream by  building refineries  and                                                               
manage  product  markets  allows companies  to  participate  more                                                               
directly in  the development.   The counter  argument is  that in                                                               
these  regions,  many of  which  are  dominated by  national  oil                                                               
companies  or something  similar,  these  companies are  choosing                                                               
partners on  the basis  of what  they bring  to the  table.    He                                                               
pointed  out that  if companies  need upstream  development, they                                                               
will go to the best  exploration and development companies and if                                                               
they  want   a  refinery   built,  they   will  go   to  refinery                                                               
specialists.   He acknowledged there  was a  time 20 to  30 years                                                               
ago,  one  company  would  provide   all  of  the  [upstream  and                                                               
downstream] work.  Thus time has eroded much of these arguments.                                                                
                                                                                                                                
4:46:42 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  discussed the  arguments against  integration [slide                                                               
18].   One of the  biggest arguments against integration  is that                                                               
capital markets appear to value  integrated company below the sum                                                               
of its parts.  He said  that much discussion was held with regard                                                               
to BP Exploration (Alaska) Inc.  with respect to the aftermath of                                                               
Macondo  when BP's  share  price  was in  decline.   He  recalled                                                               
analysts  suggesting that  BP should  be broken  into pieces  and                                                               
sold off because  the individual assets were worth  more than the                                                               
company was  worth.  He  said the  argument against this  is that                                                               
costs are  incurred so it  is expensive to  split a company.   He                                                               
suggested  that if  any value  can  be derived  by keeping  these                                                               
assets  together  one  should  do  so.   One  strong  value  that                                                               
continues  to   exist  is  the   synergy  between   refining  and                                                               
petrochemicals.    He  highlighted  that  Total  Company  [French                                                               
energy]  and ExxonMobil  have  large  refining and  petrochemical                                                               
operations and would be reluctant to split those operations.                                                                    
                                                                                                                                
4:47:41 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH related  that the  second  argument has  to do  with                                                               
strategic focus.   In many  integrated companies,  the downstream                                                               
sector  is neglected  strategically  at the  expense of  upstream                                                               
positioning and  growth, particularly  in the current  climate of                                                               
narrow  refining margins  and  sustained, high  oil  prices.   He                                                               
suggested that  by taking  these companies  apart and  creating a                                                               
management team  dedicated to downstream  they should be  able to                                                               
create  more value  with that  capital  base than  in the  larger                                                               
company.                                                                                                                        
                                                                                                                                
MR.  REINSCH offered  the third  argument against  integration is                                                               
materiality.     There  are   very  few   materially,  physically                                                               
integrated  oil  companies  left.     For  example,  by  removing                                                               
Marathon and ConocoPhillips out of  the mix, the exhibit on slide                                                               
18  shows  refining  capacity versus  upstream  production.    He                                                               
highlighted  that there  are  only a  handful  of companies  with                                                               
significant refining  capacity and  secondly these  companies are                                                               
not just refining the company's  own product.  He emphasized that                                                               
there are  two business models going  on here.  As  he previously                                                               
mentioned  ExxonMobil  and  Total  Company  both  have  a  strong                                                               
integration  between refining  and petrochemicals  and would  not                                                               
likely want to break those functions apart.                                                                                     
                                                                                                                                
MR. REINSCH noted that the three  other large players - Statoil ,                                                               
ENI, and  Repsol YPF -  are companies that  were to a  greater or                                                               
lesser degree national or quasi-national  oil companies for their                                                               
respective countries:   Norway, Italy,  and Spain.   He suggested                                                               
these  companies   would  likely  face   considerable  government                                                               
opposition to  de-integration.  The final  and fairly significant                                                               
argument against integration  would simply be that  the world has                                                               
evolved.  There  was a time when it was  important to control the                                                               
value chain  from the barrel produced  to the gallon sold  at the                                                               
service station, otherwise  one risked exposure.   He pointed out                                                               
that in this  world of more flexible and  liquid trading, futures                                                               
contracts,   contract  sanctity,   and  product   differentiation                                                               
specialization  have eroded  the benefits  from integration  that                                                               
really defined this industry years ago by and large isn't there.                                                                
                                                                                                                                
MR.  REINSCH provided  an example.   Forty  years ago  the debate                                                               
about security  supply was a  debate about physical  barrels, but                                                               
now security supply  is about contract terms.    The dialogue has                                                               
changed about integration.                                                                                                      
                                                                                                                                
4:51:16 PM                                                                                                                    
                                                                                                                                
MR. REINSCH summarized the discussion  by relating how PFC Energy                                                               
sees the pros and cons concluding.   He said it certainly appears                                                               
that  share  appreciation  is  the  number  one  driver  for  de-                                                               
integration.  Within certain companies  there is a belief that by                                                               
separating   the   management   teams,  management   focus,   and                                                               
strategies of these  operations which have no driving  need to be                                                               
integrated that there  is more value to be created  than the cost                                                               
of taking them apart.   Therefore de-integration makes sense from                                                               
that perspective.  The market  development arguments that existed                                                               
in  the past  for a  downstream presence  have largely  ended and                                                               
arguably  one of  the last  frontiers that  was the  case was  in                                                               
Africa,  and even  there  BP, Total,  Shell  are divesting  their                                                               
refining and  product marketing activities to  pure play refiners                                                               
and  marketing   companies  who  perform  these   services  as  a                                                               
business.                                                                                                                       
                                                                                                                                
MR.  REINSCH  noted  his  third   observation  is  that  internal                                                               
decision making  and the  increased sophistication  of regulation                                                               
of this  industry on  a global  basis has  really taken  away any                                                               
value  companies may  have  derived  from cross-subsidization  or                                                               
barriers to  competitor entry that being  integrated allowed them                                                               
to secure.    Those activities  simply don't exist to  the extent                                                               
they  did  so the  value  has  eroded in  terms  of  a return  to                                                               
integration argument.                                                                                                           
                                                                                                                                
