Legislature(2011 - 2012)HOUSE FINANCE 519

04/25/2012 01:00 PM RESOURCES


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01:07:13 PM Start
01:08:08 PM HB3001
05:27:00 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
In Participation with House ENE
+= HB3001 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Industry Testimony
               HB3001-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:08:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON announced  that the only order  of business would                                                               
be  invited testimony  from the  oil and  gas industry  regarding                                                               
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."                                                                                                                
                                                                                                                                
                  ConocoPhillips Alaska, Inc.                                                                               
1:09:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  invited ConocoPhillips  Alaska, Inc.  to provide                                                               
its testimony.                                                                                                                  
                                                                                                                                
1:10:17 PM                                                                                                                    
                                                                                                                                
SCOTT  JEPSEN, Vice  President, External  Affairs, ConocoPhillips                                                               
Alaska, Inc., reviewed  an outline of the discussion  that he and                                                               
Mr.  Clark intended  to cover  today, which  included the  latest                                                               
financial  performance   of  ConocoPhillips;  the   potential  in                                                               
Alaska, particularly in terms of  the legacy fields; the existing                                                               
fiscal  framework;   and  ConocoPhillips'  commitment   to  spend                                                               
additional funds  in Alaska if  there are substantial  changes to                                                               
the fiscal framework in Alaska.                                                                                                 
                                                                                                                                
1:11:13 PM                                                                                                                    
                                                                                                                                
DAN   CLARK,   Manager,   Strategy  and   Portfolio   Management,                                                               
ConocoPhillips  Alaska,  Inc.,  referring  to  slide  3  entitled                                                               
"Latest Financial  Performance", began  by stating  that although                                                               
ConocoPhillips  Alaska, Inc.  ("ConocoPhillips") does  make money                                                               
in  Alaska,  there  are  significant benefits  to  the  State  of                                                               
Alaska.   For  the first  quarter of  2012 ConocoPhillips  earned                                                               
$616 million  and paid  $1.5 billion in  taxes and  royalties, of                                                               
which  about $1.2  billion went  to the  State of  Alaska.   On a                                                               
daily basis, $13.1  million of taxes and  estimated royalties and                                                               
$16.5  million of  total government  take go  to the  state.   He                                                               
acknowledged  that ConocoPhillips'  first  quarter earnings  were                                                               
$173  million higher  than they  were for  the fourth  quarter of                                                               
2011 and attributed  it to the four tankers in  the water between                                                               
Valdez  and the  West  Coast as  of the  end  of December,  which                                                               
resulted in  additional deliveries  to the  West Coast  that were                                                               
beyond  ConocoPhillips' production.    Although  there have  been                                                               
several  comparisons  in regard  to  the  earnings in  Alaska  as                                                               
opposed  to the  Lower 48,  he opined  that such  comparisons are                                                               
difficult  because   the  makeup   of  the  production   is  very                                                               
different.  In  fact, over half of  ConocoPhillips' production in                                                               
the Lower  48 is natural  gas production.   When one  reviews the                                                               
equivalent per  barrel oil  price for gas  in the  first quarter,                                                               
it's  around  $15-$16  per  barrel   versus  $100-plus  for  oil.                                                               
Furthermore,   when   one    considers   ConocoPhillips'   liquid                                                               
production in the Lower 48, a  good proportion of that is natural                                                               
gas liquids.   Those natural  gas liquids are recovered  from the                                                               
natural gas production and are a lower value.                                                                                   
                                                                                                                                
1:13:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   TUCK   inquired   as   to   how   many   tankers                                                               
ConocoPhillips run per year.                                                                                                    
                                                                                                                                
MR. CLARK said  he didn't know, but offered to  provide it to the                                                               
committee.  He then informed  the committee that a tanker equates                                                               
to  about 900,000  barrels and  with annual  production of  about                                                               
225,000-230,000 barrels a day one can sort of do the math.                                                                      
                                                                                                                                
1:14:24 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN referred to slide  4 entitled "Production is Declining                                                               
in Alaska", which  is a chart that shows Lower  48 production and                                                               
Alaska  production.   In  terms of  oil, the  Lower  48 is  going                                                               
through  a Renaissance  and  has been  on  a substantial  incline                                                               
since  2008  with  production increasing  by  about  25  percent.                                                               
Production  has declined  by  about 15  percent  during the  same                                                               
timeframe in Alaska.   He attributed the  increased production in                                                               
the Lower  48 to  use of  fracking/horizontal drilling  for shale                                                               
gas, resource potential,  and higher oil prices.   In Alaska, the                                                               
resource potential,  price, and  technology exist.   However, the                                                               
problem with  Alaska is that  under Alaska's Clear  and Equitable                                                               
Share  (ACES)  as  oil  prices change  an  investment  in  Alaska                                                               
doesn't  result in  the  same upside  as in  other  places.   Mr.                                                               
Jepsen  opined that  the aforementioned  is  the deciding  factor                                                               
with   regard  to   what's  holding   Alaska  back   because  the                                                               
ingredients for  a substantial increase  in investment  in Alaska                                                               
are present and  would have a substantial positive  impact on the                                                               
production from the  North Slope.  Moving on to  slide 5 entitled                                                               
"Legacy  Fields are  Key to  Future  Production", he  highlighted                                                               
that the  legacy fields accounted  for about 90 percent  of North                                                               
Slope production in 2011.   Furthermore, future production on the                                                               
North Slope is  by far the largest resource [in  the state].  Mr.                                                               
Jepsen informed  the committee that the  data on slide 5  is from                                                               
the  2009  Department  of  Revenue  (DOR)  report  that  reviewed                                                               
production for the years 2010-2050.   This report is used because                                                               
it was the last year in which  the data is parsed in such detail.                                                               
The  data represents  future cumulative  production during  2010-                                                               
2050.   The  combined  production of  Point Thomson,  Nikaitchuq,                                                               
Liberty, and Oooguruk  don't compare to the  opportunities in the                                                               
legacy  fields.   He highlighted  that the  cumulative production                                                               
isn't  riding the  base decline  into the  ground, it's  going to                                                               
require tens of billions of dollars  to achieve it.  Whether that                                                               
production is  achieved over the next  30 years is a  function of                                                               
whether Alaska  can attract the  capital investment  necessary to                                                               
make the investments.                                                                                                           
                                                                                                                                
MR.  JEPSEN  continued  on to  slide  6  entitled  "Opportunities                                                               
within  Legacy  Fields"  and  noted  that  ConocoPhillips  drills                                                               
designer wells.   Coil tubing drilling units are used  to drill a                                                               
sidetrack from an existing well.   The sidetrack can be from 500-                                                               
3,500  feet long  horizontal into  targeted sands  as thin  as 10                                                               
feet.  Therefore,  ConocoPhillips is developing a  field within a                                                               
field.    For instance,  in  the  Kuparuk  River Unit  there  are                                                               
isolated  fault  blocks that  are  targeted  with these  designer                                                               
wells.   This  new horizontal  drilling and  targeting technology                                                               
allows  production   in  these   isolated  fault  lines.     This                                                               
technology,  he opined,  has been  extremely  leveraging for  the                                                               
development  of Prudhoe  Bay  and Kuparuk  River  Units and  will                                                               
continue to  be a  development opportunity in  the future.   This                                                               
technology is  also being used  to drill  into thin sands.   When                                                               
considering   the   entire  opportunity   suite,   ConocoPhillips                                                               
believes there  could be  more rigs drilling  in Alaska  if there                                                               
was  the  appropriate fiscal  framework  to  make the  case  that                                                               
Alaska  is  as  attractive  for investment  as  other  locations.                                                               
ConocoPhillips is spending  more capital in the  Lower 48 because                                                               
it doesn't see the upside  for investments in Alaska. However, he                                                               
emphasized that  he didn't want  to leave the committee  with the                                                               
impression  that   ConocoPhillips  isn't  drilling   or  pursuing                                                               
opportunities in  Alaska as it  spends about $900 million  a year                                                               
in  Alaska,  which  is ConocoPhillips'  net  shares  for  Alpine,                                                               
Prudhoe Bay,  and Kuparuk units.   Furthermore, ConocoPhillips is                                                               
drilling   wells,  shooting   seismic,   and  pursuing   facility                                                               
expansions  where  they make  sense.    Again, with  a  different                                                               
fiscal framework, he  opined that there could  be more investment                                                               
in Alaska.   He then  addressed viscous  oil and stated  that the                                                               
viscous  and heavy  oil  reservoirs  on the  North  Slope are  an                                                               
immense resource.   ConocoPhillips, its predecessor  ARCO, and BP                                                               
have spent the last 30-plus  years trying to find technologies to                                                               
make  viscous and  heavy oil  commercial.   In fact,  he recalled                                                               
that his first  job in Alaska in  1982 was to find a  way to make                                                               
West Sak  and Ugnu  commercial.  However,  after enough  data was                                                               
collected, it  was determined  that the  heavy oil  doesn't float                                                               
and thus  the focus turned  to the viscous oil  in West Sak.   In                                                               
the  intervening  years,  technological  advancements  have  been                                                               
made.   The best part  of West Sak and  Kuparuk is on  stream and                                                               
producing about  14,000 barrels a  day.  Mr. Jepsen  related that                                                               
although there have  been problems, a lot has been  learned.  For                                                               
example,  there   was  massive   water  breakthrough   for  which                                                               
technology was  developed and  is being  tried on  a well-by-well                                                               
basis.   Furthermore,  progress is  being made  in regard  to the                                                               
problems   with   drilling   the    wells,   pumps,   and   sand.                                                               
ConocoPhillips'  current   plan  is  to   expand  its   West  Sak                                                               
production  from the  core area  to the  Eastern North  East West                                                               
Sak.  Although it's an area  that doesn't have quite as good oil,                                                               
ConocoPhillips believes  it can  be produced with  the technology                                                               
that's  available  today.     However,  it's  a   high  risk  and                                                               
technologically challenging area.   He noted that  the extent and                                                               
pace  at which  ConocoPhillips pursues  that opportunity  depends                                                               
upon  being able  to make  the  case that  capital investment  in                                                               
Alaska is  as attractive as  other opportunities as  other places                                                               
in the world and the Lower 48.   In the price world of today with                                                               
the  technology  that  has   been  developed,  ConocoPhillips  is                                                               
opportunity  rich  that  is ConocoPhillips  doesn't  have  enough                                                               
capital   to  pursue   every   opportunity   around  the   world.                                                               
Therefore, the  company has  to consider  those places  where one                                                               
would get the  best return on the investment.   Alaska could do a                                                               
lot to improve its position, he  reiterated.  Mr. Jepsen told the                                                               
committee that exploration and  satellite opportunities are still                                                               
available, particularly  in the  Alpine and Kuparuk  River Units.                                                               
As some may  know, ConocoPhillips has been active  in lease sales                                                               
recently and the hope is that  there will be sufficient change in                                                               
Alaska's  fiscal  framework  so  that  more  investment  will  be                                                               
attracted   and  ConocoPhillips   can   pursue   some  of   those                                                               
exploration  opportunities.    He noted  that  ConocoPhillips  is                                                               
advancing and  pursuing engineering on some  of the opportunities                                                               
in the  legacy fields.   However,  ConocoPhillips won't  make the                                                               
long lead time, highly capital  intensive investment necessary to                                                               
pursue those  until the case  can be made that  these investments                                                               
are  the  best place  for  ConocoPhillips  to invest  its  money.                                                               
ConocoPhillips  will continue  to  seek additional  opportunities                                                               
[in Alaska], he said.                                                                                                           
                                                                                                                                
MR. JEPSEN then turned to heavy  oil technologies.  The heavy oil                                                               
is more  viscous, and thus  thicker and  heavier than what  is in                                                               
West Sak.  Much  of this heavy oil is located  in very cold parts                                                               
of the  reservoir and some  of the  heavy oil just  doesn't flow.                                                               
Therefore, heavy oil is challenging,  particularly in addition to                                                               
the environmental constraints in  Alaska that require development                                                               
from  central  locations.     Although  ConocoPhillips  has  been                                                               
reviewing ways  to produce  this heavy oil  resource for  over 30                                                               
years, the  commercial technology that would  allow production of                                                               
this heavy  oil doesn't exist  yet.  Therefore, he  cautioned tax                                                               
changes that target  heavy oil because the  technology to address                                                               
heavy oil doesn't  exist yet and placing an emphasis  on it won't                                                               
bring that oil to market.   Furthermore, he opined that long term                                                               
this  isn't the  prolific reservoir  similar to  Prudhoe Bay  and                                                               
Kuparuk River Units.   The rate of the heavy oil  will be a small                                                               
percentage  of  what has  been  experienced  with the  light  oil                                                               
reservoirs.    Still,   heavy  oil  is  a   large  resource  that                                                               
ConocoPhillips  will  pursue,  but  the  focus  will  be  on  the                                                               
locations  where results  with significant  impact to  Alaska and                                                               
North Slope production can be achieved.                                                                                         
                                                                                                                                
1:28:04 PM                                                                                                                    
                                                                                                                                
MR. CLARK  then directed  attention to slide  7 entitled  "ACES -                                                               
High Average  Government Take"  which presents  a chart  from PFC                                                               
Energy  that  compares  worldwide  fiscal  regimes  at  $100  per                                                               
barrel.   He noted that  for those areas with  private royalties,                                                               
the  private  royalties  are  included  in  the  government  take                                                               
numbers.    He  highlighted  that  the  red  bars  on  the  chart                                                               
represent  ACES, while  the gold  bars represent  other countries                                                               
included  in  the  Organization   for  Economic  Cooperation  and                                                               
Development (OECD).   Relative to the other  OECD countries, ACES                                                               
at $100  per barrel is  a high  government take, he  pointed out.                                                               
He further  pointed out  that at  $140 per  barrel, the  red bars                                                               
representing existing  and new development  in Alaska  under ACES                                                               
would  move  up  and  there would  be  higher  government  takes.                                                               
Basically, the  bar representing the existing  producer in Alaska                                                               
would  move  above  Norway  and  the  bar  representing  the  new                                                               
development  in  Alaska  would  move  up  above  Trinidad.    The                                                               
aforementioned  highlights   the  effect  of   the  progressivity                                                               
mechanism within ACES.                                                                                                          
                                                                                                                                
1:29:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PETERSEN asked if the  chart on slide 7 takes into                                                               
account the tax credits offered in Alaska.                                                                                      
                                                                                                                                
MR. CLARK replied yes.                                                                                                          
                                                                                                                                
1:30:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON inquired  as to  the location  of the  red                                                               
bars representing Alaska under ACES if HB 3001 were implemented.                                                                
                                                                                                                                
MR.  CLARK said  he hasn't  seen such  a chart  from PFC  Energy.                                                               
However, he opined that the  fiscal outcome of the implementation                                                               
of HB 3001 would be similar to that of HB 110.                                                                                  
                                                                                                                                
REPRESENTATIVE HERRON  asked whether ConocoPhillips has  done any                                                               
modeling  on  [the  fiscal  results   of  the  implementation  of                                                               
HB 3001].                                                                                                                       
                                                                                                                                
MR.  CLARK answered  that he  would provide  analysis during  his                                                               
presentation.                                                                                                                   
                                                                                                                                
1:31:00 PM                                                                                                                    
                                                                                                                                
MR.  CLARK, referring  to  the  chart on  slide  8, reminded  the                                                               
committee  that progressivity  is  a situation  in  which as  oil                                                               
price or  margin increases  the state/government  take increases.                                                               
He explained that the chart on  slide 8 relates the percent share                                                               
of the  industry, the  federal government, and  the state.   This                                                               
chart,   he  clarified,   represents   a   marginal  take   rate.                                                               
Therefore, it  measures the take by  a party as the  price of oil                                                               
increases.  For example, if the  price of oil rises from $110 per                                                               
barrel  to $111  per barrel,  the total  government take  of that                                                               
incremental dollar would be over  86 percent under ACES while the                                                               
industry share  would be about 13.5  percent of that.   Mr. Clark                                                               
then highlighted that progressivity  has been impactful from $70-                                                               
$125 price  range and  takes a  larger and  larger share  of each                                                               
incremental dollar.  He pointed out  that the chart on slide 8 is                                                               
based  on Fall  2011 Revenue  Source  Book data  for fiscal  year                                                               
2013.                                                                                                                           
                                                                                                                                
1:33:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON pointed  out that the chart  specifies the prices                                                               
are  based on  Alaska North  Slope  (ANS) West  Coast oil  prices                                                               
although  the  percentages are  based  on  production tax  value,                                                               
which subtracts all costs.   Therefore, he surmised that it would                                                               
be company specific such that the chart relates an average.                                                                     
                                                                                                                                
MR. CLARK  replied yes, adding that  since the chart is  based on                                                               
Revenue Source  Book data it's  an amalgamation of  the industry.                                                               
For this fiscal year, the price  [of ANS West Coast oil] is about                                                               
$32 per barrel of oil.                                                                                                          
                                                                                                                                
MR. JEPSEN clarified  that the chart is  relating the incremental                                                               
dollar    after   all  the  costs  and  tax   credits  have  been                                                               
subtracted.   Therefore, it's the  marginal share of  the profit.                                                               
Once a  $110 per  barrel is  earned, for  the next  dollar earned                                                               
after  $110 there  are no  more  costs, tax  credits, or  capital                                                               
costs to  be subtracted from that  dollar.  Therefore, a  pure $1                                                               
goes to the company and of  that next dollar, at $110 per barrel,                                                               
the state and federal government will take about $0.86.                                                                         
                                                                                                                                
