Legislature(2011 - 2012)HOUSE FINANCE 519

04/23/2012 01:00 PM RESOURCES


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01:43:09 PM Start
01:43:46 PM HB3001
03:50:33 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--Delayed to 1:30 p.m.--
In Participation with House ENE
+= HB3001 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Division of Oil and Gas Presentation
Continuation of Presentation by PFC Energy
               HB 3001-OIL AND GAS PRODUCTION TAX                                                                           
                                                                                                                                
1:43:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON 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."   He  noted that this  was the                                                               
second meeting of the day.   He pointed out that the minutes from                                                               
an earlier mentioned U.S. Senate  meeting had been distributed to                                                               
members.                                                                                                                        
                                                                                                                                
1:45:32 PM                                                                                                                    
                                                                                                                                
WILLIAM  BARRON, Director,  Central Office,  Division of  Oil and                                                               
Gas,  Department of  Natural  Resources,  presented a  PowerPoint                                                               
entitled  "Decline  Curves."   Directing  attention  to  slide  2                                                               
entitled  "Decline Curve  Shapes: Semilog  Rate-Time," he  stated                                                               
that  decline  analysis  is  a  foundation of  the  oil  and  gas                                                               
industry   and  is   used  for   rate  projections   and  reserve                                                               
determinations.   He  explained  that typically  there are  three                                                               
decline  curves, which  are exhibited  on the  graph on  slide 2.                                                               
The curves reflect an exponential  decline, a hyperbolic decline,                                                               
and a harmonic decline.  The  harmonic decline is special and not                                                               
seen very often,  while the exponential decline  is very typical,                                                               
and many people  have suggested that Prudhoe Bay  is exhibiting a                                                               
hyperbolic decline.   However, he noted that  [the decline curve]                                                               
changes over time.                                                                                                              
                                                                                                                                
1:47:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK  asked if  it  would  be  true to  say  that                                                               
Prudhoe Bay  had been in  an exponential decline,  but progressed                                                               
into a hyperbolic decline.                                                                                                      
                                                                                                                                
MR. BARRON explained that decline  analysis is a strong indicator                                                               
of  future production  and future  cumulative  recovery, but  the                                                               
mechanisms  are reservoir  generated and  focused.   He clarified                                                               
that often it is not clear  until later in the decline whether it                                                               
is a hyperbolic  or exponential decline.  As a  field matures and                                                               
advances,  the parameters  can  be changed  based  on EOR,  water                                                               
flood, gas cap injection, and  etcetera.  Some would view Kuparuk                                                               
as  an  exponential decline  and  Prudhoe  Bays as  a  hyperbolic                                                               
decline.   However, such  dialogue is  "slicing thin  hairs." Mr.                                                               
Barron specified  that he merely  wants to relate that  there are                                                               
different declines and they are  more representative on a semilog                                                               
plot  than a  Cartesian plot,  which speaks  to Co-Chair  Feige's                                                               
question  yesterday regarding  whether the  Prudhoe Bay  curve is                                                               
flattening.   The Prudhoe Bay  curve looks as if  it's flattening                                                               
due  to  an   aberration  with  the  Cartesian   plot,  which  is                                                               
compounded because later  in its life it looks  like a hyperbolic                                                               
rather than a linear exponential [decline curve].                                                                               
                                                                                                                                
REPRESENTATIVE TUCK  inquired as  to the  circumstances regarding                                                               
the rarely seen harmonic decline.                                                                                               
                                                                                                                                
MR. BARRON offered to share more details at a later date.                                                                       
                                                                                                                                
REPRESENTATIVE   HERRON  asked   if  the   proposed  legislation,                                                               
HB 3001, is seeking a harmonic decline.                                                                                         
                                                                                                                                
MR. BARRON said that is difficult  to answer as the decline graph                                                               
is  a reservoir  delivery evaluation.   The  tie to  a commercial                                                               
term is  very vague  and maybe not  at all.   He opined  that the                                                               
legislation is  attempting to  flatten out  the decline  curve by                                                               
"bringing  more production  on."    He noted  that  later in  the                                                               
presentation  he  has  an  example that  might  help  answer  the                                                               
question in  that when a certain  amount of work is  done and the                                                               
decline [curve]  is changed, it  will then return to  the decline                                                               
after the work is complete.                                                                                                     
                                                                                                                                
REPRESENTATIVE  SADDLER asked  what  conclusion  should be  drawn                                                               
from the first slide.                                                                                                           
                                                                                                                                
MR. BARRON,  noting the formulas  listed on the slide,  said that                                                               
he  wanted  to illustrate  that  there  is  very sound  math  and                                                               
science associated with decline curve analysis.                                                                                 
                                                                                                                                
1:51:44 PM                                                                                                                    
                                                                                                                                
MR.  BARRON  moved  on  to  slide  3  entitled  "Items  Affecting                                                               
Production" and listed well  drilling, well maintenance, enhanced                                                               
oil    recovery,     new    facilities     and    infrastructure,                                                               
debottlenecking,  and new  technologies as  means for  increasing                                                               
production.    He stated  that  new  technologies are  introduced                                                               
every day and  it is the blending of these  new technologies that                                                               
bring  advances that  allow old  fields to  be maintained  in the                                                               
future as well as bring on other fields.                                                                                        
                                                                                                                                
REPRESENTATIVE    GARDNER    requested    an    explanation    of                                                               
debottlenecking.                                                                                                                
                                                                                                                                
MR. BARRON explained that debottlenecking  refers to changing the                                                               
size of  pipes and  valves to allow  more production  through the                                                               
system.   Without debottlenecking,  a decrease in  production can                                                               
occur.     He  offered   an  example   in  which   engineers  and                                                               
geoscientists determine  that a  1,000 barrel  a day  facility is                                                               
all that is  necessary to produce an oil field  and that facility                                                               
is built.   Typically, at the inception of a  1,000 barrel of oil                                                               
field  there would  be  900 barrels  of oil  and  100 barrels  of                                                               
water.   As  the field  matures, the  water to  oil ratios  could                                                               
change such  that there  could be  900 barrels  of water  and 100                                                               
barrels of  oil.  Such  changes would require  debottlenecking to                                                               
change the size of the pipes  to allow the increased or decreased                                                               
amounts of oil  and water to maintain the flow.   For those large                                                               
processing  facilities, pressure  gauges are  utilized throughout                                                               
the system to find major  pressure drops and address them because                                                               
all pressure is more back pressure  on the well that causes it to                                                               
be a  lower producer.   The aforementioned is another  example of                                                               
debottlenecking.                                                                                                                
                                                                                                                                
1:55:34 PM                                                                                                                    
                                                                                                                                
MR.  BARRON, returning  attention  to slide  3,  said that  aging                                                               
infrastructure,   gas  and   water   handling  facilities,   well                                                               
failures,  overall cost  structure, and  a decrease  in new  rate                                                               
production would all lead to decreasing production.                                                                             
                                                                                                                                
REPRESENTATIVE TUCK inquired  as to how much  more oil production                                                               
would be  associated with delivering  2 billion cubic  feet (bcf)                                                               
of gas.                                                                                                                         
                                                                                                                                