4:53:36 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  said that although  there are technical  drivers for                                                               
integration,  the  same benefits  can  be  secured through  joint                                                               
venture  agreements  and  contracts where  third  party  refiners                                                               
don't need to be secured  through physical ownership.  He offered                                                               
PFC Energy's  overall conclusion is  that to the extent  there is                                                               
further  pressure for  companies  to de-integrate,  it will  come                                                               
from share  appreciation arguments, with Chevron  and Shell being                                                               
the  companies that  PFC Energy  thinks will  most likely  be the                                                               
recipients of this type of pressure.                                                                                            
                                                                                                                                
4:54:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PRUITT asked,  related  to  materiality, for  the                                                               
reason  that companies  such as  Statoil, Eni,  and Repsol  would                                                               
have considerable  government opposition  to de-integration.   He                                                               
asked for clarification  on whether they feel a need  to have the                                                               
upstream and downstream connection.                                                                                             
                                                                                                                                
MR.   REINSCH  explained   in  all   three  companies   that  the                                                               
governments no  longer have a  majority share.   It is more  of a                                                               
legacy  sense  of  responsibility  for  managing  their  domestic                                                               
market environment.   So while all three companies  are no longer                                                               
in the  national oil company  arena, they are all  still dominant                                                               
players  in  their domestic  current  markets.   Governments  and                                                               
people consider them as champions of  the energy sector so to de-                                                               
integrate and sell off one  element or another would be construed                                                               
either a weakness or counterproductive.                                                                                         
                                                                                                                                
4:56:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PRUITT   related  his  understanding   that  even                                                               
companies  such as  BP and  Shell  were at  one point  nationally                                                               
owned.     He  asked  whether  the   three  previously  mentioned                                                               
companies would be  moving towards de-integration if  it were not                                                               
for the political pressure.                                                                                                     
                                                                                                                                
MR. REINSCH  stated that since  all three are  European companies                                                               
the dialogue would progress because  pure play refining companies                                                               
and pure  play marketing companies  that would pay to  access the                                                               
assets.  The  companies are not receiving a premium  to own along                                                               
the  value chain.   He  offered  his belief  that the  discussion                                                               
would  advance,  but  the  legacy  element  and  culture  in  the                                                               
domestic markets  are not worth  the expense relative to  what it                                                               
would cost to take that step.                                                                                                   
                                                                                                                                
REPRESENTATIVE PRUITT recollected  his conversations with Statoil                                                               
confirmed that it is a pride issue.                                                                                             
                                                                                                                                
REPRESENTATIVE HERRON  referred to product demand  growth regions                                                               
of China,  Middle East, and India  [slide 17].  He  asked whether                                                               
the  committee should  keep these  countries in  mind as  members                                                               
consider HB  3001, since  they will pay  a premium  for petroleum                                                               
products.                                                                                                                       
                                                                                                                                
MR. REINSCH responded that regardless  of what happens in Alaska,                                                               
the  state will  remain  exposed to  international  pricing.   He                                                               
explained that in  the past a company could offer  to develop the                                                               
hydrocarbons, build the refineries,  and manage another country's                                                               
products, which presented a powerful  argument; however, in these                                                               
high demand  growth jurisdictions  that cachet no  longer exists.                                                               
These  countries  have  their  own  national  oil  companies  and                                                               
refineries  since all  are capable  of  managing their  upstream,                                                               
midstream, and  downstream businesses.  For  example, BP recently                                                               
executed  with Reliance  Limited Industries  (Reliance) in  India                                                               
for pockets of  expertise BP doesn't have.  He  stated that BP, a                                                               
premier  global  deepwater  developer,  struck  partnership  with                                                               
Reliance  to gain  access  to a  large swath  of  acreage in  the                                                               
Krishna Godavari (KG) Basin in India.   This made sense for India                                                               
because  India didn't  have that  degree of  deepwater expertise;                                                               
however, for BP to build a  refinery might elicit the response of                                                               
whether BP  could do it any  better than a refining  company, and                                                               
if not, BP  must compete with everyone else.   He summarized that                                                               
to be  a downstream  player the company  must compete  with other                                                               
downstream competitors.                                                                                                         
                                                                                                                                
5:01:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PETERSEN related his  understanding the old school                                                               
of thought  about vertical integration  was that a  company would                                                               
have control  of the product  from the beginning  through retail.                                                               
He  sought  clarification  that  more  countries  are  moving  to                                                               
specialization because  there is less capitalization  involved in                                                               
being  vertically-integrated, since  more  business segments  are                                                               
necessary, but  specializing would allow  a company to  be better                                                               
able to make a profit.                                                                                                          
                                                                                                                                
MR. REINSCH acknowledged  that is part of the argument.   He said                                                               
that   until  relatively   recently  there   weren't  specialized                                                               
refining  companies or  specialized  product marketing  companies                                                               
since it wasn't  easy to break into the stranglehold  held by the                                                               
integrated players.  The only real  success people had was in the                                                               
upstream.  He  agreed that companies who are allowed  to focus on                                                               
one  end  of  the  value  chain who  perform  well  can  be  more                                                               
competitive  than  integrated  companies that  spread  management                                                               
expertise, focus  and strategy across  all elements of  the value                                                               
change.  Some integrated companies  are recognizing this fact, as                                                               
well,  since  the competitive  forces  will  improve returns  and                                                               
result in more efficient capital expenditures.                                                                                  
                                                                                                                                
5:03:31 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON related  that this part of  the presentation will                                                               
discuss  ConocoPhillips  de-integration  and  the  difference  in                                                               
ConocoPhillips's perspective as an upstream  company versus as an                                                               
integrated oil  company.   He expressed  interest in  hearing PFC                                                               
Energy's  perspective as  well as  the  relationship between  the                                                               
three North Slope  integrated oil companies, who  will become two                                                               
integrated  oil  companies with  a  partner  just upstream.    He                                                               
pointed out that  ConocoPhillips did not normally  buy leases for                                                               
exploration, but currently did so.   He asked whether this is the                                                               
type  of   thing  the  state   could  expect  from   an  upstream                                                               
materiality focus.                                                                                                              
                                                                                                                                