CO-CHAIR  SEATON said  members  are familiar  with effective  tax                                                               
rates on the  overall barrel price sale versus  the marginal that                                                               
merely  looks  at an  incremental  price  difference between  one                                                               
barrel and  another.  Although the  numbers used on the  chart on                                                               
slide  8 may  be  from  the Fall  2011  Revenue  Source Book,  he                                                               
surmised  that   they're  company   specific  in  terms   of  the                                                               
production  tax value  and that's  from  where incremental  value                                                               
comes.                                                                                                                          
                                                                                                                                
MR.  CLARK   offered  that  this  slide   could've  utilized  the                                                               
production  tax value  margin (PTV),  which would  mean that  $32                                                               
would be subtracted  from each of the price points  to obtain the                                                               
margin.                                                                                                                         
                                                                                                                                
1:35:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER  asked  if   this  chart  refers  to  the                                                               
marginal share of the entire barrel of oil, not the profit.                                                                     
                                                                                                                                
MR.  CLARK   said  that  the   basic  presumption  is   that  the                                                               
incremental dollar  is all profit  and nothing else  is changing.                                                               
For further  clarification, Mr. Clark specified  that both profit                                                               
and the incremental price per barrel are the same.                                                                              
                                                                                                                                
1:36:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK   asked  whether   the  chart   assumes  the                                                               
particular company  isn't taking advantage  of the tax  credit as                                                               
it lowers the  tax rate on progressivity in addition  to what the                                                               
company can subtract for the credit.                                                                                            
                                                                                                                                
MR. CLARK  explained that  the tax  works as  follows:   the West                                                               
Coast revenue is calculated,  transportation costs are subtracted                                                               
as are all the qualified  operating and capital expenses to reach                                                               
a PTV,  which is where the  tax is calculated.   Furthermore, for                                                               
qualified  capital expenditures  there is  tax credit,  depending                                                               
upon the type  of expenditure.  Once the tax  is calculated, [the                                                               
qualified  capital expenditures]  can  be deducted.   He  further                                                               
explained  that  in  this particular  analysis,  when  the  price                                                               
increases by  $1, there is  no change in credits,  investment, or                                                               
costs.  Therefore, there's no  particular impact on this marginal                                                               
share take in that scenario.                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK  surmised  then  that in  relation  to  this                                                               
chart, it's  irrelevant whether a  company took advantage  of the                                                               
tax credits.                                                                                                                    
                                                                                                                                
MR.  CLARK clarified  that  at  an oil  price  of  $110, the  tax                                                               
credits would've  already been taken  advantage of  because there                                                               
is no change in  cost when going from $110 to  $111 per barrel of                                                               
oil.   In  further  response to  Representative  Tuck, Mr.  Clark                                                               
confirmed that whether a company  takes full or partial advantage                                                               
of the tax credits, the chart remains the same.                                                                                 
                                                                                                                                
1:37:58 PM                                                                                                                    
                                                                                                                                
MR. CLARK,  returning to the presentation,  directed attention to                                                               
the chart  on slide  9, which further  illustrates the  impact of                                                               
progressivity.   This chart  uses dollar per  barrel in  order to                                                               
take out  the effects of  changes in production.   He highlighted                                                               
that  the  green  line representing  ConocoPhillips'  net  income                                                               
stays in  a fairly tight range  of plus or minus  $20 per barrel,                                                               
regardless of  oil prices.   Therefore,  it illustrates  that the                                                               
upside  isn't with  the investor,  ConocoPhillips.   However, the                                                               
state's  share,  represented  by  the  red  line,  tracks  fairly                                                               
closely with  oil price and  thus when the  oil price is  up, the                                                               
upside/share  goes  to the  state.       Moving  on  to slide  10                                                               
entitled "HB  3001 Provides More  Equitable Split",  he explained                                                               
that the  graphic illustrates  the split  of a  barrel of  oil in                                                               
terms of costs, industry share,  federal income tax, and Alaska's                                                               
share at three  different prices.  Under ACES, when  the price of                                                               
oil  rises  from $100  to  $150  per  barrel the  industry  share                                                               
increases  from $20  per barrel  to $28  per barrel,  whereas the                                                               
Alaska  share increases  from  $37  to $75  per  barrel.   Again,                                                               
that's the impact  of progressivity in which the  state takes the                                                               
predominant  share of  the upside.   In  comparison, the  graphic                                                               
illustrates that  under HB 3001 when  oil is $100 per  barrel the                                                               
industry share  increases from  $23 to $36  per barrel  while for                                                               
the state the increase is from  $32 per barrel to $62 per barrel.                                                               
Although  under HB  3001 the  predominant portion  of the  upside                                                               
still goes to  the state, ConocoPhillips believes  HB 3001 offers                                                               
a more equitable split between the state and the industry.                                                                      
                                                                                                                                
1:41:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER recalled that one  of the goals of ACES is                                                               
to encourage  investment of [the investor's]  profits thereby the                                                               
tax rate is reduced on every dollar earned.  She asked:                                                                         
                                                                                                                                
     Does  that do  that at  all  in your  first, say,  $100                                                                    
     barrel oil  under ACES  you have  $37, the  state's got                                                                    
     $32.     If you  take  ... $7  of those  $37 invest  in                                                                    
     Alaska, the state picks up  however much in the credits                                                                    
     so of the $7 you invest it's roughly what would it be                                                                      
        that we pay for and then it takes your total tax                                                                        
     percentage rate down all the way, right?                                                                                   
                                                                                                                                
MR. CLARK  reminded the  committee that  the deductions  for ACES                                                               
for capital  and operating expenses  are generous and all  can be                                                               
taken in  the first  year.   That and  the credits  are available                                                               
because  the tax  rates  are  so high.    While  this reflects  a                                                               
similar  level   of  investment,  if  a   company  increases  its                                                               
investment it would reduce their  tax rate.  However, the company                                                               
would have to  operate under the presumption  that it's investing                                                               
in something that will generate a return.                                                                                       
                                                                                                                                
REPRESENTATIVE  GARDNER  emphasized,  "That's the  whole  point."                                                               
She opined  that it provides  an extra  reason to invest  and the                                                               
expectation  is that  a company  would invest  in something  that                                                               
generates return, whether it's under ACES or HB 3001.                                                                           
                                                                                                                                
MR. JEPSEN  explained that  tax credits lower  the tax  bill, but                                                               
don't change  the tax rate.   The  tax credits are  applied after                                                               
the  tax is  calculated.   Mr. Jepsen  related his  understanding                                                               
that  Representative Gardner  is referring  to the  effective tax                                                               
rate in which  the tax paid is divided by  taxable revenue, which                                                               
will  change  as  a  function  of  tax  credits.    However,  the                                                               
statutory tax  rate doesn't change  and the marginal tax  rate is                                                               
quite high.                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARDNER  related her understanding that  the point                                                               
of progressivity is  based, in part, on the level  of profit.  If                                                               
the company's profit is less, then the progressivity decreases.                                                                 
                                                                                                                                
MR.  JEPSEN specified  that  as  the PTV  decreases  so does  the                                                               
progressivity.   Under ACES,  the base rate  is 25  percent until                                                               
the   minimum  is   reached.     Mr.  Jepsen   opined  that   the                                                               
aforementioned  makes Alaska  a good  place for  investment.   If                                                               
there  was  ACES, with  no  progressivity,  there would  be  more                                                               
investment in Alaska, he further opined.                                                                                        
                                                                                                                                
1:45:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  recalled the  statement  that  the credits  and                                                               
instantaneous deductibility need to be  high because the tax rate                                                               
is  high.   In  order  to balance  the  aforementioned, does  the                                                               
credit and instantaneous deductibility need  to be lowered so the                                                               
two balance, he asked.                                                                                                          
                                                                                                                                
MR. JEPSEN  answered that  the committee  should review  that and                                                               
determine  the  appropriate balance  between  tax  rates and  tax                                                               
credits.   He reminded the committee  that ConocoPhillips reviews                                                               
the total  government share  and the  industry share  and whether                                                               
it's sufficient to attract incremental capital.                                                                                 
                                                                                                                                
1:46:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER clarified  that she  meant that  spending                                                               
lowers a company's tax rate and asked if that's correct.                                                                        
                                                                                                                                
MR. JEPSEN replied that is correct.                                                                                             
                                                                                                                                
1:46:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON referred to the  historical data on slide 9                                                               
and asked  if HB  3001 passed,  would ConocoPhillips'  net income                                                               
and the state's share remain the same [as it does under ACES].                                                                  
                                                                                                                                
MR.  CLARK  said  that  although he  hasn't  done  that  specific                                                               
calculation,  the line  representing  ConocoPhillips' net  income                                                               
and  the  state's share  would  move  closer together  and  track                                                               
similarly.                                                                                                                      
                                                                                                                                
1:47:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE MUNOZ inquired as to  how the return on capital in                                                               
Alaska compares to that of the Lower 48.                                                                                        
                                                                                                                                
MR.  CLARK, reviewing  2011 numbers  for ConocoPhillips,  related                                                               
that in  Alaska the cash margin  was about $31 per  barrel, while                                                               
plays such as the Eagle Ford and  the Bakken in the Lower 48 have                                                               
significantly  higher cash  margins,  closer to  $50 per  barrel.                                                               
Although the earnings are less in  the Lower 48, when one reviews                                                               
specific oil plays there are  much higher returns and that's what                                                               
attracts the capital in ConocoPhillips.                                                                                         
                                                                                                                                
1:48:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  requested an explanation of  adding depreciation                                                               
back  in and  how that  influences the  fact that  Alaska has  no                                                               
depreciation because Alaska allows the  capital to be written off                                                               
in the first year.                                                                                                              
                                                                                                                                
MR. JEPSEN  specified that  Co-Chair Seaton  is referring  to net                                                               
income  according  to  generally accepted  accounting  principles                                                               
(GAAP)   rules.      The   deductibility   under   ACES   affects                                                               
ConocoPhillips'  tax  rate,  but  doesn't  impact  the  company's                                                               
federal  depreciation.   Therefore, it's  basically an  after tax                                                               
calculation  that  takes  into consideration  state  and  federal                                                               
taxes.   While  ConocoPhillips is  able to  deduct operating  and                                                               
capital costs from revenue in order  to determine the tax rate in                                                               
Alaska, it's  not the  same as the  depreciation for  the federal                                                               
tax return.   Basically, it's the units  of production, depletion                                                               
of ConocoPhillips'  capital invested  over the  North Slope.   He                                                               
said  that it's  a  number that  stays  relatively constant  over                                                               
time.   [Depreciation]  is added  back  in because  it reaches  a                                                               
[more accurate] cash position after  tax than if it's subtracted.                                                               
Mr.   Jepsen   said   that's    how   the   accountants   require                                                               
ConocoPhillips account  for income  as a  large corporation.   In                                                               
further  response  to  Co-Chair  Seaton,  Mr.  Jepsen  agreed  to                                                               
provide further information on the aforementioned calculation.                                                                  
                                                                                                                                
1:50:35 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN,  continuing on to  slide 11  entitled "ConocoPhillips                                                               
Capital  Expenditures",  directed  attention to  the  chart  that                                                               
relates  ConocoPhillips'  capital  investment profile  in  Alaska                                                               
versus  the Lower  48.   As the  chart indicates  ConocoPhillips'                                                               
investment in Alaska  is fairly flat, which he  attributed to the                                                               
lack  of returns  in Alaska  versus  what is  available in  other                                                               
places.  The capital  is going to places in the  Lower 48 such as                                                               
the Bakken,  Eagle Ford, and Permian  Basin.  He noted  that many                                                               
of  these  locations  are  very mature  basins.    For  instance,                                                               
Permian  Basin has  been abandoned  four to  five times  over the                                                               
course  of its  history and  reopened due  to a  technological or                                                               
price breakthrough.   Currently, Permian Basin  is being reopened                                                               
due  to  technological  and  price  breakthroughs.    Mr.  Jepsen                                                               
related his  belief that  there is a  similar opportunity  set in                                                               
Alaska, and  to some extent it's  not realized how good  it could                                                               
be because Alaska  doesn't have the same  profit environment that                                                               
oil companies experience in the Lower 48.                                                                                       
                                                                                                                                
MR.  JEPSEN concluded  with  slide 12  that is  a  letter to  all                                                               
Alaskans  from ConocoPhillips.    He acknowledged  that there  is                                                               
concern with  regard to  how the  state can  be certain  that oil                                                               
companies  will  invest  more   money  and  produce  the  results                                                               
expected by  the state enacting  a tax  change.  However,  by the                                                               
nature  of corporations  and the  size  of investments  required,                                                               
it's difficult to  sign a contract and move through  the steps to                                                               
the   commitment   desired.     He   partially   attributed   the                                                               
aforementioned to  the fact that  a lot of these  projects aren't                                                               
at the  point of going  to the  board of directors  for approval.                                                               
This  letter   attempts  to  place   a  lot   of  ConocoPhillips'                                                               
credibility on  the table by  saying that if it  observes changes                                                               
in Alaska's  fiscal system similar  to those proposed in  HB 110,                                                               
ConocoPhillips will pursue more  drilling activities in the North                                                               
Slope,   more   satellite   development  and   more   exploration                                                               
opportunities, and work with partners  at Prudhoe Bay.  He opined                                                               
that the most underappreciated is  that the $5 billion associated                                                               
with the aforementioned  opportunities is the tip  of the iceberg                                                               
and not the entire opportunity suite.   Drawing from his years in                                                               
the business,  Mr. Jepsen emphasized that  ConocoPhillips doesn't                                                               
know today  what it  will be doing  20 years from  now.   The oil                                                               
industry isn't  that predictable, particularly since  advances in                                                               
technology continuously create new  opportunities.  For instance,                                                               
in 1982 ConocoPhillips thought it  would be done with Prudhoe Bay                                                               
and Kuparuk River Unit by now.   In fact, it was thought that the                                                               
Trans-Alaska Pipeline  System (TAPS) would  be shut down  by now.                                                               
However,  the situation  is  far from  the  aforementioned.   Mr.                                                               
Jepsen  closed by  relating that  if Alaska  implements a  fiscal                                                               
framework   that  allows   investors  to   invest  in   the  best                                                               
opportunities, it will  result in the best situation  for the oil                                                               
companies as  well as  the state.   Such a  change in  the fiscal                                                               
framework  will   result  in   more  production,   investment  in                                                               
[opportunities]  with  the  nearest-term   impact  and  the  most                                                               
profitability.   Oil  companies  are resource  focused, and  thus                                                               
they will  continue to focus on  heavy oil; there is  no need for                                                               
special  legislation  or  tax  breaks   to  incentivize  the  oil                                                               
companies to  invest.  Oil  companies have  been doing so  for 30                                                               
years, without  the tax  focus.  Rather,  he emphasized  that oil                                                               
companies need a tax regime  that makes Alaska welcoming in terms                                                               
of investing  money and  applies across the  board.   In parting,                                                               
Mr.  Jepsen  related that  the  legacy  fields  hold the  key  to                                                               
Alaska's  future.    Although  the North  Slope  Basin  has  such                                                               
potential, the fiscal framework in Alaska poses a challenge.                                                                    
                                                                                                                                
1:56:15 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  highlighted charts from  the Alaska Oil  and Gas                                                               
Conservation  Commission (AOGCC)  regarding the  number of  wells                                                               
drilled  by  ConocoPhillips,  which  doesn't  seem  to  have  any                                                               
relationship  to the  price or  the  tax regime.   Therefore,  he                                                               
questioned why  the legislature should  anticipate that  a change                                                               
in the  fiscal framework would result  in a change in  the number                                                               
of wells per year that ConocoPhillips drills.                                                                                   
                                                                                                                                
MR. JEPSEN  informed the  committee that from  1996 to  now there                                                               
has been a  significant difference in the type  of wells drilled.                                                               
In the past, ConocoPhillips drilled  rotary wells with a big hole                                                               
and a  single bore, whereas  now they  might enter 15  well bores                                                               
and  drill three  to six  horizontal wells  from that  individual                                                               
well bore.  Therefore, the  wells ConocoPhillips drills today are                                                               
more  cost effective  wells.   The  difference  between 1996  and                                                               
today  is the  type of  well drilled  and how  they are  counted.                                                               
ConocoPhillips is  not drilling 66  new holes in the  ground from                                                               
the surface  down every  year, rather the  total number  of wells                                                               
includes  the  well  bores being  drilled  from  existing  wells.                                                               
From 1996  until a few years  ago, there was a  relatively stable                                                               
oil price environment.   Although the price of  oil has increased                                                               
dramatically  since   2007/2008,  the  response  that   has  been                                                               
experienced elsewhere  hasn't occurred in Alaska.   He attributed                                                               
the aforementioned to the fact  that Alaska doesn't have the same                                                               
overall economic impact of other locations.                                                                                     
                                                                                                                                