MR. BARRON explained that, for a  field such as Prudhoe Bay, more                                                               
energy  going in  increases oil  production.   Therefore, an  off                                                               
take of  2 bcf for gas  production would result in  a decrease in                                                               
oil production.   The  aforementioned is why  the Alaska  Oil and                                                               
Gas  Conservation  Commission  (AOGCC)   is  concerned  with  any                                                               
withdrawals  of gas  from the  Prudhoe Bay  reservoirs.   For all                                                               
systems, the more energy kept in  the system the easier it is for                                                               
the oil production to come out.                                                                                                 
                                                                                                                                
CO-CHAIR  FEIGE inquired  as to  the  impact to  the recovery  of                                                               
Prudhoe Bay in a scenario in  which another source of gas outside                                                               
the Prudhoe  Bay field, such  as Point  Thomson, is found,  it is                                                               
injected, and it raises the pressure of the Prudhoe Bay field.                                                                  
                                                                                                                                
MR.  BARRON replied  that anything,  including  gas from  another                                                               
source or  water, could be  injected to  fill the void  left from                                                               
the withdrawal  of oil, in  order to  re-build the pressure.   In                                                               
fact, some of  the initial modeling results he  has reviewed from                                                               
the  operators illustrate  an  uplift of  oil  production from  a                                                               
Point Thomson  injection.  Again,  it does not matter  from where                                                               
the gas comes the goal is to maintain reservoir energy.                                                                         
                                                                                                                                
REPRESENTATIVE P. WILSON asked how this correlates to heavy oil.                                                                
                                                                                                                                
MR. BARRON  replied that the  discussion focused on  the recovery                                                               
of  oil  from the  main  body  for  Prudhoe  Bay.   A  discussion                                                               
regarding viscous oil would revolve  around the concern about the                                                               
ability  of  the  oil  to   flow  through  the  rock.    Clearly,                                                               
maintaining reservoir  energy in  that regard is  beneficial, but                                                               
it is  less traumatic than it  is to merely move  and extract the                                                               
fluids from the rock in a viscous state.                                                                                        
                                                                                                                                
2:00:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  LYNN  asked whether  the  injection  gas is  more                                                               
advantageous than the injection of  water or vice versa, in terms                                                               
of oil recovery.                                                                                                                
                                                                                                                                
MR. BARRON replied  yes.  He explained  that typically reservoirs                                                               
contain a gas column, an oil  column, and a water column, and the                                                               
goal  is  to maintain  the  energy  associated with  the  overall                                                               
reservoir.   Therefore, normally  one would  inject gas  into the                                                               
gas  column and  water into  the  water column  to maintain  full                                                               
pressure for  oil recovery.   He  reported that  it is  easier to                                                               
push oil with  water than it is  to push oil with gas,  but it is                                                               
necessary to simultaneously maintain the gas pressure.                                                                          
                                                                                                                                
REPRESENTATIVE LYNN  asked what  the best  alternative is  in the                                                               
context of HB 3001.                                                                                                             
                                                                                                                                
MR. BARRON  answered that  it is  a combination  of both  gas and                                                               
water injection.                                                                                                                
                                                                                                                                
REPRESENTATIVE PETERSEN related his  understanding that there can                                                               
be too much  natural gas pressure, which makes  a field difficult                                                               
to develop as is exhibited at Point Thomson.                                                                                    
                                                                                                                                
MR.  BARRON replied  that  Point Thomson  is  a very  complicated                                                               
reservoir  that  those  in  the  industry  would  describe  as  a                                                               
retrograde  condensate, which  requires a  constant balancing  of                                                               
the reservoir pressure.  He  explained that in a pressure-volume-                                                               
temperature phase envelope, which  considers the component of the                                                               
product  itself,  at  high pressure  with  constant  temperature,                                                               
reservoir pressure can  be decreased such that  the product moves                                                               
from  a  gas  phase  to  a   liquid  phase.    For  a  retrograde                                                               
condensate,  if the  reservoir pressure  continues  to drop,  the                                                               
product can  return to a gas  phase.  Another problem  with Point                                                               
Thomson is that a high  pressure reservoir is extremely costly to                                                               
maintain the  pressure at  a level  that keeps the  gas in  a gas                                                               
phase rather  than a liquid  phase or, in  a gas cycle,  drop the                                                               
pressure of the  reservoir such that the liquids  can be stripped                                                               
out at very elevated pressures through the surface facilities.                                                                  
                                                                                                                                
2:04:00 PM                                                                                                                    
                                                                                                                                
MR. BARRON, returning to his  presentation, directed attention to                                                               
slide 4 entitled "PBU Initial  Participating Area," which depicts                                                               
the 9.9  percent annual exponential  decline in Prudhoe Bay.   He                                                               
explained  that  this graph  reflects  a  work case  decline,  as                                                               
opposed to  a no-work case, as  it includes every well,  piece of                                                               
equipment, work-over,  and recompletion.   He noted that  some of                                                               
his team  is reviewing how to  peel those components in  order to                                                               
determine the real decline of a no-work case.                                                                                   
                                                                                                                                
2:06:02 PM                                                                                                                    
                                                                                                                                
MR.  BARRON  moved on  to  slide  5, "PBU  Initial  Participating                                                               
Area,"  which   indicates  the   resulting  changes   during  the                                                               
timeframe when water  is injected into the gas cap.   Over two to                                                               
three years  there is a  3.5 percent  decline, which is  why some                                                               
would say a  hyperbolic decline is being exhibited in  as much as                                                               
a lot  of parameters of  the field have  been changed by  doing a                                                               
lot of  work.   He pointed  out that it  took, starting  in 2004,                                                               
almost four years  to see any of the benefits  to production from                                                               
that capitalization.  He declared  that, as the parameters of the                                                               
field were changed, the decline was  altered.  He stated that the                                                               
goal  is to  create  a  fiscal regime  to  encourage the  overall                                                               
development and  longevity of  the field.   However, one  must be                                                               
mindful that  recognizable results for these  capital investments                                                               
can take five to seven years.                                                                                                   
                                                                                                                                
2:07:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER, directing  attention to  slide 5,  asked                                                               
whether  the green  dots  from  2007-2011 on  the  graph are  the                                                               
result of funds spent in 2003 or earlier or from 2001 decisions.                                                                
                                                                                                                                
MR. BARRON answered that the green  dots are the direct result of                                                               
investments made  in 2002-2003  by putting  the facilities  in to                                                               
put water  in the gas cap  at the IPA.   The design, engineering,                                                               
and capital projects  were done in 1999 - 2004,  but the benefits                                                               
were not recognized  until 2007.  Some projects have  a long lead                                                               
time in terms of seeing any benefit, he remarked.                                                                               
                                                                                                                                