MR. REINSCH explained that what  has happened with ConocoPhillips                                                               
and what  he predicted  would increase in  the next  two planning                                                               
cycles  is emergence  of a  de-integrated  pure upstream  player;                                                               
however it is one with a  new chief executive officer, new board,                                                               
and  a new  executive  fully  exposed to  the  discipline of  the                                                               
market.  Clearly, he said, the  company will be looking for a new                                                               
strategy and  direction.  He also  said, "One of the  questions I                                                               
know -  I have no  doubt it's asking itself  - is what  role does                                                               
Alaska play  in that  new direction."   He  pointed out  that the                                                               
Alaska portfolio  has a different  meaning in  materiality within                                                               
the ConocoPhillips  upstream portfolio, global, than  it does for                                                               
BP and  ExxonMobil.  He  said Alaska can  "turn the dial"  on the                                                               
ConocoPhillips global portfolio,  more so than it  can for either                                                               
BP or ExxonMobil given the  same change in investment environment                                                               
or  change in  production volumes.    Alaska fits  well with  the                                                               
strategy that ConocoPhillips  has as a company  with the majority                                                               
of its  assets resident  in industrialized,  developed economies.                                                               
Thus relative to  its peers ConocoPhillips resides  in safe haven                                                               
environments.   The other  side of  the coin  is that  safe haven                                                               
environments  tend  to be  mature  basins,  with relatively  high                                                               
costs which makes  it more difficult to balance  the issues, thus                                                               
engendering  discussions of  fiscal systems.   He  suggested that                                                               
other  than  a  sharpened  focus   on  upstream  metrics  by  the                                                               
management team, it  doesn't really change the  dialogue - Alaska                                                               
still needs  to fit  within that portfolio,  and Alaska  needs to                                                               
show that it is part of  the solution to their strategy, targets,                                                               
and objectives since that is what  these companies look for to an                                                               
extent.                                                                                                                         
                                                                                                                                
CO-CHAIR SEATON  asked whether ConocoPhillips's  participation in                                                               
exploration leases was in anticipation of this new focus.                                                                       
                                                                                                                                
MR. REINSCH was uncertain,  but acknowledged their de-integration                                                               
has been  planned for some length  of time so certainly  it would                                                               
fall  within  that  time  of   influence  so  arguably  it  would                                                               
represent some positioning with de-integration in mind.                                                                         
                                                                                                                                
5:08:43 PM                                                                                                                    
                                                                                                                                
MR. REINSCH discussed the "Special  Issue:  Basin Designation and                                                               
Allocation of Free  Cash Flow" [slide 20].  He  stated that there                                                               
has been  a fair amount  of discussion in prior  presentations in                                                               
the Senate Finance and Resource  Committees about designations of                                                               
areas.     He  highlighted  six  definitions to  allocate  basins                                                               
within the global portfolios.  The  "core area" is really an area                                                               
that produces  a stable stream of  net cash flow and  is material                                                               
to the company.   He pointed out  that a core would be  of a much                                                               
larger size for ExxonMobil than for  Apache.  He referred to them                                                               
as the driving portfolios for growth for these companies.                                                                       
                                                                                                                                
MR. REINSCH  defined a  "focus area" as  an area  where companies                                                               
are investing  capital with  an eye  towards growing  through new                                                               
source production and  reserves growth into cores.   Typically, a                                                               
focus area is a net consumer of  free cash flow.  Cash flow would                                                               
come from other  areas of the portfolio and would  be a portfolio                                                               
in  the investment  phase.   He  defined "new  venture" areas  as                                                               
areas new to the company and  less mature assets, such as initial                                                               
exploration and positioning, but  still are consumers of capital.                                                               
Generally speaking  there would  be little  or no  production, he                                                               
said.                                                                                                                           
                                                                                                                                
MR.  REINSCH  highlighted the  fourth  area  as "harvest  areas."                                                               
These  are areas  that produce  net cash  flow -  revenue greater                                                               
than costs  - with  investment at or  below a  replacement level.                                                               
In  other  words, the  company  would  be investing  to  maintain                                                               
production  or manage  a decline.   All  harvest areas  have some                                                               
form of limit to growth, whether  that would be due to geological                                                               
potential, competitor landscape,  or limited room to  run.  These                                                               
areas  tend to  be the  areas of  "portfolio churn"  where larger                                                               
companies  will  gradually  sell  off assets  for  a  variety  of                                                               
reasons,  such  as the  asset  is  not  performing well,  or  the                                                               
company  cannot put  management  time or  technical time  towards                                                               
continuing  to develop,  or  the asset  doesn't  represent as  an                                                               
attractive  an opportunity  as something  else  in the  company's                                                               
portfolio.   He emphasized that  when speaking to  harvest areas,                                                               
he is not talking about entire  countries or basin areas.  Within                                                               
any given  basin, mature  fields may be  going into  decline that                                                               
perhaps  could be  managed through  intensive enhanced  recovery,                                                               
but generally  speaking these consist  of the mature fields  in a                                                               
company's portfolio.                                                                                                            
                                                                                                                                