1:59:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SADDLER surmised then  that in 1996 ConocoPhillips                                                               
drilled 60 wells  and now it's drilling multiple  well bores from                                                               
those 60  wells.  Therefore, it's  60 times a factor  of three to                                                               
five.                                                                                                                           
                                                                                                                                
MR. JEPSEN  replied no, and  clarified that  ConocoPhillips might                                                               
have  10-15 existing  well bores  from  which multi-laterals  are                                                               
drilled.   In  further response,  Mr. Jepsen  said that  he would                                                               
need  to  review the  AOGCC  data  set before  answering  further                                                               
because there are many ways in which to define wells.                                                                           
                                                                                                                                
REPRESENTATIVE SADDLER  then asked if more  drilling is occurring                                                               
now.                                                                                                                            
                                                                                                                                
MR. JEPSEN  answered no, but  confirmed that more well  bores are                                                               
being drilled from existing wells.   Again, he expressed the need                                                               
to review the AOGCC data.                                                                                                       
                                                                                                                                
2:01:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON inquired as to  how long after a new tax                                                               
regime is  in place would the  state see an increase  in revenues                                                               
because of an increase in production.                                                                                           
                                                                                                                                
MR.  JEPSEN  explained  that when  ConocoPhillips  increases  its                                                               
capital   investment  one   would  likely   observe  more   jobs,                                                               
businesses, and  a boost in  the local economy across  the state.                                                               
However, he  cautioned that it takes  time to get a  drilling rig                                                               
to the North Slope.   In fact, if a rig has to  be built it could                                                               
possibly  take  two  to  three   years,  whereas  refurbishing  a                                                               
drilling rig from the Lower 48 might  only take a year.  If there                                                               
is  the  need for  a  substantial  capital  investment in  a  new                                                               
facility,  it  could  take  five   to  eight  years  before  full                                                               
production.     Therefore,   the  timeframe   depends  upon   how                                                               
complicated the project.   Mr. Jepsen confirmed  that there won't                                                               
be an instantaneous  response in terms of production  as a result                                                               
of  incremental  capital investment,  although  there  will be  a                                                               
response  in the  local  economy.   He  told  the committee  that                                                               
ConocoPhillips makes  it a point to  hire as many Alaskans  as it                                                               
can.                                                                                                                            
                                                                                                                                
REPRESENTATIVE P.  WILSON asked  if ConocoPhillips  could provide                                                               
any idea how long it would  take to make the pipeline fuller than                                                               
it is now.                                                                                                                      
                                                                                                                                
MR. JEPSEN  said that ConocoPhillips  shares that goal  of making                                                               
the pipeline fuller.   However, how long it will  take to flatten                                                               
and potentially  reverse the  decline will be  a function  of the                                                               
type of fiscal  framework the state implements.   In his opinion,                                                               
ACES  doesn't  work   and  is  broken  from   the  standpoint  of                                                               
attracting additional investment in  places where necessary.  Mr.                                                               
Jepsen  opined  that the  response  from  the producers  will  be                                                               
proportional to the change in the fiscal framework.                                                                             
                                                                                                                                
2:04:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE    PETERSEN    requested   an    explanation    of                                                               
ConocoPhillips  reported  11,000  barrel   per  day  increase  in                                                               
production.                                                                                                                     
                                                                                                                                
MR. CLARK  reminded the  committee that there  was a  shutdown on                                                               
TAPS  for  over  a week,  which  was  related  to  a leak.    The                                                               
aforementioned was  a significant impact to  production, and thus                                                               
ConocoPhillips production  last year  was understated  because of                                                               
the shutdown.                                                                                                                   
                                                                                                                                
REPRESENTATIVE PETERSEN, referring to  slide 11, pointed out that                                                               
the chart illustrates that the  investment increases in the Lower                                                               
48  while  remaining   steady  in  Alaska.     He  asked  whether                                                               
ConocoPhillips  is drilling  in the  North Dakota  area where  he                                                               
recalled there is shale oil  that requires drilling more often to                                                               
ensure constant  production.  In such  a situation Representative                                                               
Petersen surmised  that ConocoPhillips would need  to invest more                                                               
in order  to maintain production  as compared to  traditional oil                                                               
wells such as those on the North Slope.                                                                                         
                                                                                                                                
MR.  JEPSEN acknowledged  that shale  wells typically  have steep                                                               
declines.   If the goal  is to maintain  a flat or  an increasing                                                               
production profile,  one must  drill at a  fairly steady  pace in                                                               
order  to build  upon  past results.   Therefore,  Representative                                                               
Petersen's  conclusion is  fairly  accurate.   However, he  noted                                                               
that on the  North Slope the base decline in  the existing fields                                                               
is about 15  percent and when horizontal wells  are drilled there                                                               
are fairly steep declines after initial production as well.                                                                     
                                                                                                                                
2:07:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE remarked  that the committee is  reviewing all the                                                               
factors that go into investment  decisions that companies make in                                                               
order to determine  what the legislature can do  with the state's                                                               
tax regime to  encourage more production on the North  Slope.  He                                                               
then  asked if  the committee  is going  down the  right path  of                                                               
analysis.                                                                                                                       
                                                                                                                                
MR. JEPSEN answered  that  it's appropriate for  the committee tp                                                               
pursue  the issues  it believes  necessary  to better  understand                                                               
where ACES ranks in comparison  to other opportunities around the                                                               
world  while  trying  to  understand   what's  important  to  the                                                               
companies.   The aforementioned  is why ConocoPhillips  wanted to                                                               
provide its  insights to the committee  in terms of how  it makes                                                               
decisions with  regard to  where to invest  capital.   Mr. Jepsen                                                               
emphasized that ConocoPhillips isn't  a single variable decision-                                                               
making  company  that  is   ConocoPhillips  doesn't  just  review                                                               
present worth and rate of returns  of a given project and invest.                                                               
ConocoPhillips  considers   political  stability,  size   of  the                                                               
resource, and  long-term cash flow  that might be  generated from                                                               
that investment.   In Alaska, when a company  invests it receives                                                               
the capital  and the tax  credit, but once production  begins the                                                               
[well] is part of  the base and subject to the  high tax rates of                                                               
ACES.     Mr.   Jepsen  said   that  the   long-term  cash   flow                                                               
opportunities in  Alaska don't match up  with other opportunities                                                               
that  ConocoPhillips  has.    To the  extent  the  committee  can                                                               
understand and focus  on the aforementioned, it  would be helpful                                                               
in  understanding what  it  will take  to  change the  investment                                                               
climate in Alaska, he opined.                                                                                                   
                                                                                                                                
2:09:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON related his  understanding that Alaska represents                                                               
about 58  percent of ConocoPhillips'  liquid production  in North                                                               
America and 63-65  percent of ConocoPhillips' profits.   He asked                                                               
how Alaska  would balance  that in  terms of  cash flow  when the                                                               
reports that the  cash flow per production from  Alaska is higher                                                               
than that of the other investments ConocoPhillips makes.                                                                        
                                                                                                                                
MR. JEPSEN explained  that when one reviews the data  in terms of                                                               
liquids to  liquids, Alaska  isn't higher than  the Lower  48 and                                                               
the  places where  ConocoPhillips is  investing its  money today.                                                               
Statistics  that indicate  Alaska is  better include  natural gas                                                               
production  and natural  gas  liquids.   There  is a  substantial                                                               
portion of ConocoPhillips  business in the Lower  48 that account                                                               
for a  lot of  ConocoPhillips' production.   Therefore,  when all                                                               
those things are rolled together  on an amalgamated basis for the                                                               
Lower 48,  it amounts to a  net income or cash  margin per barrel                                                               
that's  less than  Alaska.   However, if  the low  value portions                                                               
that ConocoPhillips isn't investing in  any more are stripped out                                                               
and  only ConocoPhillips'  liquid plays  are considered,  it's an                                                               
entirely different story.                                                                                                       
                                                                                                                                
2:12:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   GARDNER,  referring   to   slide   12  and   the                                                               
commitments  to  Alaska  if  HB 110  or  similar  legislation  is                                                               
passed, asked whether the inverse  statements are true if nothing                                                               
passes or nothing similar passes.                                                                                               
                                                                                                                                
MR. JEPSEN responded that if  things stay the same, Alaska should                                                               
expect the  same focus  as exists now.   ConocoPhillips  is still                                                               
drilling, shooting seismic,  and considering other opportunities.                                                               
The difference is in terms of  how fast the opportunities will be                                                               
pursued  and  whether  ConocoPhillips  can  fully  exploit  those                                                               
opportunities.  Mr. Jepsen opined:                                                                                              
                                                                                                                                
     So, really  changing ACES is about  realizing potential                                                                    
     that we  have here in the  state.  If you  don't change                                                                    
     ACES,  ... we're  not moving  everything out  of Alaska                                                                    
     tomorrow.    We're  still here,  but  you're  basically                                                                    
     going to  see the same  kind of investment that  we see                                                                    
     today.  And  I think we can have a  much better future,                                                                    
     a   stronger   economy,   more  jobs,   more   business                                                                    
     opportunities in  this state  if we  have a  robust oil                                                                    
     and gas business here.                                                                                                     
                                                                                                                                
2:13:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  FOSTER  recalled  the mention  of  the  potential                                                               
reversal  of  the  decline,  and  requested  that  ConocoPhillips                                                               
comment on that statement versus merely slowing the decline.                                                                    
                                                                                                                                
MR. JEPSEN  reiterated that  the results  ConocoPhillips achieves                                                               
will be proportional  to the changes in the fiscal  framework.  A                                                               
robust  fiscal framework  that allows  investors to  invest where                                                               
they   think  the   best  opportunities   are   will  result   in                                                               
opportunities  that may  not have  been thought  of earlier.   He                                                               
expressed hope  that shale oil,  Great Bear, will  be successful.                                                               
Although  he  acquiesced that  there  is  more potential  in  the                                                               
legacy fields than  the oil companies are willing  to discuss, he                                                               
was fairly  confident that there  won't be much change  in what's                                                               
happening  in  these  fields  if  the  fiscal  structure  doesn't                                                               
change.   He pointed out that  going from 6 percent  to 4 percent                                                               
or 2  percent represent a substantial  change to the state  as it                                                               
enhances the economic future of the state and oil business.                                                                     
                                                                                                                                
2:15:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK inquired as  to ConocoPhillips' definition of                                                               
reasonable profit in order to result in more activity.                                                                          
                                                                                                                                
MR.  JEPSEN clarified  that ConocoPhillips  has  always and  will                                                               
continue to meet its lease  obligations.  The discussion today is                                                               
regarding how to make Alaska  a more attractive place for capital                                                               
investment.   Under  all the  variables used  to make  investment                                                               
decisions, Alaska is handicapped by ACES.                                                                                       
                                                                                                                                
REPRESENTATIVE TUCK then inquired as  to what percentage of every                                                               
dollar Alaska gives to the industry is reinvested in Alaska.                                                                    
                                                                                                                                
MR.  JEPSEN  said he  couldn't  answer  that  at this  time,  but                                                               
offered that  ConocoPhillips' response would be  proportional [to                                                               
Alaska's fiscal framework].  He  then encouraged the committee to                                                               
keep in  mind that  ConocoPhillips invests  in Alaska  because it                                                               
does   make  a   profit.     Although  he   predicted  additional                                                               
investment,  he maintained  that ConocoPhillips  will still  have                                                               
profits that come out of the state.                                                                                             
                                                                                                                                
2:17:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER inquired  as to  how long  ConocoPhillips                                                               
will continue  to do  [business] in Alaska  if there's  no change                                                               
[in the fiscal framework].   More specifically, he inquired as to                                                               
what kind  of future ConocoPhillips  would predict for  Alaska if                                                               
the pipeline  continued for 50  years, as  has been assured  by a                                                               
judge, with no changes [in the fiscal framework].                                                                               
                                                                                                                                
MR.  JEPSEN responded  that  he didn't  want  to discuss  ongoing                                                               
litigation.  With regard to  how long ConocoPhillips will do what                                                               
it's doing, Mr. Jepsen said that  will be a function of the price                                                               
environment, costs, profitability, and  technical risks that tend                                                               
to  increase  as the  fields  mature.    In further  response  to                                                               
Representative Saddler,  Mr. Jepsen confirmed that  the committee                                                               
can't assume that if the state  does nothing, things will be fine                                                               
forever.                                                                                                                        
                                                                                                                                
2:18:27 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  related his understanding  that there is  a limit                                                               
on the well spacing allowed in  the Kuparuk River Unit, and asked                                                               
whether it  would be  a factor.   Specifically, he  asked whether                                                               
ConocoPhillips would be  able to increase production  if the well                                                               
spacing was reduced.                                                                                                            
                                                                                                                                
MR.  JEPSEN,  noting  his presumption  that  Co-Chair  Feige  was                                                               
referring to  well spacing for  producers and injectors,  he said                                                               
he  wasn't  aware  that additional  well  spacing  requests  were                                                               
rejected.   Typically, if a case  for closer well spacing  can be                                                               
made, it's brought before an  entity such as AOGCC who determines                                                               
whether  that's the  best way  to recover  the resource  from the                                                               
reservoir.   Mr. Jepsen  further said that  he wasn't  aware that                                                               
ConocoPhillips had any issues with  well spacing, particularly in                                                               
the Kuparuk River Unit.                                                                                                         
                                                                                                                                
2:20:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  asked   whether  ConocoPhillips  considers  the                                                               
reduction of the  maximum production tax rate from  75 percent to                                                               
60 percent in HB 3001 as significant.                                                                                           
                                                                                                                                
MR. JEPSEN remarked  that if the maximum production  tax rate was                                                               
reduced  to the  point that  impacted  the price  range in  which                                                               
ConocoPhillips  is operating  would be  beneficial.   However, if                                                               
the reduction only impacts the  $180-$220 per barrel environment,                                                               
then it's not very helpful.                                                                                                     
                                                                                                                                
2:20:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MUNOZ   requested  examples   of  ConocoPhillips'                                                               
decision not to proceed with certain projects due to ACES.                                                                      
                                                                                                                                
MR. JEPSEN  replied that the  Eastern North East West  Sak (NEWS)                                                               
project  is  very much  at  risk.   Although  ConocoPhillips  may                                                               
pursue part of the Eastern NEWS  project under ACES, no change to                                                               
ACES may  impact how fast and  the extent to which  it's pursued.                                                               
The  aforementioned  is  probably  the case  for  most  potential                                                               
projects.   Currently, the magnitude  of the state tax  is fairly                                                               
significant, he remarked.                                                                                                       
                                                                                                                                
2:21:57 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON highlighted that  a royalty reduction application                                                               
is available  for an uneconomic project.   He inquired as  to why                                                               
that isn't a factor for a project that's marginally economic.                                                                   
                                                                                                                                
MR. JEPSEN advised that he's not  an expert on what's required to                                                               
seek royalty relief,  but opined that the  royalty relief statute                                                               
wasn't crafted to address [the  fact] that every field, even with                                                               
a change in ACES, will have some accumulation that's uneconomic.                                                                
                                                                                                                                
CO-CHAIR SEATON encouraged Mr. Jepsen  to investigate the royalty                                                               
relief statute further.                                                                                                         
                                                                                                                                
2:22:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  inquired as to states,  provinces, or plays                                                               
in North America where ConocoPhillips is currently aggressive.                                                                  
                                                                                                                                
MR. JEPSEN answered that ConocoPhillips  is aggressive in the oil                                                               
sands of Canada,  the Bakken, Permian Basin, and  Eagle Ford, all                                                               
of which  are liquid plays and  located in places with  much more                                                               
favorable tax regimes than Alaska.                                                                                              
                                                                                                                                
2:23:39 PM                                                                                                                    
                                                                                                                                
MR. JEPSEN, in response to  Representative Foster, explained that                                                               
Eastern NEWS is the next tranche  of West Sak or viscous oil that                                                               
ConocoPhillips is considering developing.                                                                                       
                                                                                                                                
2:24:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON recalled  that  at  the hearing  yesterday                                                               
consultants advised  the committee  to negotiate a  decline curve                                                               
and incentivize incremental production.   He asked if a 2 percent                                                               
decline curve would be reasonable to negotiate.                                                                                 
                                                                                                                                
MR. JEPSEN answered  that a 2 percent decline curve  would take a                                                               
lot  of investment.    Furthermore, he  didn't  believe it  would                                                               
change much.                                                                                                                    
                                                                                                                                
2:24:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  asked if  a  reduction  in taxes  by  30                                                               
percent would  result in ConocoPhillips experiencing  an increase                                                               
in investment by 30 percent.                                                                                                    
                                                                                                                                
MR. JEPSEN  explained that the  changes wouldn't  be proportional                                                               
since the changes  would be a function of  the available projects                                                               
that make  sense in  the existing fiscal  framework.   Mr. Jepsen                                                               
clarified  that  he's saying  that  making  the fiscal  framework                                                               
better will result  in more investment whereas a  small change in                                                               
the  fiscal framework  will likely  not result  in any  change in                                                               
behavior [from the producers].                                                                                                  
                                                                                                                                
2:26:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE inquired as to  the best method to incentivize new                                                               
production in terms of the decline curve.                                                                                       
                                                                                                                                