2:08:59 PM                                                                                                                    
                                                                                                                                
MR. BARRON  moved on to  slide 7  entitled "Kuparuk River  Unit -                                                               
Kuparuk  Participating  Area,"  declaring  it to  be  the  second                                                               
largest oil  field in North America.   He stated that  this graph                                                               
clearly reveals a 10 percent  exponential decline for the Kuparuk                                                               
River Unit.   Moving on to slide 8, he  reflected on the dramatic                                                               
change in  the decline  curve from 10.5  percent to  7.5 percent,                                                               
which  he  primarily  attributed to  increased  infield  drilling                                                               
activities.  Kuparuk  is a world class water flood  field and the                                                               
company developing  it is  performing a  great deal  of reservoir                                                               
management as it  determines where the oil has been  pushed to by                                                               
the water, making work overs,  drilling new wells, and performing                                                               
recompletions  necessary to  capture  the product.   More  recent                                                               
additional drilling indicates a decrease  in the decline curve to                                                               
5 percent.  Therefore, it  is important to understand the impacts                                                               
of  capitalization relative  to the  original base  curve of  the                                                               
aggregate for all the wells.                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON said  "We've got  the AOGCC  development service                                                               
wells  and  well bores  for  ConocoPhillips,  which as  operator,                                                               
presume that  those are going  to be  Kuparuk.  ...  There didn't                                                               
seem to  be any uptick in  wells being drilled in  that timeframe                                                               
over  the other  timeframes that  we  had.   And so,  how are  we                                                               
attributing that  rate of  decline to the  same number  of wells,                                                               
basically,  being drilled  in those  years that  they were  being                                                               
drilled in previous years."                                                                                                     
                                                                                                                                
MR. BARRON, in  response to Co-Chair Seaton, said that  it is not                                                               
necessarily the number of wells  drilled, but the location of the                                                               
wells and the  location to where they are recompleted.   He posed                                                               
a scenario  in which  there is line  drive water  flood reservoir                                                               
and modeling  to where the  oil bank  is being moved.   Selective                                                               
wells in selective  locations can be drilled  or recompletion can                                                               
be performed such  that a zone or  part of a zone is  shut off to                                                               
increase oil production.   He declared that there has  not been a                                                               
major  drilling increase  since 2000.    In fact,  he recalled  a                                                               
curve that  relates that there  has been a continuous  decline in                                                               
drilling  on the  North  Slope, save  one outlier  in  2004.   He                                                               
informed the committee that the  aforementioned means the decline                                                               
is  trying to  be arrested  by  "attacking the  reservoir at  the                                                               
right location."  Mr. Barron  related that to his knowledge there                                                               
were  no other  major  facilities installed  or  major change  in                                                               
reservoir management  of the field,  and therefore it  could only                                                               
be attributed  to the  increase in wells  brought online  at that                                                               
time.   He noted  that it  may be only  half a  dozen to  a dozen                                                               
wells every year.                                                                                                               
                                                                                                                                
2:13:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON explained  that he is trying to  determine if the                                                               
rate of decline  is being attributed to drilling  the same number                                                               
of wells as had been drilled  in the previous years.  However, he                                                               
related  his  understanding  that   it  is  being  attributed  to                                                               
improved  technology not  to increased  capital  spending or  any                                                               
other system since capital spending  in Kuparuk was basically the                                                               
same throughout those years.                                                                                                    
                                                                                                                                
MR. BARRON  said that  he didn't know  what the  capital spending                                                               
was  through  that  timeframe.     He  clarified  that  from  the                                                               
information base he  has the driving mechanism in  this change of                                                               
decline is based  on drilling technology and the  number of wells                                                               
introduced.     The  multi-lateral  coil  tubing   work  and  the                                                               
selective  workovers on  existing wells  have been  advantages in                                                               
Kuparuk.    The  point,  he  emphasized,  is  that  as  companies                                                               
continue to work  the field, they become smarter and  are able to                                                               
identify which  wells to bring  on and  which wells to  turn off.                                                               
For  example, in  Prudhoe Bay  there is  a very  robust reservoir                                                               
simulator through which  it's predicted where the  gas will break                                                               
out, and  therefore the companies try  to shut those wells  in to                                                               
conserve energy and free up  the facilities.  Mr. Barron stressed                                                               
that it  is a dynamic process  that is reviewed on  a daily basis                                                               
by engineers and geoscientists of these companies.                                                                              
                                                                                                                                
CO-CHAIR SEATON, referring to proposed  HB 3001, questioned how a                                                               
change  in  the  tax  system   [is  related  to  an  increase  in                                                               
production]  if it  is  not related  to the  number  of wells  or                                                               
increased  capital spending  but rather  to smarter  drilling and                                                               
increased technology.                                                                                                           
                                                                                                                                
MR. BARRON replied that each  of the examples mentioned including                                                               
every  well drilled,  workovers, and  new technology,  is capital                                                               
driven  and requires  a  dollar  infusion into  the  field.   The                                                               
companies  are  trying  to  employ  their  capital  in  the  most                                                               
efficient  manner  and  manage the  reservoirs  as  prudently  as                                                               
possible.                                                                                                                       
                                                                                                                                
CO-CHAIR SEATON surmised then that it  is not about the amount of                                                               
increased capital expended  but rather the use of  the capital in                                                               
the field.   Therefore,  he questioned  how a  change in  the tax                                                               
regime would result in smarter employment of capital.                                                                           
                                                                                                                                
MR. BARRON  characterized this as a  "circular logic discussion."                                                               
He countered  that the current  use of capital had  decreased the                                                               
decline  of the  field from  10  percent to  5 percent.   If  the                                                               
companies received more  money to perform more work  because of a                                                               
change in  fiscal regime  that improved  their net  present value                                                               
(NPV) and  internal rate  of return (IRR)  on any  given project,                                                               
the  counter  logic is  that  more  money  results in  a  flatter                                                               
production profile.   He clarified  that he is pointing  out that                                                               
if the company  had performed no work there would  be an elevated                                                               
decline  rate.    Therefore, clearly  the  more  money  companies                                                               
receive and  the more  advances in  technology that  are employed                                                               
that result in the reduction in  the decline rate from 10 percent                                                               
to  5 percent,  it is  not much  of "a  leap of  faith" that  the                                                               
decline  rate could  be flattened  or even  reversed.   He noted,                                                               
however, that it  is related to whether the  smaller projects are                                                               
available and  economic as time  passes.  Again, the  Prudhoe Bay                                                               
example was  a five- to  seven-year project waiting for  the true                                                               
value to  come to the company  and the state.   During that time,                                                               
the oil  companies were taking  the risk with the  product price.                                                               
He  shared that  the design  and  conceptual work  is being  done                                                               
today  for projects  that will  hopefully come  into play  in the                                                               
next  several years  and those  projects are  still very  capital                                                               
intensive.  As  time passes more gas and water  has to be handled                                                               
for a lower return of oil  production for these two major fields.                                                               
Therefore, anything  the state can  do to decrease costs  for the                                                               
oil  companies  is  an  advantage  for  the  state  in  terms  of                                                               
increased  production  as  well  as  more  capital  infusion  and                                                               
expense infusion in the field.   "It's how you spin it," he said.                                                               
He expressed  concern with recent discussion  regarding reviewing                                                               
the decline  over the  last two  years and  making that  the base                                                               
because it is  not the true base decline of  the field, rather it                                                               
is an  aberration attributable to  ongoing capital work  that has                                                               
had a positive impact on the life of the field.                                                                                 
                                                                                                                                
CO-CHAIR SEATON opined that he  did not believe anyone disagrees,                                                               
but  indicated  concern  when  increased  drilling  is  specified                                                               
without  the number  of wells  increasing and  attributing it  to                                                               
technological changes to production.                                                                                            
                                                                                                                                