MR. REINSCH  suggested that  within those  same basins  new field                                                               
developments or new opportunities  may represent "focus areas" or                                                               
"new ventures".   He provided a classic example,  noting the Gulf                                                               
of  Mexico shelf  region has  been in  production decline  for an                                                               
extended period  of time.   The majors  were largely  leaving the                                                               
shelf  and the  assets were  picked up  by smaller  companies who                                                               
have  been working  the assets  more  intensively.   At the  same                                                               
time,  the most  recent examples  in the  lower tertiary,  in the                                                               
ultra-deep   water  areas,   have   seen   very  large   resource                                                               
discoveries  taking place.    So  while the  Gulf  of Mexico  has                                                               
definite harvest  assets and components,  as a basin it  also has                                                               
significant  areas of  new venture  activity and  focus activity.                                                               
It  is important  that  everyone understand  what  is meant  when                                                               
speaking of harvest  areas.  He explained when one  is managing a                                                               
decline, or investing  at or below replacement  of production, as                                                               
an ongoing business practice, that  would be defined as a harvest                                                               
asset.                                                                                                                          
                                                                                                                                
MR.  REINSCH   pointed  out  that  in   a  competitive  operating                                                               
environment  the  assets would  gradually  be  rolled over.    He                                                               
defined  "sit &  hold" as  a category  that applies  more to  the                                                               
national  oil companies  than the  publically-traded oil  and gas                                                               
companies.   Some  companies hold  large amounts  of acreage  and                                                               
just sit  and wait for a  variety of reasons, including  that the                                                               
fiscal  terms don't  make  sense to  engage,  or the  aboveground                                                               
risks - political, social, or military  - are too great to engage                                                               
in now.   Finally,  he defined  the "exit/potential  exit" areas.                                                               
He related that PFC Energy  takes the portfolios of the companies                                                               
they follow  and allocate  them into  these definitions  of basin                                                               
designations.                                                                                                                   
                                                                                                                                
5:15:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PRUITT referred to  harvest areas and recalled him                                                               
mentioning companies  typically sell  off harvest  area holdings.                                                               
He acknowledged  the state  has seen this  happen in  Cook Inlet,                                                               
but not  on the North Slope.   He asked whether  he foresees this                                                               
as moving in that direction.                                                                                                    
                                                                                                                                
MR.  REINSCH  characterized Alaska  as  a  whole  as being  in  a                                                               
harvest mode.   Alaska has had a set of  legacy assets in decline                                                               
for some period of time, yet  those assets are still valuable for                                                               
reasons   beyond   the   producing   horizons  -   due   to   the                                                               
infrastructure -  which will allow for  commercial development of                                                               
close-in  fields   of  less  attractive  resource   in  terms  of                                                               
viscosity  or  crude  oil  type.    Yet  the  leveraging  of  the                                                               
infrastructure for  prior investments  can allow  those resources                                                               
to be  brought to production  in the most efficient  and economic                                                               
manner.    So  companies  are  staying  because  they  still  see                                                               
potential, he concluded.                                                                                                        
                                                                                                                                
MR. REINSCH raised the argument, in  terms of the context of this                                                               
discussion, noting  companies have opportunities  for investment,                                                               
but not all  resources are alike.  For example,  very heavy crude                                                               
oil has a different value than  light, sweet, crude oils and that                                                               
difference must  be reflected.  Additionally,  high-cost enhanced                                                               
recovery  has  a  different  cost  base  than  natural  reservoir                                                               
pressure in  terms of  producing the  next incremental  barrel of                                                               
crude oil.  He pinpointed this as the argument being focused on.                                                                
                                                                                                                                
MR. REINSCH said the legacy  fields are in decline, and companies                                                               
are  investing to  keep the  decline rates  at 6  percent, rather                                                               
than  12  percent,  but  all  of  the  capital  in  the  economic                                                               
investment has  been vetted, approved,  pitted against  all other                                                               
opportunities in the portfolios,  and has succeeded in attracting                                                               
capital.    The  next  step   is  "the  next  dollar"  where  the                                                               
discussion moves to, which is  all commercial.  He cautioned that                                                               
will be  taking the decline  rate from  12 percent to  6 percent.                                                               
He wondered about the next  step, noting Alaska has potential new                                                               
growth in and around the legacy  asset, and some potential in the                                                               
Chukchi Sea,  where a new  set of considerations come  into play,                                                               
particularly from the perspective of this committee.                                                                            
                                                                                                                                
5:20:00 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH  suggested the  real  question  is how  to  maximize                                                               
revenue  for  all parties.    He  referred  to the  chart  titled                                                               
"Global  Ares  of  Upstream  Operations"   to  Alaska,  which  is                                                               
depicted  as the  blue "harvest"  areas.   He explained  the blue                                                               
reflects the assets  that are generating free cash  flow from the                                                               
production fields and generally  speaking, in a global portfolio,                                                               
will go to other opportunities.                                                                                                 
                                                                                                                                
5:20:46 PM                                                                                                                    
                                                                                                                                
MR. REINSCH discussed the "Special  Issue:  Basin Designation and                                                               
Allocation of Free Cash Flow"  [slide 21].  He indicated Alaska's                                                               
oil fields were built from the  net free cash flow generated from                                                               
other  producing  jurisdictions globally.    He  referred to  two                                                               
charts "2003-2005:   Sources  & Uses  of Cash  Flow" for  a large                                                               
representative set of  companies and "2008-2010:   Sources & Uses                                                               
of Cash Flow."   He explained the first chart  represents a macro                                                               
look at the industry, in which  North America and Europe were the                                                               
cash  engines  driving  deepwater   development  in  Sub  Saharan                                                               
Africa.  Five  years later Europe has still  been producing cash,                                                               
but it is  largely Sub Saharan Africa that has  been generating a                                                               
large wall  of cash directed to  North America.  He  predicted as                                                               
the clock  rolls forward three years,  that cash will be  used to                                                               
develop the  next basin,  whether it is  Angola pre-salts  or the                                                               
equatorial margin  of Northern South  America, since  billions of                                                               
dollars of capital will be  required.  He highlighted that Europe                                                               
has  typically  been  the  cash  cow of  this  industry  for  two                                                               
decades.                                                                                                                        
                                                                                                                                