MR. JEPSEN responded that he would  want to give that answer some                                                               
thought and  consideration.  ConocoPhillips believes  there needs                                                               
to be a  blanket change to the tax framework  that applies to all                                                               
production in order to avoid  complications arising from managing                                                               
a  decline curve  and  tracking new,  old,  and incremental  oil.                                                               
ConocoPhillips is looking  for a way forward that  makes Alaska a                                                               
good  place  to invest.    Mr.  Jepsen  said  that the  focus  of                                                               
ConocoPhillips is to  establish a framework similar  to what's in                                                               
Australia  where  the  industry  takes  40  percent  of  the  net                                                               
[profits].                                                                                                                      
                                                                                                                                
2:28:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  acknowledged that each  well has its  own decline                                                               
curve, but  opined that tracking  each individual  well's decline                                                               
curve  wouldn't be  the most  efficient method.   He  highlighted                                                               
that the North  Slope has a decline curve  that's aggregated over                                                               
all the companies and the fields  across the North Slope.  If the                                                               
state was to  set a decline curve, what would  be the appropriate                                                               
level of aggregation, he asked.                                                                                                 
                                                                                                                                
MR. JEPSEN again  related the need to give  additional thought to                                                               
the question.                                                                                                                   
                                                                                                                                
2:30:23 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  encouraged Mr. Jepsen and  the upcoming industry                                                               
representatives  to  make  all the  considerations  and  get  the                                                               
information back to the committee.                                                                                              
                                                                                                                                
2:31:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SADDLER   expressed    the   need   to   provide                                                               
ConocoPhillips the  opportunity to  dispel any  misconceptions or                                                               
fallacies about ConocoPhillips and  its operations in Alaska that                                                               
have been portrayed in the public discussion.                                                                                   
                                                                                                                                
MR.  JEPSEN agreed  that here  has been  a lot  of rhetoric,  but                                                               
didn't believe  there was any  particular point worthy  of focus.                                                               
He  expressed  hope that  the  testimony  today illustrates  that                                                               
ConocoPhillips  is  a  diligent  operator that's  here  to  stay,                                                               
although it would like a  different tax environment so that there                                                               
could  be  more  investment  in  Alaska.    With  regard  to  the                                                               
discussion surrounding "harvest", Mr.  Jepsen opined that harvest                                                               
isn't drilling wells, shooting  seismic, considering new recovery                                                               
techniques, and  pursuing technology.   He mentioned that  he has                                                               
worked in  places where there  has been harvest assets  and there                                                               
is a large difference between what's  done with a field that's on                                                               
its last leg and is about  to be divested versus what's occurring                                                               
in Alaska.                                                                                                                      
                                                                                                                                
2:32:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON asked  if the  unanimity aspect  of some  of the                                                               
working interest owner  agreements on the North Slope  has been a                                                               
problem.                                                                                                                        
                                                                                                                                
MR. JEPSEN, drawing  from his experience working  in Alaska since                                                               
the  early 1980s  when much  of his  work was  with partners  and                                                               
peers,  said  he  wasn't  aware   of  a  situation  when  partner                                                               
differences  delayed  or  put off  production  or  investment  in                                                               
locations that were good investments.   Although there were times                                                               
when  companies   had  different   positions  from   an  analysis                                                               
perspective, they  all had  the same  goal of  reserve additions,                                                               
production,  and   generating  net  income  for   the  companies.                                                               
Generally, those things line up and move ahead.                                                                                 
                                                                                                                                
2:35:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   FOSTER   asked   whether   outside   of   Alaska                                                               
ConocoPhillips is  subject to an incentive  program that involves                                                               
declining curves.                                                                                                               
                                                                                                                                
MR. JEPSEN  and MR.  CLARK both  said they  weren't aware  of any                                                               
other location with such an incentive program.                                                                                  
                                                                                                                                
2:35:43 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 2:35 p.m. to 2:49 p.m.                                                                       
                                                                                                                                
                               BP                                                                                           
                                                                                                                                
2:50:06 PM                                                                                                                    
                                                                                                                                
                                                                                                                                
CO-CHAIR SEATON invited BP to provide its testimony.                                                                            
                                                                                                                                
2:51:01 PM                                                                                                                    
                                                                                                                                
DAMIAN BILBAO,  Head of Finance, Developments  and Resources, BP,                                                               
began  by  relating  that  BP  believes  HB  3001  would  deliver                                                               
meaningful tax change  for Alaska and result in  a progression as                                                               
much as $5  billion in new projects, as a  first step.  Referring                                                               
to  slide  3,  he  highlighted  that  BP  opened  its  office  in                                                               
Anchorage in  1959.   A year later  geologists arrived  and began                                                               
working on  opportunities on  the North  Slope.   In the  last 10                                                               
years BP has invested over  $13.4 billion just with Alaska firms,                                                               
which  doesn't include  BP's total  investment over  the last  10                                                               
years.   Along with the  investment has  been a lot  of learning,                                                               
including  a deep  understanding  of the  opportunity to  partner                                                               
with the state in the  development of local talent and resources.                                                               
Over  the  last  10  years,   BP  has  worked  closely  with  the                                                               
University  of Alaska  system and  other institutions  to support                                                               
the capability  in the state.   Currently, BP in Alaska  has over                                                               
2,100 employees, of  which over 80 percent  are Alaska residents.                                                               
He characterized hiring Alaskans as  just good business.  He then                                                               
highlighted the  275 Alaska  Process Industry  Careers Consortium                                                               
(APICC) students that  have been hired in the last  10 years, the                                                               
54 internships  BP has  offered over  the last  five years.   Mr.                                                               
Bilbao related  an example that  illustrates why BP  believes its                                                               
partnership/work with the state's institutions  has paid off.  In                                                               
addition to  the 2,100  employees BP  has over  6,000 contractors                                                               
who  work  primarily  on  the   North  Slope.    Of  those  6,000                                                               
contractors, about  5 of  6 work to  renew the  infrastructure on                                                               
the North  Slope in  order to ensure  that the  infrastructure is                                                               
fit for the  next 30 to 50 years of  opportunity that BP foresees                                                               
in Alaska.  One of the  six or about 1,000 contractors is focused                                                               
on  bringing  new barrels  into  production,  which reflects  the                                                               
investment  climate in  Alaska.   He  then  highlighted BP's  $70                                                               
million of direct community investment since 2001.                                                                              
                                                                                                                              
2:57:18                                                                                                                         
2:58:01 PM                                                                                                                    
                                                                                                                                
MR.  BILBAO turned  the  committee's attention  to  how BP  makes                                                               
investment decisions.   He noted that he listened  to the hearing                                                               
in  which PFC  provided a  presentation regarding  how investment                                                               
decisions are  made.  While  BP doesn't  agree with PFC  on every                                                               
point,  PFC's analysis  was sound  and based  on deep  experience                                                               
with the industry.  Therefore,  he said he is comfortable talking                                                               
within the  framework PFC  presented to the  committee.   He then                                                               
echoed ConocoPhillips'  testimony that the investment  fund isn't                                                               
an unlimited  amount of money.   In the year prior  to a project,                                                               
the corporation  determines what  the appropriate total  level of                                                               
investment for  the next year  is based on factors  including the                                                               
view  on oil  price,  the suite  of opportunities,  circumstances                                                               
around the globe, and the  obligation to manage the balance sheet                                                               
and meet  the commitment to shareholders  and other stakeholders.                                                               
The year  begins in  competition for a  defined amount  of money,                                                               
which is particularly impactful on  the growth projects given the                                                               
fact the  underlying activity to  support the safe  and efficient                                                               
management  of the  fields  will  occur as  needed.   The  growth                                                               
projects,  in  particular,  have  to  compete  globally  for  the                                                               
limited amount  of funds.   Mr. Bilbao moved  on to the  graph on                                                               
slide 5  entitled "Global investment  is limited and goes  to the                                                               
most attractive regions."  The  chart shows production curves for                                                               
the  following  four different  oil  producing  regions:   Texas,                                                               
Alaska, North Dakota,  and Alberta as well as the  price for each                                                               
barrel of oil  over that time.  The chart  spans the timeframe of                                                               
1977  to  2010.     He  mentioned  his   understanding  from  the                                                               
Department  of  Revenue's (DOR)  testimony  that  just last  week                                                               
North  Dakota passed  Alaska  in total  production  volume.   The                                                               
graph  relates  just  four  examples  of  regions  competing  for                                                               
investment, and thus growth projects  from these regions or other                                                               
regions  have  to compete  for  the  same  group  of funds  on  a                                                               
consistent set  of metrics.   The chart illustrates  that despite                                                               
the increasing  price of  oil globally over  the last  few years,                                                               
production in Alaska has declined  and continues to do so whereas                                                               
the other three regions have experienced increased production.                                                                  
                                                                                                                                
3:01:03 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KAWASAKI recalled  from PFC's  testimony that  of                                                               
all three majors  on the North Slope,  BP's portfolio illustrates                                                               
more  of  a  harvest  situation  for  upstream  investment.    He                                                               
inquired as to  how to guarantee under HB 3001  that Alaska would                                                               
get  more money  for future  development if  BP is  spending more                                                               
money where there is growth.                                                                                                    
                                                                                                                                
MR.  BILBAO  clarified that  the  growth  follows the  investment                                                               
opportunity,  and   thus  if  the  investment   climate  is  more                                                               
attractive, the  funds and investment  will follow and  result in                                                               
growth.     The  growth  won't  occur   without  the  appropriate                                                               
investment climate.   Mr. Bilbao  emphasized that  Alaska remains                                                               
BP's  largest  resource  base globally,  with  the  exception  of                                                               
Russia.    Therefore, it's  not  a  question of  opportunity  and                                                               
resource but  rather is a question  of investment attractiveness.                                                               
If  Alaska  isn't  competing  in  BP's  portfolio  as  the  graph                                                               
illustrates, then the  investment will not come to  Alaska at the                                                               
same velocity  it does  to other  regions and  as a  result there                                                               
won't be growth.                                                                                                                
                                                                                                                                
3:03:13 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON recalled  that in  the  1990s it  was said  that                                                               
[BP's  focus was]  harvest,  and questioned  then  why one  would                                                               
anticipate a reversal if the state changes the tax regime.                                                                      
                                                                                                                                
MR. BILBAO specified that there are  periods of time in any field                                                               
where  funds will  flow in  to build  the infrastructure  and the                                                               
wells, as  was the case in  Alaska, and during those  times funds                                                               
come  out of  other regions  to  fund the  infrastructure on  the                                                               
North Slope.   After that  massive initial investment,  there's a                                                               
period  of production  during which  funds are  used for  ongoing                                                               
operations and  growth in other  areas.   He said that's  how all                                                               
companies work as  it's managing the portfolio.   Therefore, it's                                                               
important  to  consider  the  longer   term  investment  in  that                                                               
context.   With  regard to  what will  change going  forward, Mr.                                                               
Bilbao stated that  if Alaska is competitive  globally, the funds                                                               
will  flow.   However,  currently  Alaska  is not  competing  for                                                               
growth projects.  As the  graph illustrates, Alaska in comparison                                                               
to three  other North American  oil producing regions,  the funds                                                               
aren't  flowing.   Furthermore, Alaska's  production decline  for                                                               
the past five years continues to  drop.  In fact, from last April                                                               
to  this  April,  BP's  production  has  dropped  by  8  percent.                                                               
Therefore, the [tax regime] has a  real impact on how BP competes                                                               
for those funds with other locations.                                                                                           
                                                                                                                                
3:05:34 PM                                                                                                                    
                                                                                                                                
MR. BILBAO,  in response to  Representative Saddler,  stated that                                                               
the chart is  from a DOR slide that's BP  felt was representative                                                               
of a broader  process.  For BP, there would  be alternatives such                                                               
as  Russia  and  Angola  where   there  have  been  a  production                                                               
increase.   Although  the messages/conclusions  would remain  the                                                               
same,  he   offered  to  provide   the  committee   with  further                                                               
information if it so desired.                                                                                                   
                                                                                                                                
3:06:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KAWASAKI pointed out  that ConocoPhillips' slide 7                                                               
entitled  "ACES  -  High  Average  Government  Take"  shows  that                                                               
Azerbaijan's tax  rate is  well above that  of Alaska  under ACES                                                               
new development.  Furthermore, the  chart shows that Angola's tax                                                               
rate  is  similarly  placed  with   Alaska  under  ACES  for  new                                                               
development  and Russia's  tax rate  falls slightly  below Alaska                                                               
under  ACES  for  existing producers.    Representative  Kawasaki                                                               
opined  that  although taxes  may  move  companies in  a  certain                                                               
direction somewhat,  BP is  working in  places with  higher taxes                                                               
than Alaska.  Therefore, he invited discussion on that point.                                                                   
                                                                                                                                
MR. BILBAO informed the committee  that over the last three years                                                               
he  has  been working  with  Indonesia  supporting some  of  BP's                                                               
liquefied natural gas (LNG) operations.   Indonesia is comparable                                                               
to Alaska on the chart presented  on slide 7.  However, the chart                                                               
doesn't  relate that  the production  sharing contract  framework                                                               
Indonesia  employs   allows  companies  to  cost   recover  their                                                               
investment  earlier on,  which  is a  significant  impact on  the                                                               
economics.   Similarly, the  fiscal mechanism  of other  areas on                                                               
the  chart   allows  the  economics   to  be  competitive.     He                                                               
acknowledged that  the total government  take is  higher overall,                                                               
but  pointed  out  that  to  be the  case  because  there  is  an                                                               
incentive earlier on to make  the investment.  The aforementioned                                                               
isn't the  case in  Alaska.   Mr. Bilbao  emphasized the  need to                                                               
consider  the  entirety of  the  structure,  not just  individual                                                               
pieces,  in  order to  obtain  a  good  sense of  the  investment                                                               
decision.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  KAWASAKI   commented  that   legislators  haven't                                                               
received much  [detailed] information from the  administration or                                                               
other [stakeholders],  and therefore legislators don't  have much                                                               
detailed information.                                                                                                           
                                                                                                                                
3:09:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK directed attention  to the obligation that BP                                                               
may  have  with  Russia  and  the  maintenance  of  the  existing                                                               
pipelines  BP acquired  in Russia.    With BP's  desire to  build                                                               
assets  elsewhere, he  questioned how  the state  can be  assured                                                               
that the money Alaska gives BP won't be used elsewhere.                                                                         
                                                                                                                                
MR.  BILBAO said  that  Russia  is a  great  example  of a  joint                                                               
venture that has had difficulties,  but the financial performance                                                               
of the unit has been strong.   Furthermore, to a large extent the                                                               
venture  has self-funded  much  of  its own  growth.   While  the                                                               
fiscal system  in Russia  does present  certain limits,  the unit                                                               
has  remained effective  and  the material  is  a very  strategic                                                               
material  part  of BP's  portfolio.    Mr. Bilbao  surmised  that                                                               
Representative Tuck is inquiring as  to how to ensure Alaska will                                                               
receive the benefit from a meaningful  tax change.  He echoed Mr.                                                               
Jepsen's    comment   that    good    projects   move    forward.                                                               
Unfortunately, projects  [in Alaska]  aren't in  the conversation                                                               
because they don't compete globally.                                                                                            
                                                                                                                                
REPRESENTATIVE TUCK  pointed out  that recently the  oil industry                                                               
has been making  more due to the rising price  of oil rather than                                                               
production  itself.   Therefore,  he  pondered whether  producing                                                               
more  works against  the company's  best  interest because  there                                                               
would be  more available  supply and  reduced price,  which would                                                               
decrease  the profit  per barrel.    Besides competitiveness,  he                                                               
inquired  as  to  what  other  major  factors  are  reviewed  for                                                               
strategy planning when considering markets.                                                                                     
                                                                                                                                
MR. BILBAO  specified that BP  doesn't enter and  control markets                                                               
as   a  first   leader.     Although  BP   may  be   the  largest                                                               
producer/leaseholder  when  it  enters  a   market  and  takes  a                                                               
material  position,   BP  doesn't   control  the  markets.     He                                                               
reiterated  that BP  progresses good  projects.   Furthermore, BP                                                               
never looks to consider the impact  of its decisions to the price                                                               
of oil globally.  As a  company, BP's total production is a small                                                               
portion of the  global oil production, and  therefore one project                                                               
isn't going  to impact the  global price  of oil.   Therefore, BP                                                               
considers projects  and does what  it can to ensure  the projects                                                               
leverage the best technology and  are efficient, and the projects                                                               
move forward if they are good projects.                                                                                         
                                                                                                                                
3:14:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK  inquired  as  to what  happened  under  the                                                               
economic  limit factor  (ELF) when  15  out of  19 wells  weren't                                                               
paying any production tax.   More specifically, he inquired as to                                                               
what decisions prevented more investment in the state.                                                                          
                                                                                                                                
MR.  BILBAO  responded that  he  isn't  prepared to  answer  that                                                               
question  as   his  experience  is   primarily  under   the  ACES                                                               
environment.   Under ACES, BP is  running fewer rigs than  in the                                                               
past and  hasn't sanctioned a major  resource progression project                                                               
since the  passage of ACES.   However, BP is investing  to ensure                                                               
that the  infrastructure is renewed  for 30 years and  would like                                                               
to invest in projects that  use that infrastructure for 30 years,                                                               
but ACES doesn't that allow to happen.                                                                                          
                                                                                                                                