MR. BARRON  clarified that his  reference to  additional drilling                                                               
simply means that  work, drilling wells, is  being performed, but                                                               
does not necessarily mean there has  been an increase in the rate                                                               
of  drilling or  the  number of  wells.  Simply put,  "additional                                                               
drilling" means that  more drilling occurred and  more wells were                                                               
added; this is a work case rather than a no-work case.                                                                          
                                                                                                                                
2:21:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON  reflected  on the  pipeline shut  down                                                               
during  the  cold  weather  two  years ago,  which  is  when  the                                                               
producers realized  how serious low  production is during  a very                                                               
cold period.  She then asked  if Mr. Barron is saying the results                                                               
of work [done  by the producers] at that time  might still not be                                                               
evident [in the production].                                                                                                    
                                                                                                                                
MR. BARRON explained that the concern  at that time, as it was so                                                               
cold, was  that it would  be difficult to  re-initiate production                                                               
through static line.  He clarified  that the problem was not with                                                               
the  oil fields  rather it  was the  re-initiation of  throughput                                                               
through the pipeline.   He declared that, as there  is not a good                                                               
benchmark to establish a "no-work"  decline in the oil fields, it                                                               
is  difficult to  establish  any  base decline  rate  as all  the                                                               
decline curves include  ongoing work.  However, he  noted that he                                                               
has a couple  of examples of individual wells  that might provide                                                               
a glimmer  of what a no-work  case in Kuparuk might  be, which he                                                               
mentioned would be reviewed shortly.                                                                                            
                                                                                                                                
REPRESENTATIVE TUCK  opined that  although a  goal is  to reverse                                                               
the decline,  it appears that  the best  result would be  to slow                                                               
the  decline, unless  new oil  fields  were brought  online.   He                                                               
asked if  there is  any possibility of  reversing the  decline in                                                               
these  existing fields,  or  is  the best  scenario  to slow  the                                                               
decline.                                                                                                                        
                                                                                                                                
MR. BARRON replied "hold that thought."                                                                                         
                                                                                                                                
CO-CHAIR  FEIGE  offered  his  belief  that  any  additional  oil                                                               
production extends the  revenue to the state.  He  asked if there                                                               
is a  technological limit  for the  amount of  capital investment                                                               
which would generate a corresponding increase in revenue.                                                                       
                                                                                                                                
MR. BARRON  replied that the  oil companies could offer  a better                                                               
answer  as they  better  understand the  cost  structure and  the                                                               
benefit  and  reward  system  in their  well  productivity.    He                                                               
expressed  agreement  that  there  is  "a  point  of  diminishing                                                               
returns."                                                                                                                       
                                                                                                                                
2:26:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MUNOZ  asked whether  any current  investments aim                                                               
to reduce the decline.                                                                                                          
                                                                                                                                
MR. BARRON replied  yes, and characterized the  work with viscous                                                               
oil  as an  investment in  future production.   For  example, the                                                               
ConocoPhillips drilled well in the  southwestern part of Kuparuk,                                                               
called Shark's Tooth, is an  expansion of some of ConocoPhillips'                                                               
work  that   is  an  investment   today  that  would   be  future                                                               
production.   Furthermore, some  of ConocoPhillips'  gas handling                                                               
and  processing facilities  for  debottlenecking  that are  being                                                               
designed  today will  be  capitalization  for future  production;                                                               
this ongoing design, modeling, and  engineering work is a routine                                                               
project for  companies' process and  product engineers.   He said                                                               
the   reservoir  management   skills  of   these  companies   are                                                               
exceptional.   He  offered further  examples  such as  electrical                                                               
submersible pumps  versus gas lift, location  of water injection,                                                               
amount  of water  to inject  or  not inject  as investments  that                                                               
could be  made "today" for future  benefit.   He  emphasized that                                                               
the aforementioned  are long-term  projects "and  this is  not an                                                               
immediate gratification kind of process."                                                                                       
                                                                                                                                
2:30:06 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  inquired as to  why the natural rate  of decline                                                               
for an oil field is important to  the [state].  He noted that the                                                               
committee is  considering the  bill to change  the tax  system to                                                               
provide  incentives to  additional economic  projects beyond  the                                                               
current  invested capital  for those  already economic  projects.                                                               
He  requested  an explanation  as  to  why  the natural  rate  of                                                               
decline  is being  reviewed  since he  understood  that they  are                                                               
already reviewing  the rate  of decline  above what  is currently                                                               
economically feasible and sanctioned.                                                                                           
                                                                                                                                
MR. BARRON  replied that his desire  is for everyone to  have the                                                               
same fundamental  understanding with  regard to what  the decline                                                               
of  the field  is.   For example,  he wanted  to ensure  that the                                                               
decline at Kuparuk  River Unit at 5 percent is  the direct result                                                               
of a great deal  of work and that if the case  had been a no-work                                                               
scenario, the  decline might  have been 23  percent.   Mr. Barron                                                               
reiterated the importance of recognizing  the amount of work over                                                               
time as all the work is  aggregated together to obtain a sense of                                                               
the magnitude  of it and  whether [the current decline]  could be                                                               
reversed.                                                                                                                       
                                                                                                                                
MR. BARRON directed attention to  the graphs on slide 10 entitled                                                               
"Large  Lower  48  Field,  Mid Size  North  Slope  Field,"  which                                                               
address an  economic situation  by which there  is early  shut in                                                               
and [the  project] is no  longer economic,  whether it is  due to                                                               
the fiscal regime, product price,  or lifting costs.  With regard                                                               
to  the question  of  whether the  aforementioned  is a  negative                                                               
impact  on the  field, he  explained that  the top  graph is  the                                                               
decline curve  and the blue  line represents 5,000 barrels  a day                                                               
and a  field of  that size  could easily  contain 100  oil wells,                                                               
which amounts  to 50 barrels of  oil per day and  100-150 barrels                                                               
of water each day.  [In the  second graph on slide 10], the curve                                                               
is the cumulative production.   He explained that if the economic                                                               
limit  is  changed  by  50  percent,  the  total  recovery  would                                                               
slightly increase from 254,000 to  271,000.  However, the life of                                                               
the  field would  be  extended  by over  10  years.   The  graphs                                                               
illustrate  the  impact  of  early  shut in  of  a  well  due  to                                                               
economics,  which  is  a  loss  of resource  in  terms  of  total                                                               
recovery and the early termination.                                                                                             
                                                                                                                                
2:36:11 PM                                                                                                                    
                                                                                                                                
MR. BARRON moved  on to slide 11 entitled "Cook  Inlet Oil Well,"                                                               
which  depicts  graphs  of  decline  curves  in  Cook  Inlet  and                                                               
Kuparuk.   He highlighted the  graph for  a Cook Inlet  well that                                                               
exhibits a 7 percent decline  per year and informed the committee                                                               
that this  well was shut in  at the end  of its life due  to high                                                               
water cut.   The  well was  shut in  when it  was at  about 40-50                                                               
barrels per  day, which is similar  to the previous example.   He                                                               
then  turned attention  to  the  second graph  that  is a  sample                                                               
Kuparuk oil well, a single well,  that has moved from its plateau                                                               
to its  decline of about 23  percent.  Mr. Barron  clarified that                                                               
he  is  trying  to  illustrate  the kind  of  work  necessary  to                                                               
maintain a level  of non-decline if the  cumulative Kuparuk River                                                               
Unit is in a 5 percent decline and  every well drilled is in a 23                                                               
percent decline.   The third  graph depicts a  recent application                                                               
of  the new  coil tubing  and multi-lateral  drilling technology,                                                               
which is designed to drill  horizontally and capture more net pay                                                               
per well.   The  aforementioned [technology]  exhibits about  a 7                                                               
percent decline  and is a well  for which the new  technology was                                                               
able  to  capture more  product  cost  effectively than  drilling                                                               
multiple wells.                                                                                                                 
                                                                                                                                