5:22:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON noted  that Repsol  YPF is  listed on  the                                                               
bottom  of slide  21.   He  asked whether  yesterday's events  in                                                               
Argentina by [President] Kirchner will affect Alaska.                                                                           
                                                                                                                                
MR. REINSCH  predicted that  the events will  impact Repsol.   He                                                               
explained  that three  days ago  on  April 10,  the president  of                                                               
Argentina enacted  the renationalization of  YPF - the  state oil                                                               
company that Repsol purchased in  the late 1990s and has operated                                                               
ever since.   Over  the years  Repsol bought  92 percent  of that                                                               
company,  and while  Repsol has  reduced its  equity position  to                                                               
about 57  percent, it  still represents 60  percent of  its total                                                               
global  production.   By  renationalizing  YPF  it took  over  51                                                               
percent of the  company from Repsol -  not from publically-traded                                                               
shares  in  the  market  -  but from  the  Peterson  Group  -  an                                                               
Argentine owned company with 27  percent of the company it holds.                                                               
He  predicted the  law will  be enacted  by May  6th or  May 7th,                                                               
noting  the legislation  has a  three-year negotiation  window of                                                               
settlement  with Repsol  before arbitration  in an  international                                                               
court.                                                                                                                          
                                                                                                                                
MR.  REINSCH stated  this impacts  Repsol  in two  ways.   First,                                                               
Repsol lost  60 percent of  its base in one  fell swoop.   On the                                                               
other hand, Repsol  lost the element of their  portfolio that was                                                               
dragging  it down  as a  corporation.   While YPF  generated cash                                                               
flow,  the   asset  was  still  a   difficult,  mature  operating                                                               
environment.    He   explained  that  Repsol  has   been  a  very                                                               
successful exploration  company the past  four or five  years and                                                               
has assets  the company can  grow.   The advantage has  been that                                                               
Repsol' s portfolio looks much  better, although it could use $10                                                               
billion  to  invest   in  the  company.     While  the  Argentine                                                               
government may settle  with Repsol, it is uncertain  if this will                                                               
happen and  it might  occur after  a lengthy  legal contest.   He                                                               
concluded that  this is  a very  difficult situation  for Repsol.                                                               
Outside of Repsol, a number  of companies in Argentina are likely                                                               
wondering   whether  this   represents   a  great   consolidation                                                               
opportunity or  if it  is time  to step quietly  to the  side and                                                               
focus elsewhere.   In  response to a  question, he  answered that                                                               
PFC was not the consultant the Argentinians used.                                                                               
                                                                                                                                
5:27:04 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH,  in response  to  another  question, explained  the                                                               
reasoning in  the legislature  is that security  of supply  is an                                                               
issue of  national interest.   He said that arguably  the drivers                                                               
for  that decision  were reflected  in the  twin capital  account                                                               
deficits and  an inability to  raise international  finance since                                                               
Argentina  defaulted on  their debt  three years  ago.   Further,                                                               
Argentina  did not  have access  to capital  markets and  already                                                               
eliminated expropriation  of profits  from the energy  sector for                                                               
any  company  operating  in  the  country.    At  the  same  time                                                               
Argentina  operated under  a  system of  subsidized  oil and  gas                                                               
prices   to   protect   consumers  from   international   prices.                                                               
Therefore,  Argentina prompted  energy  demand growth  at a  time                                                               
when they were importing significant  amounts of natural gas.  He                                                               
recapped  his belief  that Argentina  was in  a box  and observed                                                               
free cash  flow being generated by  the YPF portfolio and  saw an                                                               
opportunity  to  address  two issues.    First,  Argentina  could                                                               
secure the  cash for  the government;  and second,  by allocating                                                               
the 51  percent - half to  the provinces and half  to the federal                                                               
government  -   it  could  address  some   long-standing  federal                                                               
provincial issues plaguing the country.    He pointed out that by                                                               
hammering YPF for  six months prior to the  legislation being put                                                               
forward  drove  the  share  price  down  to  a  point  where  the                                                               
government will  have a  good argument  during the  settlement to                                                               
Repsol.  He referred to it as  policy in a crisis and he surmised                                                               
that  everyone will  argue  at the  end of  the  day it  probably                                                               
wasn't the  best policy move,  but it is  too late to  change the                                                               
decision.                                                                                                                       
                                                                                                                                
5:29:27 PM                                                                                                                    
                                                                                                                                
MR. REINSCH discussed slide 22 titled  "Example:  Nexen Inc."  He                                                               
explained the portfolio  allocation of free cash  flow in action.                                                               
He explained the  bottom right hand side of the  slide is a chart                                                               
which  reflects   the  global  representation  of   Nexen  Inc.'s                                                               
portfolio (Nexen) and  the status of the company.   The left-hand                                                               
side  bars show  combinations of  cash flow  and Capex  over time                                                               
starting in 2000  and moving to 2010.  He  pointed out that Nexen                                                               
had  an asset  in Yemen  - the  Masila block  - that  generated a                                                               
tremendous  amount of  cash flow  with relatively  little capital                                                               
expenditures  and on  the basis  of the  cash flow  were able  to                                                               
secure  and develop  the  North  Sea Buzzard  assets.   The  very                                                               
generous cash  flow from  their North  Sea portfolio  has allowed                                                               
them to pour capital into the  development of their Long Lake oil                                                               
sands and  unconventional gas assets  in Canada, and in  the U.S.                                                               
Gulf of  Mexico deepwater assets.   One  can see how  the company                                                               
has redirected its  free cash flow from one set  of assets within                                                               
its portfolio  to develop another and  it will continue to  do so                                                               
over  time.     He  pointed  out  that   reviewing  any  upstream                                                               
exploration and  production companies will demonstrate  that same                                                               
movement  of  cash  flow  over   time.    Clearly,  part  of  the                                                               
discussion  has  been  that  Alaska  wants  to  be  part  of  the                                                               
portfolio that is receiving capital  and wants to grow production                                                               
as  opposed  to  being  part   of  the  portfolio  that  is  only                                                               
contributing to developments elsewhere.                                                                                         
                                                                                                                                