3:15:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  highlighted that  Alaska has  the number  one or                                                               
two  ranked  credit  system  in  the world  in  terms  of  credit                                                               
allowances  on capital  infusion as  well as  immediate deduction                                                               
and no depreciation.   Therefore, Co-Chair Seaton  inquired as to                                                               
how the  return on  capital [in Azerbaijan]  is quicker  than the                                                               
100 percent  deduction and  the credit  system that's  allowed in                                                               
Alaska.                                                                                                                         
                                                                                                                                
MR. BILBAO said he could  discuss the production sharing contract                                                               
BP has  with Indonesia, with  which he  is more familiar.   Since                                                               
it's tremendously  complicated, he  agreed to  do so  in writing.                                                               
Mr. Bilbao remarked  that in BP's view, it isn't  able to attract                                                               
the investment  it would like.   In terms  of oil and  gas rates,                                                               
Alaska is last.                                                                                                                 
                                                                                                                                
3:18:12 PM                                                                                                                    
                                                                                                                                
MR. BILBAO, returning to his  presentation, directed attention to                                                               
slide  6.   He told  the committee  that Alaska  has really  good                                                               
rocks  and it's  BP's largest  resource base  outside of  Russia.                                                               
The  three  things  that move  the  opportunities  to  production                                                               
growth/additional investment include  efficiency, technology, and                                                               
tax change.  Efficiency and  technology are within the producer's                                                               
control.  He  noted that efficiency ensures  that the appropriate                                                               
people are working  on the appropriate things  in the appropriate                                                               
way.   Alaska  hire is  one  way to  achieve the  aforementioned.                                                               
With  regard to  technology, Mr.  Bilbao said  that Alaska  has a                                                               
fantastic  track  record  of   developing  and  implementing  new                                                               
technologies,  which he  would  continue to  expect.   The  third                                                               
lever is the fiscal environment, which  is the tax change that is                                                               
within the  legislature's control.   Therefore,  BP does  what it                                                               
can  with  the  first  two  levers,  efficiency  and  technology.                                                               
However, the  more the lever on  tax change is pulled,  the lower                                                               
the  obstacles  surrounding  efficiency  and  technology  become.                                                               
Although  it's a  combination of  the three  that result  in more                                                               
investment, it's ultimately a tax  change that will determine how                                                               
many  projects move  out of  the funnel.   As  has been  publicly                                                               
stated  by  BP Alaska's  president,  there  is  a minimum  of  $5                                                               
billion  in first  phase development  of potential  projects that                                                               
would  move forward  with  meaningful tax  change.   However,  if                                                               
taxes  don't change,  the hurdles  for efficiency  and technology                                                               
become larger.  Frankly, if  the taxes don't change, the business                                                               
will have  to change  because the  hurdles around  efficiency and                                                               
technology become much  larger.  Mr. Bilbao pointed  out that the                                                               
$5 billion  in projects  has been  consistently mentioned  by the                                                               
three  producers and  will  be pursued  once  the efficiency  and                                                               
technology challenges have been overcome.   Still, a reduction in                                                               
taxes would make those technology  and efficiency challenges less                                                               
difficult to overcome.                                                                                                          
                                                                                                                                
3:22:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PETERSEN  inquired as  to  the  timeframe of  the                                                               
potential $5 billion in new investment.                                                                                         
                                                                                                                                
MR.  BILBAO responded  that the  majority of  the new  investment                                                               
would be  over 5-10 years.   He noted  that most of  the activity                                                               
listed on slide  6 will be drilling led, and  thus it will depend                                                               
upon getting  the rigs  on the  North Slope.   Mr.  Bilbao stated                                                               
that  BP would  start the  drilling the  day after  a tax  change                                                               
passed.                                                                                                                         
                                                                                                                                
3:23:19 PM                                                                                                                    
                                                                                                                                
MR.  BILBAO, in  response  to  Representative Gardner,  clarified                                                               
that the  day after  a tax  change passed  BP would  move forward                                                               
with the  projects [listed on  slide 6] by getting  the equipment                                                               
to the North Slope.  If  BP knew the right fiscal environment was                                                               
in place, BP would work on  procuring and moving more rigs to the                                                               
North Slope.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER asked  whether BP  would have  to perform                                                               
the calculations  to determine  whether projects  are competitive                                                               
or have those calculations already been done.                                                                                   
                                                                                                                                
MR. BILBAO  said that although  BP would  have to go  through the                                                               
process, there  have been internal and  external conversations on                                                               
many of these.  Therefore, BP has  a fairly good idea of where it                                                               
stands on  the projects.   Drilling  opportunities are  among the                                                               
least  difficult conversations  as  they tend  to  be more  about                                                               
equipment availability and less so  about economic hurdles.  Once                                                               
drilling   opportunities    become   economically    viable   and                                                               
competitive, they tend to progress more quickly.                                                                                
                                                                                                                                
3:24:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON asked whether the Parker rigs were a problem.                                                                   
                                                                                                                                
MR. BILBAO  said that  BP always ensures  that all  the equipment                                                               
that it uses  is ready to be  used in the manner  expected.  Once                                                               
the  Parker rigs  are deemed  ready to  be put  into service,  BP                                                               
would  need  to  decide  whether  they should  be  added  to  the                                                               
existing fleet  or replace  existing less  efficient rigs  in the                                                               
fleet  to   maintain  the  overall   level  of  activity.     The                                                               
aforementioned   will   revolve   around   how   many   of   BP's                                                               
opportunities  are  economic,  and   therefore  it's  more  about                                                               
equipment than the economic threshold.                                                                                          
                                                                                                                                
3:26:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  recalled hearing  from all  the companies                                                               
repeatedly that  no one can promise  that a project can  be green                                                               
lighted  [merely  because of  a  tax  change], although  it  will                                                               
improve the  possibility/opportunity.   She clarified  that she's                                                               
asking  whether this  spending commitment  has already  been made                                                               
and it's just  a matter of timing  or does the project,  due to a                                                               
change in the  economics of the project, have  to obtain approval                                                               
to move forward.                                                                                                                
                                                                                                                                
MR.  BILBAO  answered  that those  projects  haven't  been  green                                                               
lighted  because they  aren't economic  currently.   If economics                                                               
change through improved efficiency,  technology, or a tax change,                                                               
BP would reevaluate the projects.   He clarified that his comment                                                               
was that  those discussions about drilling  opportunities tend to                                                               
be  less   difficult  because   the  technology   and  efficiency                                                               
challenges are  typically better understood as  is the inventory.                                                               
The company knows  there are great rocks it just  needs to ensure                                                               
that it's pursuing economic projects.                                                                                           
                                                                                                                                
3:27:24 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON,   referring  to  the  deployment   of  capital,                                                               
inquired as to  the availability [of capital] for  Prudhoe Bay or                                                               
any of  the North Slope  developments in  terms of being  able to                                                               
sanction those projects.                                                                                                        
                                                                                                                                
MR. BILBAO replied no, the only  challenge BP faces in Alaska for                                                               
attracting more capital is the investment climate.                                                                              
                                                                                                                                
CO-CHAIR SEATON  asked if any  projects have been delayed  by one                                                               
of the three partners not being in alignment with the others.                                                                   
                                                                                                                                
MR.  BILBAO  related  his  experience  that  good  projects  move                                                               
forward.   Although  he acknowledged  that the  partners may  not                                                               
always  agree  on the  technical  details  and execution  of  the                                                               
project, he  opined that  the cumulative debate  is best  for the                                                               
state and the producers.                                                                                                        
                                                                                                                                
CO-CHAIR   SEATON   surmised   that  Mr.   Bilbao   agreed   with                                                               
ConocoPhillips  that some  projects  may have  been delayed,  but                                                               
those delays were  due to internal debates.   He further surmised                                                               
that  there weren't  projects  that were  canceled  by one  party                                                               
being in a  different strategic point in time  as the investments                                                               
were going forward.                                                                                                             
                                                                                                                                
MR. BILBAO replied that he wasn't aware of such.                                                                                
                                                                                                                                
3:29:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PRUITT  inquired as  to the meaning  of additional                                                               
drilling  in  legacy  fields  and   how  BP  would  differentiate                                                               
additional drilling in  legacy fields from the  drilling BP would                                                               
do if there was no change in the tax structure.                                                                                 
                                                                                                                                
MR.  BILBAO  clarified that  additional  drilling  at the  legacy                                                               
fields  means that  there are  drilling opportunities  at Prudhoe                                                               
Bay  and  Kuparuk  River  Unit that  currently  don't  meet  BP's                                                               
thresholds to  compete for  funds globally, which  is why  BP has                                                               
less rigs  running on the  North Slope than it  has historically.                                                               
If  costs  continue  to  increase   on  the  North  Slope,  those                                                               
increases would put further pressure  on the opportunities, which                                                               
would mean  BP would continue  to monitor  those in terms  of the                                                               
global competitiveness of those opportunities.                                                                                  
                                                                                                                                
REPRESENTATIVE PRUITT  asked whether  there are certain  types of                                                               
drilling that's  absolutely off the  table.  For instance,  is BP                                                               
doing down hole work, but not  new wells starting at the surface.                                                               
Or,  are  there  opportunities  in the  legacy  fields  that  are                                                               
productive under the current system  such that drilling can start                                                               
at the surface, he asked.                                                                                                       
                                                                                                                                
MR. BILBAO replied yes, adding  that the largest opportunities on                                                               
the North Slope are within the  legacy fields.  However, he noted                                                               
that  BP  is  on  an  ongoing  basis  entering  and  sidetracking                                                               
existing well bores.  The biggest  addition of new rate is when a                                                               
new reservoir  or a new  pad is constructed.   The aforementioned                                                               
are the type  of growth investments that have  the most difficult                                                               
time competing under ACES globally.   For example, constructing a                                                               
new pad  on the west side  of Prudhoe Bay would  be a significant                                                               
investment  because  of  the   high  upfront  capital  investment                                                               
required  for  such a  project.    While  it  would be  the  most                                                               
effective way to  manage the decline, it would be  among the most                                                               
challenged for investment under the current tax regime.                                                                         
                                                                                                                                
REPRESENTATIVE  PRUITT   surmised  then  that  there   are  still                                                               
opportunities,  "ground  down   infrastructure",  in  the  legacy                                                               
fields that have not been touched.                                                                                              
                                                                                                                                
MR. BILBAO  opined that  what's lost in  the conversation  is the                                                               
appreciation  for  how much  work  goes  into reaching  that  6-8                                                               
percent.   Considering  the rock  itself with  no investment  and                                                               
only ensuring  that the operations  were safe and  efficient, Mr.                                                               
Bilbao related  that the rocks  would produce 16-18  percent less                                                               
the next  year than the year  prior.  He then  emphasized that BP                                                               
invests a significant  amount of money with a lot  of people just                                                               
to reach the  6-8 percent decline.  The aforementioned  is one of                                                               
the reasons not  to ignore those operations and  only focus above                                                               
a certain decline  rate.  He surmised  that Representative Pruitt                                                               
is getting to  the point that the  best place to look  for oil is                                                               
in the  [legacy] fields.  There  are billions of barrels  left in                                                               
the  legacy fields  within Prudhoe  Bay and  Kuparuk River  Unit,                                                               
which is  why BP focuses on  that and doesn't explore  outside of                                                               
the legacy fields.                                                                                                              
                                                                                                                                
3:36:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON surmised that  BP means that it wants to                                                               
wait  to  develop  until  it's  economic  as  compared  to  other                                                               
projects in the U.S. and the world.                                                                                             
                                                                                                                                
MR. BILBAO clarified  that when he says  that [Alaska's] projects                                                               
aren't competitive  globally he's saying that  while BP continues                                                               
to work on projects [in Alaska]  to better understand what can be                                                               
done  with the  efficiency and  the technology,  the gap  between                                                               
where the  projects stand  now competitively  and where  BP would                                                               
like them  to be as even  an option versus where  they would need                                                               
to  be to  materially compete  is quite  large.   Although BP  is                                                               
reviewing ways to  gain efficiency and technology  to address the                                                               
gap, the gap  can be narrowed significantly  with the appropriate                                                               
tax system in place.                                                                                                            
                                                                                                                                
REPRESENTATIVE P.  WILSON maintained that because  the tax regime                                                               
is better  elsewhere, it's  more economic for  BP to  do business                                                               
there than  in Alaska.   The economics  aren't related  merely to                                                               
whether a  project can be  done in  Alaska rather it's  whether a                                                               
project is economic in the broad scheme.                                                                                        
                                                                                                                                
MR.  BILBAO  agreed  with Representative  P.  Wilson's  summation                                                               
broadly,  but  added  that  Alaska   is  a  high  cost  operating                                                               
environment with one of the  most restrictive fiscal environments                                                               
on the planet.                                                                                                                  
                                                                                                                                
3:39:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SADDLER asked  whether the  term "economic"  is a                                                               
relative or absolute term when BP uses it.                                                                                      
                                                                                                                                
MR.  BILBAO answered  that  it's a  combination,  but noted  that                                                               
there are  certain minimum  expectations.   He recalled  that PFC                                                               
testified  that  companies  will  have  minimum  expectations  in                                                               
regard to what a project will deliver.                                                                                          
                                                                                                                                
REPRESENTATIVE  SADDLER asked  whether  BP has  to reshuffle  the                                                               
deck every year and compare opportunities globally.                                                                             
                                                                                                                                
MR.  BILBAO explained  that typically  the company  has a  fairly                                                               
good  idea   of  where  [projects/opportunities]  are   from  the                                                               
previous  year.   Typically, the  analysis will  be in  regard to                                                               
what has changed  whether it is efficiencies,  new technology, or                                                               
a tax structure change.                                                                                                         
                                                                                                                                
3:41:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON   recalled  being   told  that   companies  have                                                               
different  hurdle rates,  although  the testimony  has been  that                                                               
projects  haven't been  canceled  [because one  partner  is at  a                                                               
different  point].   Therefore, he  surmised that  the goal  [for                                                               
Alaska] is to  make something work for the toughest  in the group                                                               
[of producers].                                                                                                                 
                                                                                                                                
MR. BILBAO pointed out that  the various producers are discussing                                                               
the same  projects and  magnitude of changes,  which is  a fairly                                                               
strong statement  given the legal  constraints the  producers are                                                               
under.   He  specified  that  tax change  is  one  aspect of  the                                                               
challenges that must be overcome [in Alaska].                                                                                   
                                                                                                                                
3:43:28 PM                                                                                                                    
                                                                                                                                
MR.  BILBAO, returning  to his  presentation,  announced that  he                                                               
would  now focus  on what  growth  in investment  could mean  for                                                               
Alaska's future.   He then  directed attention to slide  8, which                                                               
presents  a  graphical  representation   of  the  OMB  data  that                                                               
compares state  revenue versus  state expenses.   In  response to                                                               
Co-Chair Seaton, Mr.  Bilbao explained that the  4 percent growth                                                               
line represents a  4 percent growth on expenses.   Therefore, the                                                               
OMB data assumes that from 2014,  expenses grew by 4 percent.  He                                                               
pointed out  that BP  added some  lines to OMB's  graph.   BP had                                                               
concerns with regard to the  forecast in revenue versus the track                                                               
record  of  production  decline  over  the  last  several  years.                                                               
[Alaska] has  experienced a 6-8  percent decline and  the revenue                                                               
forecast is  largely a flat  line.  The line  for revenue at  a 6                                                               
percent decline provides an idea  of what the difference would be                                                               
if production  wasn't flat but was  declining at 6 percent.   The                                                               
graph  illustrates  that  if  prices  were  flat  and  production                                                               
declined at 6 percent, one would  expect a budget deficit in 2018                                                               
of about  $1.8 billion.   BP also added a  line that denotes  a 4                                                               
percent decline.   If there  was a  way to manage  the production                                                               
decline at  4 percent through additional  investment, the deficit                                                               
would be  just under $1  billion less than it  would be with  a 6                                                               
percent  production  decline.    Mr.  Bilbao  then  recalled  DOR                                                               
Commissioner Butcher's  testimony estimating  that next  year the                                                               
break-even price for the budget to be  $95 per barrel of oil.  He                                                               
further recalled DOR  testimony relating that over  the last five                                                               
to six  years the  price of  oil has been  above $100  per barrel                                                               
about 20-30 percent  of the time and below $100  per barrel 70-80                                                               
percent of  the time,  which raises concerns  with regard  to the                                                               
reliability  of $100-$110  price  forecasts.   Furthermore,  that                                                               
challenge can't  be managed  overnight and  one can't  wait until                                                               
2017 or 2018  to produce more.  More production  has to begin now                                                               
because projects take  four to six years before  they bring forth                                                               
material production.   Mr.  Bilbao then  told the  committee that                                                               
with a 6  percent decline, the only way the  general fund revenue                                                               
forecast  works is  to assume  the price  of oil  is rising  by 6                                                               
percent  per  year.    "If you  assume  production  continues  to                                                               
decline at  6 percent, then the  only way the revenue  stays flat                                                               
is  if the  price of  oil  goes up  6 percent  every year,  which                                                               
basically would  mean that the state  is betting its future  on a                                                               
high oil  price."  He  suggested that there's an  opportunity for                                                               
the  state  and  the  producers  to work  together  to  begin  to                                                               
progress some of the projects that  will deliver an impact to the                                                               
projected deficit now, not in five or six years.                                                                                
                                                                                                                                