REPRESENTATIVE TUCK, referring to the  Cook Inlet Oil Well graph,                                                               
related his understanding that the single  well was cut off at 50                                                               
barrels of  oil per day  over a 215-month  period and was  due to                                                               
the amount of water.                                                                                                            
                                                                                                                                
MR. BARRON expressed his agreement.                                                                                             
                                                                                                                                
2:39:06 PM                                                                                                                    
                                                                                                                                
MR. BARRON,  returning to his  presentation, said that  slides 12                                                               
and 13 relate to earlier  questions from Representatives Kawasaki                                                               
and Tuck.  The graph on  slide 12 entitled "Kenai Gas Field Daily                                                               
Production  in mcf/d"  exhibits  actual data  for  the Kenai  gas                                                               
field,  which  has  a  lot  of  natural  seasonal  swing  due  to                                                               
deliveries  of  gas  to  Anchorage.    He  then  highlighted  the                                                               
negative decline  between 1991 and  1999, after which there  is a                                                               
marked reversal of the decline  as a result of increased drilling                                                               
in  the  gas  field  that  was  primarily  necessary  to  satisfy                                                               
contractual  obligations with  the  supply companies,  Anchorage,                                                               
and the  liquefied natural  gas (LNG)  market.   He characterized                                                               
the Kenai gas  field as a local exhibit of  where the decline can                                                               
be  reversed.   Moving  on  to the  graph  on  slide 13  entitled                                                               
"Forties Field,  North Sea, production,"  he declared  this curve                                                               
to  be  an  even  more  pronounced example  for  a  new  operator                                                               
initiated program that  reversed the decline.  In  response to an                                                               
earlier question by Representative  Gardner, he stated that there                                                               
are over several  hundred drilling rigs operating  in the Permian                                                               
Basin  in  Texas,  which  are  not drilling  into  shale.    More                                                               
specifically,  the  Spraberry  Field is  experiencing  a  "robust                                                               
renaissance" in  an area that is  not shale driven.   He declared                                                               
that all of  these are tangible examples of  areas experiencing a                                                               
"robust uptick in production."                                                                                                  
                                                                                                                                
REPRESENTATIVE TUCK, referring to slide  12, asked if the reverse                                                               
of  the  decline  in  the  Kenai gas  field  was  due  to  recent                                                               
exploration  for  gas,  as opposed  to  the  earlier  exploration                                                               
solely  for oil.   He  asked if  gas and  oil decline  curves are                                                               
comparable.                                                                                                                     
                                                                                                                                
MR. BARRON replied that gas  decline analysis could also be done,                                                               
and he clarified  that the initial Kenai  exploration history had                                                               
been for gas,  not oil, to supply the local  market.  He reported                                                               
that  the particular  operator in  the Kenai  gas field  targeted                                                               
most of its  exploration dollars associated with  gas rather than                                                               
oil.  However,  during the last lease sale in  Cook Inlet, Apache                                                               
obtained a tremendous amount of  acreage as Apache believes it is                                                               
an  unbelievably unexplored  oil province.   In  fact, Apache  is                                                               
going to  penetrate deep for  oil and the  notion is that  as one                                                               
seeks deep oil,  one will penetrate shallow gas.   In the last 20                                                               
years gas not oil has been the target in the Cook Inlet.                                                                        
                                                                                                                                
REPRESENTATIVE  TUCK  recalled  in  2009 and  2010  when  Pioneer                                                               
sought  exploration   credits  for  gas  and   presented  similar                                                               
testimony.                                                                                                                      
                                                                                                                                
MR.  BARRON   clarified  that  there  is   a  difference  between                                                               
exploration work  and development work.   The Kenai gas  field is                                                               
an example  of a known  quantity in an  existing field.   He held                                                               
the  Kenai  gas  field  as   an  example  in  which  focused  and                                                               
concentrated  effort can  change a  field's natural  decline with                                                               
capitalization and drilling.                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI asked  if  there are  any large,  mature                                                               
fields, similar to Kuparuk River  Unit or Prudhoe Bay, which have                                                               
had  an adjustment  to their  decline  curve.   Referring to  the                                                               
Forties Field,  North Sea,  production graph,  he inquired  as to                                                               
the amount  of capital investment  and circumstances  required to                                                               
get the  uptick.  He noted  that the overall design  of the curve                                                               
is not changed.                                                                                                                 
                                                                                                                                
MR. BARRON replied that he did  not have the cost figures, but he                                                               
offered  to  forward some  information.    He said  that  capital                                                               
improvements could improve the decline,  at least for a period of                                                               
time,  but  that  it  would  eventually  return  to  the  natural                                                               
decline.   The point is that  the Forties Field is  an example in                                                               
which  the  influx  of capital  and  facility  modifications  did                                                               
reverse the decline, at least for five to six years.                                                                            
                                                                                                                                
REPRESENTATIVE  DICK,  describing  a  level of  futility  in  the                                                               
discussion,  offered  his belief  that  the  legislature has  the                                                               
following choices:  do nothing; offer  some help and hope it does                                                               
some good; get  involved with details that  are better understood                                                               
by  the   industry;  or,  have  a   good  conversation  regarding                                                               
incentives to get beyond the decline curve.                                                                                     
                                                                                                                                
2:51:29 PM                                                                                                                    
                                                                                                                                
MR.  BARRON presented  slide 15  entitled "What  will it  take to                                                               
reach  the goal?"  which, he  opined, echoes  what Representative                                                               
Dick  has said.   He  declared  that it  is important  to have  a                                                               
collaborative   and   competitive   environment  with   a   clear                                                               
understanding  for  all  the  barriers  and  to  define  ways  to                                                               
increase access to all fields, at all locations, at all times.                                                                  
                                                                                                                                
REPRESENTATIVE  PETERSEN reminded  the committee  that Alaska  is                                                               
competing  with other  oil  fields.   He  asked  if the  proposed                                                               
legislation, with  its accelerated depreciation, is  enough of an                                                               
incentive for the  oil companies to invest in  Alaska sooner than                                                               
in other areas.                                                                                                                 
                                                                                                                                
MR.  BARRON said  that he  did  know how  much one  piece of  tax                                                               
legislation  would work.   He  explained  that the  focus of  the                                                               
Division of  Oil and Gas is  to "be the technical  repository for                                                               
the state  of oil  and gas."   He  declared that  economic levers                                                               
which increase  the net present value  or the rate of  return are                                                               
generally viewed as  favorable and could bring  a project forward                                                               
to operation.   He  informed the  committee that  he has  had the                                                               
good fortune to work as an  operator, a contractor, and now as an                                                               
owner over  the course of  his 35-38  years in the  oil industry.                                                               
From  his years  as an  operator he  learned that  he wanted  the                                                               
contractors  to be  financially successful  because it  meant the                                                               
contractor would have longevity and  would lead to the contractor                                                               
having better staff  and equipment.  That situation  is really no                                                               
different  than what  the state  is in  as the  owner of  the oil                                                               
fields; it is necessary for the  oil producers to have success in                                                               
order to continue  to invest in the fields.   He declared that it                                                               
is  a  balance  between  the oil  producers  having  success  and                                                               
protecting the state's rights as the owner.                                                                                     
                                                                                                                                