5:32:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER asked  whether  other  companies were  in                                                               
harvest mode  or exit mode  in the UK  North Sea during  the time                                                               
Yemen cash flow was  used to bring new volumes on  line in the UK                                                               
North Sea.                                                                                                                      
                                                                                                                                
MR.  REINSCH responded  that  Nexen  was able  to  secure the  UK                                                               
portfolio of  a company called  EnCana that had decided  to shift                                                               
its  strategy from  becoming the  largest  global independent  to                                                               
becoming  the  largest  gas  producer in  North  America.    This                                                               
resulted in  strategically stranding some very  high-value assets                                                               
outside  North  America.    Nexen  was  able  acquire  the  asset                                                               
portfolio on  the strength of  its Yemen cash flow  and financing                                                               
capability.   He pointed out that  Buzzard at that time  was just                                                               
being developed as the largest oil  discovery in the North Sea in                                                               
the prior 20  years.  He characterized it as  a real jewel, which                                                               
Nexen could  acquire since  Nexen had  the Yemen  asset developed                                                               
and has been  generating large amounts of cash flow  on an annual                                                               
basis.   Thus Nexen could afford  to make that move,  develop the                                                               
asset, and then afford to make the next move.                                                                                   
                                                                                                                                
MR.  REINSCH, in  response to  Representative Gardner,  confirmed                                                               
that  the sale  of the  UK North  Sea portfolio  by EnCana  was a                                                               
classic  case  of  arguably   commercial  economic  assets  being                                                               
divested for  a strategy purpose.   He said that EnCana  took the                                                               
money it generated from the North  Sea and invested it into North                                                               
America because  EnCana believes North America's  gas prices were                                                               
heading to $5 and higher in  2000-2001.  He suggested that EnCana                                                               
had a  different vision of  the future than other  companies did.                                                               
He suggested that no one would  have sold those assets purely for                                                               
economic or  commercial reasons,  but the assets  were sold  as a                                                               
strategy driver.                                                                                                                
                                                                                                                                
5:35:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DICK acknowledged that  the oil companies say they                                                               
need  a  more  favorable  tax  regime,  which  is  fairly  broad.                                                               
However,  the legislature  is trying  to determine  what specific                                                               
changes will bring about the desired outcome.                                                                                   
                                                                                                                                
5:36:57 PM                                                                                                                    
                                                                                                                                
MR. REINSCH  suggested that  part of the  challenge in  Alaska is                                                               
that  Alaska has  quite a  diversity of  investment opportunities                                                               
from well-established  legacy fields, to untapped  gas resources,                                                               
to  high  viscosity heavy  crudes,  and  to frontier  exploration                                                               
plays.   He  offered his  belief that  the question  becomes much                                                               
more subtle,  such as  what are  Alaska's goals  in one  to three                                                               
years,  in three  to  five years,  and in  five  to seven  years.                                                               
Further, it's  also a matter of  how Alaska can align  those with                                                               
the capability of the industry to  deliver.  For instance, if the                                                               
state's goal  is to achieve  production to  the extent it  can be                                                               
flattened in the next three to  five years, the goal can't be met                                                               
by exploration.   He pointed out the cycle  time from exploration                                                               
to discovery  to new production.   One of the reasons  PFC Energy                                                               
can speak  so firmly about  portfolios is  that if it  will "turn                                                               
the dial"  for any of  the companies  in the five-  to seven-year                                                               
time frame,  the resource  is already  discovered and  PFC Energy                                                               
has already modeled  it.  He said,  "That's what we do."   If the                                                               
state is  looking beyond that  the next exploration  potential in                                                               
the next two  to three years will have an  impact 7-10 years from                                                               
that time.  He stressed that it  is what the state already has in                                                               
the bank  - enhanced recovery on  those assets - or  what is soon                                                               
to  be  brought  into  production,   which  is  the  focus.    He                                                               
acknowledged  that may  take  a different  set  of fiscal  action                                                               
responses.    Then  the  state  must  review  its  portfolio  and                                                               
recognize  that these  assets  will  decline.   No  one wants  to                                                               
destroy capital  so the question  becomes what can  the companies                                                               
deliver  and  what   do  they  need  to   attract  that  capital.                                                               
Companies  can invest  here, but  have  the choice  to invest  in                                                               
another jurisdiction.                                                                                                           
                                                                                                                                
MR. REINSCH  said the great  advantage Alaska has in  this global                                                               
gas  discussion is  that Henry  Hub is  completely irrelevant  to                                                               
Alaska;  however,  that  it  not   the  choice  at  Lake  Charles                                                               
[Louisiana], since  Henry Hub  is everything to  them.   He asked                                                               
whether anyone is  going to liquefy LNG in the  Lower 48 and send                                                               
if off to  Europe or Asia, with  a $4 spread.  He  pointed out it                                                               
wasn't that  long ago that gas  was at $7 and  there were reasons                                                               
it dropped.  The beauty of being  in Alaska is that gas isn't gas                                                               
in Alaska, instead  it is oil.  He characterized  gas as S-shaped                                                               
curves  sold into  an Asia  market  at crude  prices so  it is  a                                                               
different dialogue; however it will  also require a different set                                                               
of incentives.   He  asked whether the  state would  only benefit                                                               
from revenue or if it would  be possible for the state to benefit                                                               
through  gasification  as  happened in  Columbia,  Argentina,  or                                                               
Brazil.   He pointed  out that  these countries  used the  gas to                                                               
wean themselves  off petroleum products which  were expensive for                                                               
them.  He  cautioned that although no company can  predict if the                                                               
state does this, the companies will  do that; all they can really                                                               
say is  that if the  state does something  it will help.   Beyond                                                               
that,  it  is  important  to  consider  reasonable  scenarios  so                                                               
everyone involved is  coming out of this in good  shape, which is                                                               
the art  of fiscal economics.   He  said, "Don't kill  the golden                                                               
goose, but  on the other hand,  you are the client;  they are the                                                               
contractor."                                                                                                                    
                                                                                                                                