3:48:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON asked  whether a change from a  6 percent decline                                                               
to a  4 percent decline  would be a  realistic change if  HB 3001                                                               
was enacted.                                                                                                                    
                                                                                                                                
3:49:24 PM                                                                                                                    
                                                                                                                                
MR. BILBAO,  in response to  Co-Chair Seaton,  directed attention                                                               
to the chart on  slide 9.  He explained that the  bar on the left                                                               
represents  2012  production  and  is  broken  down  between  the                                                               
natural base  decline and the  continued well work  and drilling.                                                               
The drilling  and well  work that  occurs annually  generates 40-                                                               
50,000 barrels  a day.   In the context  of the North  Slope, the                                                               
Oooguruk  field  is  currently producing  6,000  barrels  a  day.                                                               
Therefore,  annually  there would  need  to  be about  eight  new                                                               
fields producing  at the level  of the Oooguruk field  to replace                                                               
what BP is  bringing in new drilling and well  work annually.  He                                                               
then  turned  to  the  bar   representing  2020  production,  and                                                               
highlighted that  the natural  base decline  is 16  percent plus.                                                               
Therefore,  if BP  did nothing  production from  the North  Slope                                                               
would be about  150,000 barrels a day.  He  opined that it's only                                                               
because  BP is  spending billions  of dollars  with many  capable                                                               
people  that BP  manages the  decline at  closer to  6-8 percent.                                                               
Turning  to the  continued well  work and  drilling in  2020, Mr.                                                               
Bilbao pointed  out that continued  well work and  drilling makes                                                               
up two-thirds of the production  in 2020, which is generated from                                                               
activity between 2012  and 2020.  The activity and  nature of the                                                               
challenge to deliver production from a  16 percent decline to a 6                                                               
percent decline  is significant.   Furthermore, one must  keep in                                                               
mind that those  barrels of oil are slightly  more expensive than                                                               
the prior year  because of the impacts of inflation  and the fact                                                               
that  the   best  wells  are   drilled  first.     He  encouraged                                                               
consideration  of not  only the  investment and  production above                                                               
the 6  percent decline  but also  the ongoing,  increasingly more                                                               
expensive  and  more  marginal  activity that  gets  to  the  6-8                                                               
percent.  In  response to Co-Chair Seaton's question  about the 4                                                               
percent  decline,  he  pointed  out   the  portion  of  the  2020                                                               
production bar representing  the $5 billion in  new projects with                                                               
meaningful tax  change as represented  in HB  3001.  As  has been                                                               
mentioned before, the $5 billion  is the first opportunity/phase.                                                               
He  confirmed that  it would  be  possible with  legacy and  non-                                                               
legacy  opportunities  to manage  that  decline  to closer  to  2                                                               
percent.  Further, it's probable  that with meaningful tax change                                                               
[the production decline]  could get closer to 4  percent with the                                                               
$5 billion.   Although  it will  take more  than just  the legacy                                                               
fields,  it will  have to  start with  the legacy  fields because                                                               
that's where most of the oil is located.                                                                                        
                                                                                                                                
3:53:29 PM                                                                                                                    
                                                                                                                                
MR. BILBAO,  returning to slide  6, emphasized that to  move from                                                               
today to the 2020  profile would mean that BP would  have to do a                                                               
lot with efficiency  and technology, which will  only happen with                                                               
meaningful tax change.                                                                                                          
                                                                                                                                
3:54:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PETERSEN, referring  to slide  9, inquired  as to                                                               
what BP considers additional opportunities on the 2020 bar.                                                                     
                                                                                                                                
MR.  BILBAO clarified  that the  $5  billion of  projects is  the                                                               
first step  and represents the  projects that BP has  worked most                                                               
thoroughly  and understands  more  definitively.   Beyond  those,                                                               
more opportunities  will be found  when the  economic environment                                                               
is right.  The first place  one will find opportunities is in the                                                               
existing fields.   Due  to the  current economic  environment, BP                                                               
doesn't have the attention it could  to the next phase.  With the                                                               
right investment  climate, more opportunities could  be found and                                                               
moved forward.  However, he noted that  BP has a sense of some of                                                               
the  candidates  for  the additional  opportunities,  where  they                                                               
would fall in  BP's natural progression of projects,  and what it                                                               
would take to  move them forward.  He opined  that it's premature                                                               
to specify  the opportunities because  they could very  easily be                                                               
passed over.                                                                                                                    
                                                                                                                                
3:55:53 PM                                                                                                                    
                                                                                                                                
MR.  BILBAO,  referring  to slide  10  entitled  "Key  Messages,"                                                               
concluded his  presentation.  He  related BP's opinion,  which he                                                               
said the  evidence supports, that ACES  is a no growth  policy as                                                               
growth projects don't compete for  investment.  Furthermore, ACES                                                               
bets  Alaska's future  on high  oil prices.   He  further related                                                               
that any  ability to  manage the  decline has  to start  with the                                                               
legacy fields since  that's where most of the oil  is located and                                                               
the infrastructure  already exists.   The  legacy fields  are the                                                               
only near-term  option for  new production.   If the  taxes don't                                                               
change,  BP's business  will  have  to change,  he  opined.   Mr.                                                               
Bilbao  then highlighted  that other  regions,  such as  Alberta,                                                               
have worked cooperatively between the  state and the producers to                                                               
reduce taxes and increase investment and production.                                                                            
                                                                                                                                
3:57:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   HERRON   reminded   the   committee   of   PFC's                                                               
recommendation for  the state to  negotiate a decline  curve with                                                               
the  majors and  then  incentivize  production.   He  asked if  2                                                               
percent is  legitimate or are  [the percentages] presented  by BP                                                               
more reasonable.                                                                                                                
                                                                                                                                
MR. BILBAO returned  to slide 9 and the opportunity  set with the                                                               
$5  billion  in  investment  that could  achieve  the  4  percent                                                               
decline.   Although BP  also sees  opportunities beyond  that, to                                                               
accomplish  that  the  base  business  has to  be  healthy.    As                                                               
illustrated  on slide  9, two-thirds  of the  production in  2020                                                               
will come from  activity taking place between 2012 and  2020.  To                                                               
ignore the aforementioned and try  to incentivize activity beyond                                                               
that  would create  a  foundation on  top of  which  it would  be                                                               
difficult  to support  incremental large  spending that  projects                                                               
require.  He then explained  that when there is a differentiation                                                               
above and  below a certain line,  the concern is that  it creates                                                               
certain unintended  consequences.   If, as was  the case  with SB                                                               
192, there is an attempt to  apply a different decline target for                                                               
each producer,  there is the  risk of giving  different producers                                                               
incentive to move projects from one  field versus the other.  The                                                               
producers,  he explained,  want  to hit  their  target and  [will                                                               
move] when  they can reach  their target more effectively  in one                                                               
field  than another.   Similarly,  the result  of establishing  a                                                               
certain decline rate  in a field or the North  Slope is different                                                               
for each producer because they  decline at different rates due to                                                               
the blend of their portfolios.   Therefore, establishing specific                                                               
decline  rates  may result  in  a  tax break  without  additional                                                               
effort  for  one  producer  while another  producer  may  need  a                                                               
significant  amount  of investment  to  reach  that rate.    More                                                               
fundamental than  the aforementioned, when BP  runs the economics                                                               
for  the next  project, he  questioned how  BP will  know whether                                                               
that's the  project that achieves  the 6  percent or above  the 6                                                               
percent.  He  further questioned what assumptions  would be used.                                                               
He  said  BP   would  have  to  run  the  economics   on  a  more                                                               
conservative   higher  tax   system.     Therefore,  Mr.   Bilbao                                                               
encouraged  the   committee  to   develop  an   alternative  that                                                               
considers the business as a whole.   Again, he told the committee                                                               
that if the investment climate  is attractive, projects will move                                                               
forward.                                                                                                                        
                                                                                                                                
4:01:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON,  referring to slide 10,  asked whether the                                                               
benchmarks presented for Alberta  remained the same as introduced                                                               
or were they whittled down or up.                                                                                               
                                                                                                                                
MR. BILBAO responded that he  didn't know specifically.  However,                                                               
he offered  that the conversations  he has had with  the industry                                                               
and  Alberta have  related  that it  was  a collaborative  effort                                                               
between the  producers and the  state, such that  they determined                                                               
what  would deliver  additional investment  while still  allowing                                                               
the state  to manage certain  fiscal requirements.  He  said that                                                               
it only works when there is a conversation.                                                                                     
                                                                                                                                
4:02:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  directed attention to  the provision in  HB 3001                                                               
that changes the maximum tax  rate from 75 percent production tax                                                               
to  60 percent.    He  then asked  whether  BP  considers that  a                                                               
significant/meaningful piece of the legislation.                                                                                
                                                                                                                                
MR. BILBAO  said that it  takes everything in the  legislation to                                                               
make it  work.   Therefore, when BP  considers its  economics, it                                                               
considers the entirety  of the legislation.   The legislation, he                                                               
opined,  will  shift  BP's  projects   into  a  more  competitive                                                               
conversation.   Picking and choosing  will result  in legislation                                                               
that may incentivize  some level of activity,  but won't approach                                                               
the over $5 million worth of opportunity that's available.                                                                      
                                                                                                                                
4:03:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER highlighted  the  option  under ACES  for                                                               
royalty  relief when  a  field is  deemed  worthy of  development                                                               
except for the tax rate.   She asked if there has been discussion                                                               
of asking for royalty relief.                                                                                                   
                                                                                                                                
MR. BILBAO related that internal  conversations within BP suggest                                                               
that  typically  royalty  relief   wouldn't  be  offered  to  the                                                               
projects BP  is considering.   However, he expressed the  need to                                                               
review  the  matter  further  and   provide  the  committee  more                                                               
information.                                                                                                                    
                                                                                                                                
4:05:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P. WILSON  inquired as to with whom  BP would deal                                                               
if it takes advantage of the royalty relief option.                                                                             
                                                                                                                                
CO-CHAIR  SEATON   explained  that  the   legislature  authorized                                                               
royalty  relief   that  is  administered   and  granted   by  the                                                               
Department of Natural Resources (DNR).   The intention of royalty                                                               
relief was  to provide  an opportunity  for projects  that aren't                                                               
economic under  conditions to become  economic and  move forward.                                                               
If royalty  relief isn't working,  then the legislature  may need                                                               
to consider policy changes.                                                                                                     
                                                                                                                                
4:06:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   PETERSEN  informed   the  committee   that  more                                                               
smaller/midsized oil  companies have  come to  Alaska to  work in                                                               
the oil  fields.  One  of the  reasons for the  aforementioned is                                                               
the  generous tax  credits  of ACES.   In  fact,  he related  his                                                               
understanding that  [Alaska] under  ACES may  be the  second best                                                               
place for tax  credits.  If other companies view  ACES as working                                                               
because of the tax credits, why would BP not view it the same.                                                                  
                                                                                                                                
MR.  BILBAO  answered   that  fundamentally  it's  distinguishing                                                               
between an  exploration period and  a production period.   During                                                               
an exploration  period, which can  take 7-10 years,  the activity                                                               
tends  to be  drilling a  well, shooting  seismic, analyzing  the                                                               
seismic, and drilling  a well all the way to  the point of making                                                               
a  development  decision  and  prior to  the  construction  of  a                                                               
facility, roads,  or pipeline.   It's  only at  the point  of the                                                               
decision  to  make a  large  infrastructure  investment when  the                                                               
company  would  begin to  consider  the  impact  of ACES  on  the                                                               
economics [of  the project].   Mr. Bilbao specified that  ACES is                                                               
very generous for the period of  time prior to producing a barrel                                                               
of oil, when the company is  trying to find oil.  Certainly, ACES                                                               
has attracted  new players.   However,  ACES isn't  very generous                                                               
for the period of  the life of a field when  the company tries to                                                               
get the barrel  out of the field  and into the market.   In fact,                                                               
during   the   aforementioned   time  period,   ACES   is   quite                                                               
prohibitive.                                                                                                                    
                                                                                                                                
4:09:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  inquired  as  to an  estimation  of  the                                                               
investment it  would take to  reduce the decline from  the legacy                                                               
fields by 2 percent across the board.                                                                                           
                                                                                                                                
MR.  BILBAO explained  that to  reduce the  decline by  2 percent                                                               
would mean  that it would  decline from  6 percent to  4 percent,                                                               
which is equivalent  to the $5 billion in investment  that BP has                                                               
already committed to publicly.                                                                                                  
                                                                                                                                
4:10:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PRUITT, referring  to  slide 10,  inquired as  to                                                               
what BP will have to do if taxes don't change.                                                                                  
                                                                                                                                
MR.  BILBAO opined  that  the  impact of  no  tax  change and  no                                                               
investment increase in Alaska will  be felt far beyond the direct                                                               
oil and  gas industry.   The three producers generate  90 percent                                                               
of the revenue for the  state, but more importantly they generate                                                               
a  large part  of the  jobs, both  directly and  indirectly.   He                                                               
reminded  the committee  that last  year's  McDowell report  said                                                               
that for  every direct  oil industry job  nine indirect  jobs are                                                               
created in the state.  With  more investment, there would be more                                                               
indirect jobs  and it  would mean  that property  owners wouldn't                                                               
have  to be  concerned about  a reduction  in property  value nor                                                               
would the  legislature have to  be concerned about finding  a new                                                               
way  to bring  in revenue  to  the state.   If  the oil  industry                                                               
experiences a  challenge to investing,  the average  citizen will                                                               
experience it day-to-day in many ways.                                                                                          
                                                                                                                                
4:14:06 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 4:14 p.m. to 4:23 p.m.                                                                       
                                                                                                                                
                            Pioneer                                                                                         
4:23:14 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON invited  Pioneer  Natural  Resources, Alaska  to                                                               
provide its testimony.                                                                                                          
                                                                                                                                
4:24:04 PM                                                                                                                    
                                                                                                                                
TODD ABBOTT, President, Pioneer  Natural Resources, Alaska, began                                                               
by  drawing  attention  to  slide  2  entitled  "Forward  Looking                                                               
Statements."    He  then  informed  the  committee  that  Pioneer                                                               
Natural Resources,  Alaska ("Pioneer  Alaska") is a  wholly owned                                                               
subsidiary  of Pioneer  Natural Resources  ("Pioneer").   Pioneer                                                               
Alaska  is headquartered  in Anchorage  with  about 70  full-time                                                               
Alaska  employees and  120 Alaska  contract workers  in Anchorage                                                               
and the North Slope.   Mr. Abbott highlighted that Pioneer Alaska                                                               
is the first  independent operator on the North  Slope, which was                                                               
achieved with  the Oooguruk project that  commenced production in                                                               
the  fall of  2008.   Currently,  Oooguruk  produces about  6,900                                                               
barrels a  day and over  the life  of the project  Pioneer Alaska                                                               
will  invest  about  $1  billion.    Referring  to  slide  4,  he                                                               
explained  that the  slide illustrates  what Pioneer  looked like                                                               
from 1997-2005,  which was a time  with the Lower 48  fields were                                                               
considered mature  and oil prices  were much lower than  they are                                                               
today.   Therefore,  companies were  going abroad  seeking growth                                                               
projects  as  the projects  in  the  Lower 48  weren't  economic.                                                               
Pioneer was  no different as  it explored abroad in  West Africa,                                                               
drilled  in  Tunisia  and  South Africa,  it  had  operations  in                                                               
Argentina, and worked in Canada.   Pioneer also did a lot of work                                                               
in  the  deepwater  of  the  Gulf  of  Mexico,  which  was  quite                                                               
successful, and of course, Alaska as  well.  He then related that                                                               
Pioneer entered Alaska to grow  its business because its Lower 48                                                               
holdings  were  mature  and  Pioneer  felt  its  fields  were  in                                                               
decline.  Alaska, with its  very large oil resources and prolific                                                               
oil and  gas basin,  fit the  bill.   Furthermore, the  state was                                                               
actively  courting independents  to  join the  majors in  Alaska.                                                               
The  aforementioned left  Pioneer feeling  as if  it could  enter                                                               
Alaska with a  more independent mindset.   Pioneer entered Alaska                                                               
with a  lower cost structure and  more agility in terms  of quick                                                               
decision making.  Moreover, things  that are less material to the                                                               
major producers are very material  to Pioneer Alaska, which leads                                                               
Pioneer Alaska  to aggressively  pursue options  that may  not be                                                               
[economic] for  the majors.   In fact,  Pioneer Alaska  does well                                                               
when  it can  come in  after the  majors and  pickup things  that                                                               
weren't material  to the majors.   Referring to slide  6 entitled                                                               
"North Slope Exploration History",  Mr. Abbott told the committee                                                               
that from  2003-2007 Pioneer Alaska drilled  11 exploration wells                                                               
that  resulted   in  one  project,  Oooguruk.     Exploration  is                                                               
difficult,  even in  a  basin  as prolific  as  the North  Slope.                                                               
Although Pioneer Alaska  found hydrocarbons in almost  all of the                                                               
11 exploration wells, to have  a commercial project one must find                                                               
the right kind  of hydrocarbons in the right  types of reservoirs                                                               
and in large enough accumulations by the right infrastructure.                                                                  
                                                                                                                                