2:56:31 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON   asked  Mr.   Barron  if  there   are  any                                                               
differences  between   his  testimony  to  the   House  Resources                                                               
Standing  Committee  and  his earlier  testimony  to  the  Senate                                                               
Resources Standing Committee.                                                                                                   
                                                                                                                                
MR.  BARRON  replied no,  but  added  that the  Senate  Resources                                                               
Standing  Committee testimony  did  include discussion  regarding                                                               
the capacity of facilities, facility  limitations, and the use of                                                               
excess capacity by third parties.                                                                                               
                                                                                                                                
CO-CHAIR FEIGE  observed that  there is  a perception  that newer                                                               
oil producers  face a barrier  in terms of access  to facilities.                                                               
He asked  how it works  for a small  producer that enters  on the                                                               
fringe of  a larger field  and wants to use  existing facilities.                                                               
He also inquired as to the impact  on the new producer as well as                                                               
the facility owner.                                                                                                             
                                                                                                                                
MR. BARRON  replied that it  is sometimes a  corporate philosophy                                                               
to piggyback  on existing facilities  to lower  operational costs                                                               
and decrease the necessary capital,  whereas other companies want                                                               
to  stand  alone  with  no  impact from  facility  owners.    The                                                               
negotiation between  the facility owner and  the producer seeking                                                               
use of an existing facility  is a very complicated and integrated                                                               
dialogue that  will revolve around  the cost and the  priority of                                                               
the  product in  the facility  in  the near-  and the  long-term.                                                               
Therefore, most operators prefer the ability to stand alone.                                                                    
                                                                                                                                
CO-CHAIR  FEIGE, acknowledging  the suggestion  for the  state to                                                               
mandate  that  facility owners  accept  oil  from any  producers,                                                               
asked if that is an appropriate policy.                                                                                         
                                                                                                                                
MR.  BARRON related  his  belief  that should  not  be under  the                                                               
purview  of the  legislature, as  such a  broad mandate  could be                                                               
very detrimental to the existing fields in Alaska.                                                                              
                                                                                                                                
3:02:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON,  pointing out that  the independent oil  and gas                                                               
producers  such   as  Brooks  Range   needed  capital   to  build                                                               
production facilities, asked  if the Division of Oil  and Gas has                                                               
the expertise to assess a  reservoir for potential reserves prior                                                               
to the state making a loan to an independent producer.                                                                          
                                                                                                                                
MR. BARRON replied yes.                                                                                                         
                                                                                                                                
CO-CHAIR  SEATON asked  if  the  Division of  Oil  and Gas  could                                                               
estimate the  potential for production  in new fields  and legacy                                                               
fields and the timeframe in which it would occur.                                                                               
                                                                                                                                
MR.  BARRON replied  that any  such information  would be  highly                                                               
speculative.   He  reflected on  earlier testimony  regarding the                                                               
impacts of truncating  the life of shale oil wells  from 20 years                                                               
to 5  years, and added that  such variables would be  unknown and                                                               
would require  a technical  estimation.  Brooks  Range is  a good                                                               
example in  that the division  does not  know the results  of the                                                               
Repsol drilling  to date.   Any discussions on  such developments                                                               
would be broad  with no specifics.  On the  other hand, the plans                                                               
of development  for the  legacy fields  are available  for review                                                               
and those projects  that are on a plan of  development are almost                                                               
always economic.  The Division of  Oil and Gas, however, would be                                                               
researching opportunities  that are  not currently  on a  plan of                                                               
development  and  are   not  yet  recognized.     He  offered  to                                                               
coordinate with the Department of Revenue for more information.                                                                 
                                                                                                                                
CO-CHAIR SEATON requested a chart  for speculative information to                                                               
"new  fields and  potential probabilities,"  as  that was  better                                                               
than zero  information.  He  also requested the current  plans of                                                               
development,  including  the  estimate  for barrels  per  day  of                                                               
production, for both legacy fields and new fields.                                                                              
                                                                                                                                
3:11:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON, referring  to slide 15, asked  if there is                                                               
a priority for "minimizing these barriers."                                                                                     
                                                                                                                                
MR. BARRON  responded that  each oil company  would have  its own                                                               
priorities for  the removal of  barriers.  He opined  that across                                                               
the board permit reform would  be a priority, especially in terms                                                               
of reducing the time between  issuance of the lease, exploration,                                                               
and first  production, because it  would have the  largest impact                                                               
on  the  state  and  the   companies.    Therefore,  barriers  to                                                               
exploration and  first production would  likely be on the  top of                                                               
the list for review.                                                                                                            
                                                                                                                                
3:13:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI   requested  that   the  forward-looking                                                               
capital expenditure  forecasts be included with  the request from                                                               
Representative Seaton.   He expressed  interest in how  DNR works                                                               
with DOR in determining the five-year forward forecasts.                                                                        
                                                                                                                                
MR. BARRON offered to include that information.                                                                                 
                                                                                                                                
CO-CHAIR  FEIGE pointed  out that  statutory incentives  could be                                                               
applied at  different points,  and asked  whether a  North Slope-                                                               
wide  incentive   for  collective  production  targets   had  the                                                               
potential to encourage cooperation among the operators.                                                                         
                                                                                                                                
MR. BARRON replied that it is  "an intriguing idea."  He surmised                                                               
that the notion is to build  a system in which greater production                                                               
would result  in a  lower tax.   He offered  his belief  that the                                                               
idea  is  worthy   of  more  dialogue  as  it   could  create  an                                                               
environment of  cooperation between the major  oil producers, the                                                               
new players, and independent producers.                                                                                         
                                                                                                                                
CO-CHAIR  FEIGE inquired  as to  the best  method to  establish a                                                               
framework for a statutory decline curve.                                                                                        
                                                                                                                                
MR. BARRON clarified that part  of the goal with his presentation                                                               
is  to  relate that  the  decline  curves cannot  be  interpreted                                                               
solely over  the prior few years,  as the decline curve  has been                                                               
impacted  by earlier  work  and investments.    Therefore, it  is                                                               
important to  review fields over  a broader timeframe  to account                                                               
for  the  earlier  work  in fields  that  have  been  dynamically                                                               
managed.  For  example, to say that the field  decline of Kuparuk                                                               
would be based  on 5 percent, when an individual  well in Kuparuk                                                               
might  be  at  20  percent  may result  in  the  creation  of  an                                                               
environment  in  which  not  doing anything  for  two  years  and                                                               
forcing  the  decline  rate  could  result  in  incremental  work                                                               
providing an advantage.   Mr. Barron opined  that introduction of                                                               
the  aforementioned  type  of   gamesmanship  is  not  desirable.                                                               
Therefore, it  is necessary to  have active dialogue  between the                                                               
operators and the owners.                                                                                                       
                                                                                                                                
CO-CHAIR FEIGE  asked about the  equation in the  proposed Senate                                                               
bill.  He further asked whether it  is best to have the state and                                                               
industry try to agree on something.                                                                                             
                                                                                                                                