5:42:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER  asked for  clarification on slide  22 for                                                               
the example for Nexen, Inc.                                                                                                     
                                                                                                                                
MR. REINSCH explained that the chart  on the left reflects on the                                                               
horizontal  axis cash  flow in  millions of  dollars, and  on the                                                               
vertical  axis  shows  capital  expenditures  (Capex)  with  $2.5                                                               
billion at the top and $2 billion  in cash flow on the right.  So                                                               
in  reviewing  Yemen -  note  the  thickness indicates  tracking,                                                               
which starts thin  and gets thicker over time.   He explained the                                                               
large  capital expenditure  in the  2000s in  Canada, before  the                                                               
cash flow  moves the  bar to the  right.  This  is the  time that                                                               
Nexen  was  spending   building  up  its  Long   Lake  oil  sands                                                               
development, which came into production  only three to five years                                                               
ago.  The result is the line  moves to the right and down showing                                                               
the cash  flow with relatively  less investment.  He  referred to                                                               
the UK on the cart, and noted  Nexen bought the asset when it was                                                               
already in  production, and basically  it developed a  large wall                                                               
of cash  flow and they've been  able to maintain it.   He pointed                                                               
out the  U.S. Gulf of  Mexico reflect asset sales  and purchases,                                                               
large  capital   expenditures  and   cash  flow   resulting  from                                                               
production.   The dominant assets are  in the UK and  Canada.  He                                                               
pointed out that after bringing  the Masila block into production                                                               
in the  early 80s when  it came to the  end of its  license life,                                                               
the  government   decided  to  take   it  back.    He   said  the                                                               
contribution of Yemen was the  North Sea and Canada portfolio, as                                                               
well as the  seeds of the West Africa portfolio  that hardly show                                                               
on  the   graph  since  the   asset  is  just  now   coming  into                                                               
development.  He  related that Nexen leveraged  that legacy asset                                                               
into  a  lot of  growth  elsewhere  in  the  world.   In  further                                                               
response  to  Representative  Saddler, he  explained  that  Nexen                                                               
spent $2.7  billion to  buy the  asset in about  2006 and  in the                                                               
second  year of  capital  expenditure spent  about $700  million.                                                               
Nexen  has  basically been  spending  an  annual amount  of  $700                                                               
million per  year on  the asset.   In  2010, Nexen  performed new                                                               
platform development  and field  work so the  Capex was  a little                                                               
higher and cash flow a little lower.                                                                                            
                                                                                                                                
5:48:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   SEATON  asked   what   relevance  the   aforementioned                                                               
discussions  on cash  flow  have to  do  with Alaska's  situation                                                               
since  Alaska  is trying  to  incentivize  in-field drilling  and                                                               
legacy fields.   He offered his belief that  these evaluations on                                                               
cash  flow  would  have  more  to  do  with  company  board  room                                                               
discussions.   He said  he did  not think  Alaska would  base its                                                               
decisions on  incremental in-field drilling since  it is unlikely                                                               
a  600-million barrel  field will  be produced  in three  or four                                                               
years.                                                                                                                          
                                                                                                                                
5:50:24 PM                                                                                                                    
                                                                                                                                
MR.  REINSCH  explained  that sometimes  the  scale  muddies  the                                                               
process;  however the  process would  be  exactly the  same.   He                                                               
pointed out with  certainty the 600 million barrel  fields lie in                                                               
places that companies  don't want to be operating.   For example,                                                               
a company  does not want  to drill  in 6,000-7,000 feet  of water                                                               
through 500 meters  of salt to get to  production formations that                                                               
have never been produced in the  world before to drill wells that                                                               
cost millions  of dollars - whether  it is in Brazil,  Angola, or                                                               
the Arctic - if  it is ExxonMobil.  On the  complete other end of                                                               
the  spectrum,  an  investment of  $6-8  million  for  horizontal                                                               
multiple-fracked shale gas  in a liquids-rich shale  basin in the                                                               
U.S.  represents  a  small investment  with  a  nice  competitive                                                               
return, albeit not as nice at 3 Mcf.                                                                                            
                                                                                                                                
MR. REINSCH acknowledged the company  would want to obtain a high                                                               
volume of liquids at that rate,  and if so, portfolios would move                                                               
as  a  result.   Alaska  would  like  to  see the  investment  in                                                               
enhanced  recovery  in  in-field   drilling  or  other  reservoir                                                               
sweeps, such  as more sophisticated water  handling techniques to                                                               
increase  recovery rates,  which is  every bit  as comparable  to                                                               
opportunities the committee  has referenced.  It would  just be a                                                               
matter of scale  at both ends.  This is  why companies don't look                                                               
only at  [net present value]  NPV, except from a  strategy sense,                                                               
such as considering investment in  Angola over a 20-year forecast                                                               
of the basin.  At the end of  the day, part of this analysis will                                                               
boil down to  a pure barrel of oil equivalent  (BOE) metrics.  He                                                               
said, "I'm going to  put a dollar in here, what  am I getting out                                                               
of it."   The company  will run the  economics at $40,  $60, $80,                                                               
$100 and  $120 per barrel of  oil pricing.  He  recalled the term                                                               
"harsh oil" or "severe oil world,"  which has been used since the                                                               
easy  oil has  all been  exploited.   All  of these  developments                                                               
carry risk so companies will  always consider their analysis.  He                                                               
was asked  how an  Alaska enhanced  recovery project  compares to                                                               
all of  these and  answered that it  truly competes  for capital.                                                               
If  that's  what  Alaska  wants  to incent,  there  are  ways  of                                                               
incenting  an enhanced  recover project,  which seems  to be  the                                                               
crux  of the  debate,  he  said.   He  cautioned members  against                                                               
concluding  that  companies  are  involved in  very  large  scale                                                               
developments all  around the world  so how could  Alaska possibly                                                               
compete, which  is not the issue.   Instead, the issue  is that -                                                               
outside of the  strategic aspects of positioning  - these metrics                                                               
give senior management and executive  boards a way of comparing a                                                               
dollar  in  Alaska  to  a  dollar  elsewhere  within  the  global                                                               
portfolio, to allow  them to make the  most efficient, effective,                                                               
profitable decision  in the interests  of their  shareholders and                                                               
their investors.   He concluded  this is essentially  exactly the                                                               
same thing Alaska is doing.                                                                                                     
                                                                                                                                