MR. ABBOTT,  moving on  to slide  7 entitled  "Alaska's Severance                                                               
Tax" explained  that Pioneer  decided to  enter Alaska  under the                                                               
ELF.    The  Oooguruk  project   was  sanctioned  under  ELF  and                                                               
construction  began under  the petroleum  production profits  tax                                                               
(PPT).   Drilling  began and  the  first oil  was revealed  under                                                               
ACES.  Therefore, slide 7 illustrates  that it's a long lead time                                                               
from exploration to first production  and that Pioneer Alaska was                                                               
always  chasing  a  moving  target  on the  tax  structure.    He                                                               
emphasized that certainty  [with regard to the  tax structure] is                                                               
critical  when  a  company  is making  decisions  to  sanction  a                                                               
project, especially when there is such  a long lead time prior to                                                               
production.  Referring to slide  8, Mr. Abbott addressed what has                                                               
changed  in the  ensuing  eight  years after  [the  first oil  at                                                               
Oooguruk].   The first change  is that oil prices  have increased                                                               
dramatically  and gas  prices have  decreased dramatically.   The                                                               
higher  oil price  allows Pioneer  Alaska to  use the  horizontal                                                               
drilling  and facturing  technology that  has been  available for                                                               
some time, although it has  been extremely expensive to use until                                                               
now.  The aforementioned has created  the shale boom in the Lower                                                               
48 and  now the landscape has  changed such that the  Lower 48 is                                                               
no  longer considered  mature.   Companies  are  no longer  going                                                               
[abroad] to find  an economic project because now it  can be done                                                               
in  the U.S.  where there  is a  stable tax  structure.   He then                                                               
directed   attention   to   slide   9   entitled   "Fixed-Royalty                                                               
Jurisdictions in US  Lower 48 Are A Key Competitor  to Alaska for                                                               
Investment  Dollars", which  he borrowed  from PFC  Energy.   The                                                               
slide  illustrates   that  from   2003-2005  North   America  was                                                               
exporting cash while  from 2008-2010 capital is  returning to the                                                               
U.S. and being  invested in the U.S. because of  the higher [oil]                                                               
prices,  technology,  and the  tax  structures  available in  the                                                               
Lower 48.                                                                                                                       
                                                                                                                                
4:31:45 PM                                                                                                                    
                                                                                                                                
MR. ABBOTT,  continuing with slide  10 entitled  "Current Pioneer                                                               
Operations  Footprint",  informed  the committee  that  Pioneer's                                                               
current operations are only in the  U.S., which is a much simpler                                                               
operation with  fewer contractual issues.   Pioneer has  sold off                                                               
its holdings  abroad and has,  to a  large extent, left  the high                                                               
risk  exploration gain  [operations] and  is focused  on resource                                                               
potential,  shale plays,  and even  conventional  resources.   He                                                               
then told  the committee  that his job  as president  for Pioneer                                                               
Alaska is  to bring capital and  investment to Alaska.   Slide 11                                                               
highlights   Pioneer's  plays   in   Texas   and  provides   some                                                               
perspective of  what Pioneer Alaska  is up against.   He informed                                                               
the committee that  the following three plays in  Texas are shale                                                               
plays:   the  Barnett  Shale, Eagle  Ford  Shale, and  Horizontal                                                               
Wolfcamp  Shale.    The  Spraberry   Vertical  in  Texas  can  be                                                               
considered  more of  a conventional  play as  there are  vertical                                                               
wells  that  are fractured.    Pioneer  is probably  the  largest                                                               
acreage holder, by far, in  the Spraberry Vertical.  Furthermore,                                                               
Pioneer  has 20,000-plus  drilling locations  yet to  drill.   He                                                               
related that  the Horizontal Wolfcamp  Shale is the  most similar                                                               
well to  that of  a well  Pioneer Alaska  would drill  in Alaska.                                                               
Mr. Abbott highlighted the scale of  activity in the Lower 48 and                                                               
the  economic  impact   apart  from  the  state   revenue.    The                                                               
aforementioned operations in Texas have  a very low geologic risk                                                               
similar  to what  exists in  Alaska and  have very  short project                                                               
cycle times  as compared  to Alaska.   He  explained that  in the                                                               
Lower  48 when  a company  makes an  investment, the  company can                                                               
drill five  wells and  decide to stop  drilling after  those five                                                               
wells.    However,  in  Alaska   the  operations  are  more  like                                                               
deepwater operations in  that the company has  to invest hundreds                                                               
of millions  of dollars before  the first few wells  are drilled.                                                               
Therefore, in  Alaska a company will  have a lot of  money on the                                                               
table  before   getting  significant  results   from  development                                                               
projects  in  Alaska.   Therefore,  the  executive  committee  of                                                               
Pioneer has  to have  tremendous confidence  in the  economics of                                                               
projects in  Alaska because they  won't take  a lot of  risk with                                                               
such a large  stake on the table before getting  results.  Moving                                                               
on  to  slide  12,  he  reviewed a  graph  that  illustrates  the                                                               
competition for  capital with the  wells in Texas versus  all the                                                               
North  Slope  wells and  reviewed  the  economic impact  felt  in                                                               
Texas.   Mr. Abbott moved  on to slide 13 entitled "2012E Capital                                                               
Spending and  Cash Flow", and  explained that the chart  on slide                                                               
13 allows  Pioneer to predict its  cash flow for any  given year.                                                               
One can  select the oil and  gas price for next  year, which will                                                               
be Pioneer's  corporate cash flow,  including hedging  and costs.                                                               
For example, at  current market prices [Pioneer  will have] about                                                               
$2.2 billion  of cash flow and  will spend about $2.4  billion in                                                               
capital.   Pioneer will spend  about $1.8 billion in  the Permian                                                               
Basin, most  of which will be  spent in the vertical  play of the                                                               
Spraberry  Basin  and a  significant  portion  in the  horizontal                                                               
wells.  He  then highlighted that Pioneer is  spending about $135                                                               
million, which is roughly 6  percent of Pioneer's capital budget,                                                               
in Alaska  versus $1.8  billion and  an additional  investment in                                                               
the  Eagle Ford  and Barnett  Shale plays.   He  opined that  the                                                               
company's   decision  to   make   the  best   return  for   their                                                               
shareholders speaks volumes.                                                                                                    
                                                                                                                                
4:38:56 PM                                                                                                                    
                                                                                                                                
MR.  ABBOTT, referring  to  the  map on  slide  14, reviewed  the                                                               
Oooguruk site.  Pioneer Alaska  continues to drill at Oooguruk as                                                               
there is  one rig on  site.  The next  step with Oooguruk  is the                                                               
Torok area.   Pioneer Alaska drilled two wells this  year, one of                                                               
which  was an  unrelated exploration  well and  the other  was an                                                               
appraisal  well from  the  Nuna-1  drill site.    With regard  to                                                               
what's  next  for  Pioneer  or  the  incremental  investment  for                                                               
Pioneer  that could  be impacted  by  tax policy,  Nuna-1 is  the                                                               
answer.  Nuna-1  has been drilled, test production  has been run,                                                               
the results are being evaluated  now, and the recommendations are                                                               
being prepared.   He acknowledged that there are a  wide range of                                                               
outcomes  that could  result  from Nuna-1  with  the most  likely                                                               
outcomes  being that  tax policy  has  a tremendous  impact.   As                                                               
noted  on slide  15, Nuna-1  is one  or two  onshore drill  sites                                                               
depending upon  the extent of  the development.  Nuna-1  is large                                                               
and is more like an oil shale  project that would be in the Lower                                                               
48 as it's highly laminated shale.   For Nuna-1 Pioneer Alaska is                                                               
drilling long horizontal  wells and the largest frack  job on the                                                               
North  Slope is  in one  of these  wells.   The [Nuna-1]  project                                                               
could result in a significant amount  of jobs for Pioneer as well                                                               
as for  the service and  construction companies that work  in the                                                               
area.   Still, this project is  up against projects in  the Lower                                                               
48 that have  lower operating costs, a better  tax structure, and                                                               
vast  resources  of which  Alaska  once  had  the monopoly.    As                                                               
related by slide  16, both Alaska and the Lower  48 have resource                                                               
potential  while  Alaska would  be  more  favorable in  terms  of                                                               
resource  competition  because  it  doesn't have  the  number  of                                                               
independents as  there are in the  Lower 48.  With  regard to oil                                                               
bias, he opined that Alaska has  a tremendous amount of oil ready                                                               
to be produced.   However, the ease of the  regulatory process is                                                               
better in the Lower 48 while  in terms of land acquisition Alaska                                                               
is  in a  better position  than the  Lower 48.   Although  Alaska                                                               
looks fairly good from a  resource perspective, Alaska is lacking                                                               
from  the   profitability  side,  which  includes   cycle  times,                                                               
execution risk, operational flexibility,  and low operating cost.                                                               
Therefore, Alaska  needs a  better tax  structure than  what's in                                                               
the  Lower  48, he  opined.    The  aforementioned, he  said,  is                                                               
illustrated  on  slide  17 entitled  "Average  Government  Take",                                                               
which the committee has already seen in previous presentations.                                                                 
                                                                                                                                
4:43:50 PM                                                                                                                    
                                                                                                                                
MR. ABBOTT,  referring to  slide 18, stated  that there  are some                                                               
aspects  to HB  3001  that are  a  good start,  such  as that  it                                                               
incents a wide array of  projects, reduces the negative impact of                                                               
progressivity,  and  makes  Alaska  projects  significantly  more                                                               
competitive.   However,  an improvement  to HB  3001 would  be to                                                               
include the small producer tax  credit extension because it makes                                                               
a real difference for small producers  such as Pioneer.  He noted                                                               
that the small  producer tax credit is really a  reduction of the                                                               
small producer's tax  liability.  Mr. Abbott  opined that Pioneer                                                               
has some good  projects in Alaska that it would  like to forward.                                                               
He  said he  wants to  bring  additional capital  to Alaska,  and                                                               
therefore he will do his absolute best  to do so.  Tax policy, he                                                               
emphasized,  would go  a  long  way in  terms  of supporting  the                                                               
capital coming to  Alaska otherwise it's an uphill  battle.  With                                                               
regard to the  Oooguruk expansion, Mr. Abbott  clarified that the                                                               
Torok expansion  is not  a done  deal and  Pioneer Alaska  is not                                                               
anywhere near sanctioning the development.   The hope is that the                                                               
expansion is  so good  that tax  policy doesn't  matter, although                                                               
it's more  likely that tax policy  will matter.  There  are a lot                                                               
of other  projects on  the North Slope  like the  Torok expansion                                                               
and  for them  tax policy  matters.   He noted  that Torok  would                                                               
bring  new   barrels  into  TAPS  and   create  construction  and                                                               
development  jobs.    In  closing,  Mr.  Abbott  reiterated  that                                                               
HB 3001 will have a positive and a material impact.                                                                             
                                                                                                                                
4:46:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  asked  if  when ACES  went  into  effect                                                               
Pioneer  was one  of the  companies  eligible for  the claw  back                                                               
provisions.  If so, what was  that worth, she asked.  She further                                                               
asked  whether Pioneer  was one  of the  companies that  received                                                               
royalty relief, and  if so, she inquired as to  the experience of                                                               
it.                                                                                                                             
                                                                                                                                
MR. ABBOTT  said that he didn't  know the answer to  the question                                                               
regarding the claw back, but offered  to obtain it and provide it                                                               
to  the committee.    He  confirmed that  Pioneer  did apply  and                                                               
receive royalty relief for the  Oooguruk project.  The receipt of                                                               
the royalty relief  was primarily driven by  Pioneer's 30 percent                                                               
net profits  lease in addition  to ACES.   As far  as quantifying                                                               
the value of the royalty relief,  he offered to research that and                                                               
provide the  information to the  committee.  In  further response                                                               
to  Representative  Gardner, Mr.  Abbott  explained  that the  30                                                               
percent net profits  lease is an additional burden  placed on the                                                               
Oooguruk lease, basically it's an income tax on Oooguruk.                                                                       
                                                                                                                                
CO-CHAIR  SEATON  interjected that  the  30  percent net  profits                                                               
lease was a bid  term on the lease at the  time, prior to Pioneer                                                               
picking up that  lease.  He explained that  there are competitive                                                               
lease sales and bonus  bids.  At the time, the  bidder bid the 30                                                               
percent  net profits  as  part of  the bonus  bid  to obtain  the                                                               
lease.  He  asked if that bid term also  applies to the expansion                                                               
project.                                                                                                                        
                                                                                                                                
MR.  ABBOTT related  his  understanding that  it  would apply  to                                                               
anything within  that lease,  which includes  Torok.   In further                                                               
response to Co-Chair  Seaton, Mr. Abbott clarified that  it was a                                                               
royalty reduction  not royalty  elimination.   Therefore, Pioneer                                                               
pays royalty and once it pays out  it will pay a [30 percent] net                                                               
profits  lease.   He further  clarified that  the 30  percent net                                                               
profits is in addition to the reduced royalty.                                                                                  
                                                                                                                                
CO-CHAIR  SEATON asked  whether the  royalty was  reduced through                                                               
royalty relief for  a period of time until a  certain point, such                                                               
as when profitability is reached.                                                                                               
                                                                                                                                
MR. ABBOTT  said he  would have  to review  the specifics  of the                                                               
terms.                                                                                                                          
                                                                                                                                
CO-CHAIR   SEATON  remarked   that   he   would  appreciate   the                                                               
information  because  it  would   help  the  committee  determine                                                               
whether the  existing royalty relief provisions  function well or                                                               
not.                                                                                                                            
                                                                                                                                
MR.  ABBOTT,   returning  to  Representative   Gardner's  earlier                                                               
question  regarding the  difficulty of  the process,  related his                                                               
understanding that the process  was extraordinarily difficult and                                                               
there  was quite  a bit  of documentation  work.   Royalty relief                                                               
isn't  an  easy administrative  process  as  it's something  that                                                               
takes a lot of data, time, and analysis.                                                                                        
                                                                                                                                
4:51:13 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  asked if the  30 percent net profits  portion of                                                               
the  lease is  after the  production tax  and all  other property                                                               
taxes.   He  further  asked  if the  profit  is  before or  after                                                               
corporate income tax.                                                                                                           
                                                                                                                                
MR. ABBOTT clarified  that [the 30 percent net  profits lease] is                                                               
after  and in  addition.   He offered  to prepare  information to                                                               
provide to the committee.                                                                                                       
                                                                                                                                
4:52:04 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  inquired as  to whether the  change from  the 75                                                               
percent  maximum  tax  to  the   60  percent  maximum  tax  is  a                                                               
significant  piece in  the  calculation for  being  able to  draw                                                               
capital to a project in Alaska.                                                                                                 
                                                                                                                                
MR. ABBOTT responded that it's  hard to say without the specifics                                                               
for  Torok.    However,  more  broadly,  the  change  is  a  good                                                               
provision, but he said he didn't  know if it's material enough to                                                               
achieve the type of investment being sought.                                                                                    
                                                                                                                                
4:53:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON asked  if Pioneer has a  process facility sharing                                                               
agreement with  existing producers or  does Pioneer have  its own                                                               
processing facility.                                                                                                            
                                                                                                                                
MR. ABBOTT confirmed that Pioneer  has an agreement such that all                                                               
of  Pioneer Alaska's  crude  production oil,  water,  and gas  is                                                               
processed   through    ConocoPhillips'   production   facilities.                                                               
Pioneer has a facilities sharing agreement  to do so.  In further                                                               
response to Co-Chair Seaton, he  confirmed the facilities sharing                                                               
agreement  would likely  remain for  any expansions,  although it                                                               
depends upon the size.  He explained  that it would have to be an                                                               
extraordinarily large  find for  Pioneer to justify  building its                                                               
own  processing facilities  rather  than  availing themselves  of                                                               
those of ConocoPhillips.                                                                                                        
                                                                                                                                
CO-CHAIR  SEATON   surmised  that  when   incentivizing  multiple                                                               
things,   including  legacy   fields  that   are  water   or  gas                                                               
constrained,  there could  be  issues.   He  then mentioned  that                                                               
Brooks Range  approached the state  about a state loan  for funds                                                               
to  construct mobile  processing  facilities  that could  process                                                               
about  15,000 barrels  per day.   If  that was  available for  an                                                               
Alaska  project, he  asked whether  that would  materially impact                                                               
the sanctioning of a project.                                                                                                   
                                                                                                                                
MR. ABBOTT  mentioned that in  his last position with  Pioneer he                                                               
was vice  president of corporate  finance.  He then  informed the                                                               
committee  that   Pioneer  measures  the  profitability   of  its                                                               
projects as a  discount return on investment (DRI),  which is the                                                               
value  divided  by the  discounted  capital.   For  every  dollar                                                               
invested, one wants to obtain  the highest value for that dollar.                                                               
Therefore, having something  that's a lower cost  of debt through                                                               
the state would decrease the  amount of capital the company would                                                               
have to deploy  and decrease the discount rate  against which the                                                               
project is  measured.   The aforementioned  is positive,  but the                                                               
question is regarding  the ratio of that piece  of capital versus                                                               
the  overall  project size.    In  further response  to  Co-Chair                                                               
Seaton,  Mr. Abbott  opined  that the  way  it's being  described                                                               
really  isn't a  relief of  capital but  rather it's  a financing                                                               
mechanism.    In that  case,  the  company  would still  pay  the                                                               
dollars  and the  interest rate  would  make the  difference.   A                                                               
change in  the interest rate  on a $200 million  investment could                                                               
help  over the  life of  a project,  but it  would need  to be  a                                                               
project that's [already] very close to being economic.                                                                          
                                                                                                                                