MR. BARRON, highlighting the individuality  of each decline curve                                                               
he presented today, replied that  having a collaborative dialogue                                                               
is  probably better  than using  an  equation because  it is  not                                                               
straightforward.                                                                                                                
                                                                                                                                
3:21:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON, reflecting  on  the small  producer tax  credit                                                               
that would sunset in 2016, asked  if companies felt that the time                                                               
window is now too short to invest  capital.  He asked if there is                                                               
any opposition to a 10-year extension of this tax credit.                                                                       
                                                                                                                                
MR. BARRON said that he has not heard of any such concerns.                                                                     
                                                                                                                                
3:23:19 PM                                                                                                                    
                                                                                                                                
JANAK MAYER,  Manager, Upstream &  Gas, PFC Energy,  reminded the                                                               
committee that he  had been contracted by  the Legislative Budget                                                               
and Audit  Committee to be  the project manager for  the analysis                                                               
of the fiscal term reform project.                                                                                              
                                                                                                                                
REPRESENTATIVE  TUCK recalled  that Mr.  Mayer has  presented the                                                               
committee  with  the  following   three  options:    the  uniform                                                               
lowering of government take, differentiation  between old and new                                                               
production, and  enhancements to the cost  progressivity of ACES.                                                               
He further  recalled that in  Texas there  is a reserves  tax and                                                               
that  the   Iraqi  model  to   increase  production   is  unique.                                                               
Representative Tuck  then requested  an explanation of  the Iraqi                                                               
model to increase production as that  seems to be a possible goal                                                               
for  the state,  whereas  the  goal for  oil  companies seems  to                                                               
typically be profit.                                                                                                            
                                                                                                                                
MR. MAYER, referring  to the reserves tax  in Texas, acknowledged                                                               
that a very  small component of the Texas fiscal  regime levies a                                                               
charge based  on the  net present  value of what  is left  in the                                                               
ground.   He  said that  he has  never seen  such a  reserves tax                                                               
applied other than as a very  small component of a fiscal regime.                                                               
Furthermore,  he  said he  was  not  aware  of anywhere  that  it                                                               
provides a  significant incentive to develop  reserves that would                                                               
otherwise    be    undeveloped,    particularly    compared    to                                                               
relinquishment provisions,  for instance, in contracts.   He then                                                               
turned to the  Iraqi service contract, which  he characterized as                                                               
a relatively  unique situation.   The  Iraqi service  contract is                                                               
for  large,  existing fields  previously  owned  and run  by  the                                                               
government  who  is  now   inviting  international  companies  to                                                               
provide capital, technology, and  service to increase production.                                                               
The  contracts   are  structured  to  reward   production  beyond                                                               
existing  production,  which is  usually  based  on a  negotiated                                                               
plateau production  figure, and  possibly a  decline, with  a fee                                                               
per barrel for production above [the  plateau].  He said a lot of                                                               
the terms  [in the near-term]  have not been favorable,  but have                                                               
been engaged by companies seeking  a strategic foothold in a very                                                               
large and significant reserve position in the future.                                                                           
                                                                                                                                
REPRESENTATIVE  TUCK asked  if the  Iraqi government's  offer for                                                               
contracts to  boost new  production is limited  in scope  to this                                                               
situation.                                                                                                                      
                                                                                                                                
MR. MAYER  replied that offering incentives  for production above                                                               
a decline curve is a similar idea.                                                                                              
                                                                                                                                
3:29:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI recalled  that  slide  28 entitled  "Key                                                               
Issues"  from  Mr.  Mayer's  PowerPoint  said,  "Across-the-board                                                               
reduction  in  government  take is  the  simplest  approach,  but                                                               
requires foregoing  significant revenues  on activities  that are                                                               
currently  economic."    He requested  an  explanation  for  this                                                               
statement.                                                                                                                      
                                                                                                                                
MR.  MAYER replied  that  any approach  in  the legacy  producing                                                               
assets that  seeks to differentiate  between base  production and                                                               
something incremental, however defined,  would immediately face a                                                               
host of  complex questions for  administration of the  system and                                                               
the incentives,  not to  mention that ACES  is already  a complex                                                               
system.  Therefore,  there is a cost and tradeoff.   On the other                                                               
hand, simply  lowering government take across  the board involves                                                               
serious cash  in terms  of more  than $1  billion in  fiscal year                                                               
2013.  He  acknowledged that the greater cost  and the difficulty                                                               
of  tackling some  of those  things  are worthwhile  in terms  of                                                               
maintaining as much revenue for the state as possible.                                                                          
                                                                                                                                
REPRESENTATIVE  KAWASAKI   asked  for  suggestions   to  increase                                                               
production,  local  jobs,  and capital  expenditures  within  the                                                               
state.                                                                                                                          
                                                                                                                                
MR. MAYER offered his belief  that a reduction in government take                                                               
can  add   new  production,  even  significant   new  production.                                                               
However,  the question  is whether  it would  add sufficient  new                                                               
production  to account  for the  lost revenue  in doing  so.   He                                                               
opined that in  the short term it might not  be sufficient enough                                                               
production to make up for the  revenue lost, but in the medium to                                                               
long  term it  is possible  if there  are significant  production                                                               
increases.   To avoid the risk,  one would take an  approach that                                                               
differentiates between existing and incremental production.                                                                     
                                                                                                                                
REPRESENTATIVE KAWASAKI  presented a decline curve  of production                                                               
compared  with the  production tax  rate at  Kuparuk River  Unit,                                                               
which  he declared  is similar  to  every other  legacy field  in                                                               
Alaska.    [The illustration]  points  out  that even  under  the                                                               
Economic Limit Factor (ELF), which  varied from 12 percent tax on                                                               
the  gross to  the  almost  zero tax  in  2006, production  still                                                               
declined.  He then expressed  disagreement with the argument that                                                               
tax  reform is  the only  means  for a  production increase,  and                                                               
offered his agreement  with the Division of Oil &  Gas that there                                                               
are other means to improve the economics of an oil field.                                                                       
                                                                                                                                
MR. MAYER expressed  agreement that taxes are only  one lever and                                                               
they  have a  certain  and limited  impact,  particularly in  the                                                               
context of  high costs and other  things that are outside  of the                                                               
state's control.                                                                                                                
                                                                                                                                
3:34:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PRUITT asked if the  defeat of the reserves tax in                                                               
2006 was the correct decision.                                                                                                  
                                                                                                                                
MR.  MAYER said  that he  would need  more information  about the                                                               
specific reserves  tax put  before the  voters prior  to offering                                                               
any judgment.                                                                                                                   
                                                                                                                                
REPRESENTATIVE PRUITT  inquired as  to Mr.  Mayer's view  on some                                                               
form of a reserves tax.                                                                                                         
                                                                                                                                
MR.  MAYER   replied  that  if   an  activity   is  fundamentally                                                               
uneconomic or  so marginal as  to be noncompetitive  for capital,                                                               
simply punishing not doing it will not make it happen.                                                                          
                                                                                                                                