5:55:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON said  she has  heard complaints  in the                                                               
legislature that  legislators did not obtain  any commitment from                                                               
companies.   She  related her  understanding  from Mr.  Reinsch's                                                               
testimony that companies cannot  give Alaska a commitment because                                                               
companies must take their decisions back to their boards.                                                                       
                                                                                                                                
MR. REINSCH confirmed this.                                                                                                     
                                                                                                                                
REPRESENTATIVE DICK  suggested the  analogy that  the legislature                                                               
is being asked to  pull a lever, but they don't  know how hard to                                                               
pull.   He expressed  interest in learning  more about  the cause                                                               
and effect between  what the legislature decides  and the desired                                                               
end result.                                                                                                                     
                                                                                                                                
MR. REINSCH agreed  with Representative Dick.   He clarified that                                                               
legislators will lay out terms  of engagement for the contractor.                                                               
In other words,  the legislature will essentially  be saying that                                                               
this is  the proposal the  state is prepared to  offer companies.                                                               
He agreed it is similar to  pulling a lever.  He highlighted that                                                               
the  legislature must  make  a decision  on  how competitive  the                                                               
state's   fiscal   system  is   compared   to   those  in   other                                                               
jurisdictions.   The complication  is that  Alaska has  more than                                                               
one type of  asset and one lever.  It  would be a straightforward                                                               
exercise if  it did.   Therefore, the  current challenge  is more                                                               
complicated since  there are different asset  types and different                                                               
timeframes,  which add  dimensions that  go beyond  the one-lever                                                               
pull.  He  predicted the action would be the  same, but "you need                                                               
more  hands  than the  one  you  had  up."   He  anticipated  the                                                               
modeling  work will  bring some  insight  to the  decision-making                                                               
process.  He emphasized the  best outcome in the discussion would                                                               
be the sense  that in the foreseeable future  the contractor will                                                               
get a risk  return reward that is competitive  and the government                                                               
is stewarding its  resources on behalf of the people  in the most                                                               
efficient  way  as  it  possibly  can.   He  was  unsure  of  the                                                               
variables and whether  it would be the realities  of fluid motion                                                               
through  rock formation  or it  would  be that  Iran decided  the                                                               
Straits of Hormuz would be just fine as is.                                                                                     
                                                                                                                                
REPRESENTATIVE GARDNER  asked what forthcoming  information would                                                               
be included in future presentations from PFC Energy.                                                                            
                                                                                                                                
6:00:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MIKE  HAWKER,  speaking   as  the  chair  of  the                                                               
Legislative  Budget and  Audit Committee,  explained that  during                                                               
the past  summer the  committee issued  contracts with  Pedro van                                                               
Meurs  and  others.    Various  committee  chairs  indicated  the                                                               
legislature  would need  professional consulting  advice with  an                                                               
international  perspective.    He  worked  with  the  Legislative                                                               
Budget and Audit  Committee's Vice Chair Stedman  to identify PFC                                                               
Energy  as  a  company  with  premier  qualifications,  and  they                                                               
requested to  engage PFC Energy specifically  for the Legislative                                                               
Budget  and   Audit  Committee,  but   also  on  behalf   of  the                                                               
legislature.   Subsequently,  PFC energy  has been  engaged in  a                                                               
five-point  work plan  to  prepare the  state's  fiscal model  to                                                               
allow  the  committee to  evaluate  different  proposals to  come                                                               
before  the legislature    However, that  kind  of modeling  must                                                               
evolve  over   the  course  of   an  engagement,   since  various                                                               
committees  may  want  to  try a  new/different  mechanism.    He                                                               
highlighted  that PFC  Energy's  contract calls  for an  evolving                                                               
model, but one designed in a  manner and presented in an open and                                                               
transparent  manner.   He noted  the commitment  with PFC  Energy                                                               
required vetting.  Further, PFC  Energy was instructed to discuss                                                               
their  model with  other modelers,  such as  ones in  the state's                                                               
Department  of  Administration and  Department  of  Revenue.   He                                                               
explained the  idea is  to ensure  that arguments  don't surround                                                               
the  model.     He   surmised  this   question  arose   from  the                                                               
misinterpretation that  Commissioner Butcher  made in  the Senate                                                               
Finance Committee, which gave the  impression that the Department                                                               
of Revenue  is using PFC's  modeling, which is  absolutely false.                                                               
He emphasized that PFC Energy  continues to work solely on behalf                                                               
of  the  legislature through  the  Legislative  Budget and  Audit                                                               
Committee.                                                                                                                      
                                                                                                                                
REPRESENTATIVE GARDNER thanked him for his thoughtful response.                                                                 
                                                                                                                                
6:04:07 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 6:04 p.m. to 6:15 p.m.                                                                       
                                                                                                                                
6:15:05 PM                                                                                                                    
                                                                                                                                
[HB 3001 was held over.]                                                                                                        

Document Name Date/Time Subjects
HRES PFC PResentation 4.21.12.pdf HRES 4/21/2012 2:00:00 PM
Change_COP_Slide.pptx HRES 4/21/2012 2:00:00 PM
HB3001