4:58:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  posed a scenario  in which the  40 percent                                                               
gross  reduction  is  reduced,  and asked  when  it  wouldn't  be                                                               
meaningful when only changing that.                                                                                             
                                                                                                                                
MR.  ABBOTT responded  that is  very  difficult to  answer.   The                                                               
corporation reviews [HB 3001] in  terms of its overall value, and                                                               
thus  [to only  consider the  percent gross  reduction] would  be                                                               
project dependent.                                                                                                              
                                                                                                                                
REPRESENTATIVE HERRON appreciated Pioneer,  which is a nimble and                                                               
successful company, providing comments today.                                                                                   
                                                                                                                                
5:00:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON recalled that there  had been questions regarding                                                               
decline curves, and  asked whether that would  apply to Pioneer's                                                               
projects.                                                                                                                       
                                                                                                                                
MR. ABBOTT  said that  reviewing a  decline curve  segregation in                                                               
terms of new oil versus old oil  is an interesting way to look at                                                               
it.  Although  he said he likes the idea,  he said it's difficult                                                               
to  comment  until  he  has  the details.    For  something  like                                                               
Oooguruk,  Pioneer produces  out  of  several different  horizons                                                               
each  of  which  has  its  own  decline.    Pioneer's  production                                                               
profile,  he  related,   would  historically  increase,  decrease                                                               
slightly,  and  then start  increasing  again.   As  the  various                                                               
reservoirs  deplete  at  different  rates  and  the  water  flood                                                               
impacts  at  different  times,   there  will  be  varying  rates.                                                               
Therefore,  the challenge  is how  to determine  the schedule  of                                                               
future  volumes based  on existing  production.   He opined  that                                                               
it's a difficult number to  ascertain and negotiation of it would                                                               
be  quite  an  exercise  between the  state  and  the  companies.                                                               
Again, if implemented correctly, it could work.                                                                                 
                                                                                                                                
5:03:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PETERSEN recalled  hearing that  some of  the new                                                               
players on  the North Slope  had found impediments to  growth and                                                               
potential due to difficulties  accessing facilities and excessive                                                               
costs for  shipping oil down the  pipeline.  He asked  if Pioneer                                                               
has experienced such.                                                                                                           
                                                                                                                                
MR.  ABBOTT  acknowledged  negotiations  to  use  ConocoPhillips'                                                               
facilities  were difficult  and took  a  long time.   He  further                                                               
acknowledged that from time-to-time  there are disagreements, but                                                               
it's a  business transaction and  is worked out.   ConocoPhillips                                                               
has  worked  with  Pioneer  on  its  facilities.    For  example,                                                               
ConocoPhillips is  doing capital planning  for a couple  of years                                                               
out  and  has inquired  as  to  Pioneer's  needs.   Although  the                                                               
relationship  between Pioneer  and ConocoPhillips  is a  business                                                               
relationship, it works.                                                                                                         
                                                                                                                                
5:05:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  commented that it's interesting  that Mr.                                                               
Abbott could  conceive of a play  that would be so  wonderful and                                                               
economic that tax policy wouldn't matter.                                                                                       
                                                                                                                                
MR. ABBOTT indicated that he's an optimist.                                                                                     
                                                                                                                                
5:05:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON related  his  understanding  that Pioneer  would                                                               
like  the small  producer tax  credit included  in HB  3001.   He                                                               
asked  if  an expiration  of  2022,  a 10-year  extension,  would                                                               
provide enough time to recruit the capital.                                                                                     
                                                                                                                                
MR. ABBOTT  replied yes, adding  that 2022 would be  a reasonable                                                               
timeframe for the extension.  Having more certainty would help.                                                                 
                                                                                                                                
CO-CHAIR  SEATON recalled  comments that  the small  producer tax                                                               
credit wasn't inflation proofed.  He  asked if Mr. Abbott saw any                                                               
need to change that from the $12  million to $15 million or is it                                                               
immaterial for most small producers.                                                                                            
                                                                                                                                
MR.  ABBOTT opined  that $3  million a  year of  an $800  million                                                               
project is  unlikely to change  Pioneer's decision on  a project.                                                               
Although  [the small  producer tax  credit] helps  with Oooguruk,                                                               
tweaking it reaches a point of diminishing returns, he remarked.                                                                
                                                                                                                                
                              AOGA                                                                                          
                                                                                                                                
5:08:25 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  invited testimony  from the  Alaska Oil  and Gas                                                               
Association (AOGA).                                                                                                             
                                                                                                                                
5:08:47 PM                                                                                                                    
                                                                                                                                
KARA   MORIARTY,  Executive   Director,   Alaska   Oil  and   Gas                                                               
Association (AOGA),  began by informing  the committee  that AOGA                                                               
is a  business trade association  with the mission to  foster the                                                               
long-term viability of  the oil and gas industry  for the benefit                                                               
of all  Alaskans.   The association's  16-member companies  are a                                                               
diverse group and the committee has  heard from two of the member                                                               
companies today.   She informed the committee  that AOGA's member                                                               
companies  have both  an onshore  and offshore  presence and  are                                                               
located  in the  Cook Inlet  and the  North Slope.   Furthermore,                                                               
AOGA  member companies  are  on  federal and  state  lands.   The                                                               
member companies  include legacy  companies, new  entrants, three                                                               
in-state refineries,  and the  Alyeska Pipeline  Service Company.                                                               
In  total AOGA's  members hold  more  than 1.2  million acres  of                                                               
land.    Therefore,  there's little  doubt  AOGA  represents  the                                                               
majority    of   oil    and    gas   exploration,    development,                                                               
transportation, refining, and marketing  activities in the state.                                                               
She  pointed out  that  one  of the  key  purposes  of any  trade                                                               
organization,  especially AOGA,  is to  provide a  forum for  the                                                               
discussion of matters  of general interest for its  members.  She                                                               
highlighted the policy  of AOGA to have 100  percent consensus on                                                               
tax policy  matters, and emphasized that  all 16-member companies                                                               
concur with the statements she's going to make today.                                                                           
                                                                                                                                
MS. MORIARTY reminded the committee  that AOGA didn't support the                                                               
tax  changes  that  were  made  in 2006  and  2007  because  AOGA                                                               
believed  then   and  now   that  the   current  tax   system  is                                                               
uncompetitive for investment  dollars, long-term development, and                                                               
production.  Furthermore, all of  AOGA's member companies believe                                                               
that meaningful changes  to the tax system are  necessary to stem                                                               
the decline in production.   In fact, today's testimony marks the                                                               
sixth  time that  AOGA has  testified  before the  Twenty-Seventh                                                               
Alaska State Legislature  regarding the need for  oil tax reform.                                                               
Throughout AOGA's testimony to the  legislature and the public it                                                               
has  stressed the  graph entitled  "Production Decline  is Real",                                                               
which  illustrates that  declining production  is a  problem that                                                               
cannot  be  ignored.   She  acknowledged  that [the  legislature]                                                               
isn't ignoring it.  The  graph shows the historical production in                                                               
the past  decade with DOR's forecast  for the next decade.   Upon                                                               
examining the past  three years a bit closer, one  will find that                                                               
production is  declining by  just under  40,000 barrels  per day.                                                               
Furthermore, the DOR forecast moving  forward is that almost half                                                               
of the new production will be from  new oil that is oil yet to be                                                               
developed.    In fact,  the  recently  released DOR  spring  2012                                                               
forecast forecasts that  in 2013 71,000 new barrels  per day will                                                               
need to be in production.                                                                                                       
                                                                                                                                
5:12:22 PM                                                                                                                    
                                                                                                                                
MS.  MORIARTY stated  that as  a trade  association, AOGA's  main                                                               
question is from where this new  oil is going to come, especially                                                               
in the short term.  She  informed the committee that Oooguruk and                                                               
Nikaitchuq,  new fields,  are  each expected  to  peak at  around                                                               
20,000-28,000  barrels per  day.   She then  reiterated that  the                                                               
current production  decline is  about the same  as these  two new                                                               
fields combined each year.  In  other words, to simply offset the                                                               
current decline two new fields  like Oooguruk and Nikaitchuq need                                                               
to come  on each  year.   Moreover, to  reach DOR's  forecast for                                                               
2013 three fields of  this size need to come on  line in the next                                                               
year.   Unfortunately,  she knew  of  no new  fields expected  to                                                               
produce oil in  the next three to five years.   She recalled that                                                               
in  2006 and  2007 many  companies testified  that ACES  wouldn't                                                               
attract  the  investment Alaska  needed  to  stem the  production                                                               
curve.   Not only  did that prediction  came true,  production is                                                               
significantly lower  today than what  was forecast when  ACES was                                                               
passed in  2007.   As the  chart entitled  "Forecast in  2007 vs.                                                               
2011  Actual   Production"  shows   the  Department   of  Revenue                                                               
predicted that in  2011 Alaska would produce  754,000 barrels per                                                               
day, but production was only at  603,000 barrels per day.  Moving                                                               
on  to  the chart  entitled  "Current  Industry Investment",  Ms.                                                               
Moriarty pointed out  that the chart relates  the total operating                                                               
expenses  in Alaska  industry wide  and  the capital  investment.                                                               
The  chart  relates  that  the  industry  investment  totals  has                                                               
remained stagnate over the last  three years.  Capital investment                                                               
has  averaged $1.7  billion, which  resulted in  a loss  of about                                                               
40,000 barrels  per day  over the same  three years.   Therefore,                                                               
current  investment levels  aren't even  stemming the  production                                                               
decline,  never mind  increasing  production.   Without bold  and                                                               
meaningful reforms  Alaska's production will continue  to decline                                                               
at a rate,  according to the Office of Management  & Budget, that                                                               
would  create potential  deficits  as early  as  2015 that  would                                                               
increase  in  each succeeding  year.    From AOGA's  perspective,                                                               
there's a  production problem  that's going to  soon result  in a                                                               
serious revenue problem for the state.                                                                                          
                                                                                                                                
MS. MORIARTY pointed out that  AOGA's member companies and others                                                               
have  testified about  what's happening  with  businesses on  the                                                               
North  Slope, the  interrelationship  between new  levels of  new                                                               
investment  each year  and the  rate of  decline in  Alaska North                                                               
Slope production  as well  as the impact  of taxes  on investment                                                               
decisions.  "These explanations are  not threats, but they're not                                                               
bluffs either,"  she stressed.   Rather,  the testimony  has been                                                               
candid  attempts   to  describe  how  those   companies  evaluate                                                               
investment  opportunities  in  Alaska versus  elsewhere  and  how                                                               
Alaska's  tax  regime  can influence  decisions  regarding  which                                                               
opportunities to  take.  She  further recalled that  recently the                                                               
legislature's  own consultants  explained to  this committee  how                                                               
investment decisions  are made and provided  a similar conclusion                                                               
that  investment  decisions  reflect   the  expectations  of  the                                                               
company's respective shareholders and  that companies will choose                                                               
the  opportunities   they  perceive   to  be  best,   all  things                                                               
considered, including taxes.  Ms.  Moriarty stated that the level                                                               
of   investment  in   Alaska  since   enactment  of   ACES  isn't                                                               
retaliation  rather the  investments  are nothing  more than  the                                                               
results  of the  competition  of opportunities  in Alaska  versus                                                               
those  elsewhere.    Therefore,   AOGA  believes  that  declining                                                               
production  is  a  slope-wide problem  that  needs  a  slope-wide                                                               
solution.   John Norman, the  commissioner of the Alaska  Oil and                                                               
Gas Conservation  Commission, recently described  Alaska's legacy                                                               
fields  as an  "anchor  tenant."   Ms.  Moriarty  said that  AOGA                                                               
continues to use the analogy that  the North Slope is like a tree                                                               
with the  two great legacy fields  being its trunk and  the other                                                               
fields branching  out and rising  out of that trunk.   Therefore,                                                               
if one peels the bark off all  the way around the trunk and makes                                                               
the tree unhealthy, all the  other branches will become unhealthy                                                               
as well, no  matter how robust they might have  been if the trunk                                                               
had stayed strong.                                                                                                              
                                                                                                                                
5:18:07 PM                                                                                                                    
                                                                                                                                
MS.  MORIARTY,   referring  to  the   slide  entitled   "Rich  In                                                               
Resources", said  that if one  considers the  resources remaining                                                               
on  the North  Slope, one  should be  encouraged.   In fact,  the                                                               
legacy fields, the conventional line  of 5 billion barrels of oil                                                               
remaining,   hold   the  most   promise   in   the  short   term.                                                               
Additionally, during this  time of record high  oil prices Alaska                                                               
should see a  flurry of activity and  increased investment levels                                                               
to get these resources to market.   The producers of the existing                                                               
non-legacy fields  on the North  Slope and the developers  of any                                                               
new  fields that  may be  discovered need  as much  production as                                                               
possible flowing from the legacy  fields through TAPS in order to                                                               
maintain affordable  costs to  ship oil from  the North  Slope to                                                               
refinery destinations.   She confirmed  Representative Petersen's                                                               
concern for high  transportation costs and characterized  it as a                                                               
real concern that  could cripple the economics of  any new fields                                                               
as well  as the economics  of any non-legacy fields  currently in                                                               
production.    Ms.  Moriarty emphasized,  "So,  we  believe  that                                                               
Alaska  and   Alaskans  need  to   appreciate  the   North  Slope                                                               
production with a great level of  concern and react with bold and                                                               
meaningful  reforms."    Without  comprehensive  reform  for  the                                                               
legacy fields as well as  other production and future production,                                                               
the entire  North Slope will be  harmed.  As Mr.  Abbott told the                                                               
committee,  tax policy  does impact  business  decisions and  the                                                               
competition  for investment  dollars  is real.   Therefore,  AOGA                                                               
encourages  the committee  to put  Alaska  in a  better and  more                                                               
competitive  position for  near-term  and long-term  development.                                                               
The  legislation, HB  3001, before  the committee  does recognize                                                               
the  overall government  take  in  Alaska is  too  high and  does                                                               
provide  meaningful reform.   Ms.  Moriarty  acknowledged that  a                                                               
solution  that  benefits all  fields  may  not be  achieved  this                                                               
special session because it appears  the legislature is fragmented                                                               
on this  issue.   However, AOGA  will continue  to work  with the                                                               
legislature  until  meaningful  tax  reform is  reached  for  all                                                               
fields on the North Slope.                                                                                                      
                                                                                                                                
5:20:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE FOSTER inquired  as to how many  barrels have gone                                                               
through TAPS.                                                                                                                   
                                                                                                                                
MS. MORIARTY  answered that  over 16 billion  barrels of  oil has                                                               
gone through  TAPS.  If one  were to include production  for Cook                                                               
Inlet,  just over  17 billion  barrels of  oil has  been produced                                                               
since statehood.                                                                                                                
                                                                                                                                
5:21:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON inquired  as  to when  a  decrease in  the                                                               
percentage alone is not meaningful to AOGA.                                                                                     
                                                                                                                                
MS. MORIARTY said that's difficult  for her to answer because she                                                               
has to  have 100 percent consensus.   In all of  the discussions,                                                               
reducing the  base rate and changing  progressivity would provide                                                               
the most meaningful reform.                                                                                                     
                                                                                                                                
5:23:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  directed attention to the  committee packet that                                                               
includes   testimony  from   the  ExxonMobil   Corporation  whose                                                               
representative couldn't be present today.   He told the committee                                                               
members could  submit questions for  ExxonMobil Corporation.   He                                                               
reviewed the committee's upcoming schedule.                                                                                     
                                                                                                                                
5:25:18 PM                                                                                                                    
                                                                                                                                
MR.  BILBAO, in  response  to  Representative Gardner's  question                                                               
regarding a discrepancy in the  decline curve BP presented versus                                                               
that of  DOR, noted  that he  has sent  a text  to his  office to                                                               
confirm whether the data submitted  by all the producers included                                                               
the  projects  associated with  the  incremental  $5 billion  and                                                               
whether  that   accounts  for   the  difference   in  production.                                                               
Therefore, Mr. Bilbao said he would like to double check that.                                                                  
                                                                                                                                
[HB 3001 was held over.]                                                                                                        

Document Name Date/Time Subjects
House Resources HB3001 2012-04-25 ConocoPhillips.pdf HRES 4/25/2012 1:00:00 PM
HB3001
BP Presentation April 25th, 2012 to House Resources and House Energy Committees.pdf HRES 4/25/2012 1:00:00 PM
HB3001
Pioneer Testimony to Joint House Resource _ Energy Committee 042512.pdf HRES 4/25/2012 1:00:00 PM
HB3001
EM - Letter to House Resources re HB 3001 - 4-25-12.pdf HRES 4/25/2012 1:00:00 PM
HB3001
04 25 12 HRES Slides.pdf HRES 4/25/2012 1:00:00 PM
HB3001