3:35:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  returned to the  situation in Iraqi,  where there                                                               
are  fairly sizable  reserves with  porous, permeable  rocks, and                                                               
lots of oil.   Upon the conclusion  of the war in  Iraqi, the oil                                                               
production   technology  in   Iraqi  was   relatively  primitive.                                                               
Therefore,  offering  contracts  to outside  companies  was  done                                                               
primarily  to raise  production to  a more  profitable level  and                                                               
obtain outside expertise.                                                                                                       
                                                                                                                                
MR. MAYER expressed his agreement.                                                                                              
                                                                                                                                
CO-CHAIR  FEIGE related  his understanding  that Alaska  does not                                                               
have primitive oil production facilities.                                                                                       
                                                                                                                                
MR. MAYER again expressed his agreement.                                                                                        
                                                                                                                                
3:36:39 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  offered his understanding that  the reserves                                                               
tax on  the Alaska ballot  had been  a gas reserves  tax, modeled                                                               
after  an oil  reserves tax  that  had been  instrumental in  the                                                               
startup of the  pipeline.  He then redirected  attention to slide                                                               
28 of Mr. Mayer's PowerPoint and  inquired as to whether there is                                                               
any  [guarantee] as  to more  production  due to  passage of  the                                                               
proposed legislation  and if so,  how much more  production would                                                               
it generate.                                                                                                                    
                                                                                                                                
MR. MAYER  said that  he could  not answer  that question  at the                                                               
moment, but offered that it  is not inconceivable that there will                                                               
be the  desire to lower  taxes across the  board and that  over a                                                               
significant  amount of  time one  could  reach a  point at  which                                                               
sufficient  new  production  is  stimulated  such  that  revenues                                                               
exceed what they would absent  that.  However, the aforementioned                                                               
is highly speculative as there are no guarantees.                                                                               
                                                                                                                                
3:38:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON,  referring  to  slide 5  of  Mr.  Mayer's                                                               
PowerPoint, inquired as  to the number of regimes  similar to the                                                               
State of Alaska.                                                                                                                
                                                                                                                                
MR. MAYER said it would depend upon the definition of similar.                                                                  
                                                                                                                                
REPRESENTATIVE HERRON  described Alaska as a  hands-off sovereign                                                               
state with no direct benefit or investment.                                                                                     
                                                                                                                                
MR. MAYER explained that Alaska  is not similar to most developed                                                               
countries with hydrocarbon  resources.  He said  although much is                                                               
made of the contrast of  state ownership in Alaska versus private                                                               
ownership  in  the Lower  48,  in  both  cases someone  owns  the                                                               
resource and  receives a  royalty.  Therefore,  in that  sense he                                                               
said  he was  not  convinced that  it is  a  defining feature  in                                                               
Alaska.   He  acknowledged  that  Alaska is  similar  to the  tax                                                               
royalty  regimes in  which the  fixed  royalty is  extended to  a                                                               
profit based  tax.  For example,  Australia has done the  most in                                                               
terms of  moving from pure  royalty to  pure taxation "as  a more                                                               
intelligent  way to  go  about  taxing the  resource."   In  that                                                               
sense,  the contrast  is between  tax  royalty jurisdictions  and                                                               
production  sharing contract  jurisdictions.   Production sharing                                                               
contract jurisdictions are jurisdictions in  which oil and gas is                                                               
produced as a result of  direct contracting between the state and                                                               
the private sector in which  revenue accrues to the state through                                                               
a deliberately  negotiated contract  that provides  for long-term                                                               
stability,  and thus  may require  no terms  be changed  over the                                                               
next  20-30  years.   The  principle  dividing line  between  tax                                                               
royalty regimes, particularly in most  of the developed world, is                                                               
the government  taking a  more hands-off  approach and  setting a                                                               
playing  field  to let  the  private  sector enter  versus  those                                                               
regimes that seek  to get the most from their  assets by directly                                                               
negotiating contracts with the  private sector, usually involving                                                               
a bidding process regarding the amount of government take.                                                                      
                                                                                                                                
REPRESENTATIVE  HERRON  suggested  the  idea that  the  State  of                                                               
Alaska  should become  an investor  instead of  changing the  tax                                                               
structure and  giving money to the  oil producers.  He  asked for                                                               
any "cautions to that thought process."                                                                                         
                                                                                                                                
MR. MAYER  cautioned that the  investors understand in  what they                                                               
are  investing and  the  risks being  taken  with the  taxpayers'                                                               
dollar.  He said that he would  need to study the dynamics of the                                                               
private  sector  players in  Alaska  before  he could  offer  any                                                               
further advice.                                                                                                                 
                                                                                                                                
CO-CHAIR SEATON  inquired as  to whether there  is a  downside to                                                               
the State  of Alaska  offering commercial terms  on loans  to the                                                               
smaller operators in  order to stimulate oil  production into the                                                               
pipeline.                                                                                                                       
                                                                                                                                
MR.  MAYER reiterated  that  the state  needs  to understand  the                                                               
risks,  especially  if,  for  any   reason,  the  loans  are  not                                                               
available   commercially.      Furthermore,  the   state   should                                                               
understand the  risk the  private sector is  not willing  to bear                                                               
that the state is and accurately judging that.                                                                                  
                                                                                                                                
CO-CHAIR SEATON surmised then that  differences in interest rate,                                                               
timing,  and  whether  there  are  adequate  reserves  should  be                                                               
reviewed in terms of the risk.                                                                                                  
                                                                                                                                
MR. MAYER agreed.                                                                                                               
                                                                                                                                
3:45:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PETERSEN, noting  that  proposed  HB 3001  allows                                                               
companies accelerated  expense depreciation,  asked if  any other                                                               
oil  regimes have  successfully  implemented  such to  accelerate                                                               
development and investment in the oil fields.                                                                                   
                                                                                                                                
MR.  MAYER replied  that Alaska  royalty, through  the production                                                               
tax, already  has the ability  to write off  expenses immediately                                                               
in  terms of  the production  tax.   However, the  timeframe over                                                               
which  one  claims capital  credits  that  go with  spending  and                                                               
enabling  them  to  be  claimed  in a  single  year  rather  than                                                               
stretching it over  two years.  Suddenly, Alaska is  a high level                                                               
of  government take,  notwithstanding more  generous regimes,  in                                                               
terms  of the  timeframe  over which  those  claims are  allowed.                                                               
There  are many  jurisdictions  that have  similar allowances  or                                                               
approaches  to  credits, but  require  them  to be  claimed  from                                                               
future production rather than in  the current year or coming year                                                               
or two.   Therefore,  Alaska's Clear  and Equitable  Share (ACES)                                                               
works at  the moment  for the legacy  lower cost  assets, despite                                                               
the high government take, is some  of the upfront loading of take                                                               
to contractors.   The change from  the two-year to one-year  is a                                                               
small  change,  but  a  positive  one  from  the  perspective  of                                                               
economics.  However, alone it does not "move the dial."                                                                         
                                                                                                                                
3:48:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  offered that  PFC  could  do any  analysis  that                                                               
committee members requested.                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI asked if any information has been                                                                       
received from the administration.                                                                                               
                                                                                                                                
CO-CHAIR SEATON said that everything currently received has been                                                                
distributed to the committee.                                                                                                   
                                                                                                                                
[HB 3001 was held over.]                                                                                                        

Document Name Date/Time Subjects
Decline Curves HRes Energy 4.23.12.pdf HRES 4/23/2012 1:00:00 PM
HB3001