Legislature(2013 - 2014)BARNES 124

03/27/2013 01:00 PM RESOURCES


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01:06:42 PM Start
01:07:01 PM SB21
03:03:30 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
- Small Producers/Explorers & AOGA
+ Bills Previously Heard/Scheduled TELECONFERENCED
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:07:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of business  is CS                                                               
FOR SENATE BILL NO. 21(FIN) am(efd  fld), "An Act relating to the                                                               
interest rate applicable to certain  amounts due for fees, taxes,                                                               
and payments  made and  property delivered  to the  Department of                                                               
Revenue; providing  a tax credit  against the  corporation income                                                               
tax  for qualified  oil and  gas  service industry  expenditures;                                                               
relating to the oil and gas  production tax rate; relating to gas                                                               
used in  the state; relating  to monthly installment  payments of                                                               
the  oil  and  gas  production  tax;  relating  to  oil  and  gas                                                               
production  tax  credits  for certain  losses  and  expenditures;                                                               
relating  to  oil and  gas  production  tax credit  certificates;                                                               
relating  to nontransferable  tax  credits  based on  production;                                                               
relating to the  oil and gas tax credit fund;  relating to annual                                                               
statements by  producers and explorers; establishing  the Oil and                                                               
Gas   Competitiveness  Review   Board;   and  making   conforming                                                               
amendments."                                                                                                                    
                                                                                                                                
1:07:36 PM                                                                                                                    
                                                                                                                                
KEN  THOMPSON,   Co-Owner/Investor,  Managing   Director,  Alaska                                                               
Venture Capital  Group, LLC (AVCG), Owner/Operator,  Brooks Range                                                               
Petroleum  Corporation,  began  his  PowerPoint  presentation  by                                                               
noting  that Alaska  Venture  Capital Group,  LLC  (AVCG) is  the                                                               
parent  company of  Brooks Range  Petroleum  Corporation, one  of                                                               
Alaska's most active exploration companies.   He further noted he                                                               
is a former president of ARCO Alaska,  Inc.  He said he has spent                                                               
75 percent  of the last three  months in the Lower  48 working to                                                               
find a new funding partner to  invest in his company's new Alaska                                                               
development projects.                                                                                                           
                                                                                                                                
MR.  THOMPSON stated  why consideration  should be  given to  his                                                               
company's  perspectives on  CSSB 21(FIN)  am(efd fld)  (slide 2).                                                               
He said  Brooks Range Petroleum has  been one of the  most active                                                               
exploration companies in Alaska,  exploring and developing solely                                                               
on  North  Slope  state  lands.   From  2007-2012,  Brooks  Range                                                               
Petroleum  drilled 10  of  the 36  exploration  wells drilled  on                                                               
North Slope  state lands.   "That is more exploration  wells than                                                               
Conoco,  BP,  Exxon, ENI,  Repsol,  and  Armstrong combined,"  he                                                               
said.  Brooks  Range Petroleum has 105,000 leased  acres in three                                                               
core  areas and  has a  joint venture  partnership with  Ramshorn                                                               
Exploration, an  affiliate of Nabors Industries.   Alaska Venture                                                               
Capital  Group was  started in  1999 and  its operating  company,                                                               
Brooks Range Petroleum Corporation, was  formed in 2006.  So far,                                                               
$200 million has been invested  in Alaska North Slope exploration                                                               
projects, with  3 discoveries from  10 wells for  about a 1  in 3                                                               
success rate.   A discovery that  was made in the  1970s has been                                                               
acquired and  is being  assessed for  development.   Mustang, the                                                               
company's  first  development  project,  is  under  construction;                                                               
photographs of its  confirmation well can be seen  on slides 6-7.                                                               
A  gravel  road  is  under  construction and  a  gravel  pad  and                                                               
facilities will be built this next  year.  Drilling will occur in                                                               
2014  and production  will  begin  fourth quarter  2014.   At  44                                                               
million  barrels of  oil, Mustang  will  contribute about  15,000                                                               
barrels of  oil per day  to the  state.  Between  its discoveries                                                               
and  acquisition,   the  company  has  three   other  development                                                               
projects   in  various   stages  of   permitting  or   conceptual                                                               
engineering.   Mustang alone will  be just under $600  million in                                                               
capital.   In 2013, 2014, and  2015 his company will  spend about                                                               
$200 million per  year, about the same level  of capital spending                                                               
as Pioneer  Natural Resources  and about  one-third the  level of                                                               
ConocoPhillips  Alaska, Inc.    Other  development projects  will                                                               
total about $1.2 billion in investment capital.                                                                                 
                                                                                                                                
1:12:04 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON addressed  what the state will be  receiving for its                                                               
investment of tax credits, which  have been very important to his                                                               
company.  Of  the $200 million his company has  spent, a total of                                                               
$69 million  has been refunded  in tax  credits.  The  state will                                                               
receive back all of its $69  million in credits in the first year                                                               
of  production  from  Mustang  alone, and  over  its  field  life                                                               
Mustang will produce revenues to the  state of $1.2 billion.  His                                                               
company has redeployed  all of the credits back  into drilling or                                                               
seismic to  find and develop  new oil.   The credits  enabled his                                                               
company to drill  three wells instead of two,  or two exploration                                                               
wells instead of  one.  This helped accelerate  the discovery and                                                               
delineation  of Mustang  in two  years  instead of  the three  it                                                               
would have taken for the company to  do on its own using only the                                                               
company's budget and capital availability.                                                                                      
                                                                                                                                
MR. THOMPSON  said his company  has experience in  bringing other                                                               
independents to  Alaska and  in raising capital  for Alaska.   It                                                               
brought Ramshorn  Exploration and  two companies out  of Calgary,                                                               
Bow  Valley Energy  and TG  World Energy,  which it  later bought                                                               
out.  Additional capital is now  being sought for Mustang as well                                                               
as the company's  three- to five-year exploration  program.  When                                                               
his company  started fund raising  18 months ago,  materials were                                                               
sent  to 210  firms.   Of the  210, only  19 had  an interest  in                                                               
Alaska  and  after further  review  only  2  of the  19  remained                                                               
interested.   In  talking with  many of  the 210  firms, two  key                                                               
things were heard.  Most  commonly heard was that Alaska's fiscal                                                               
regime   is  complex   with  a   high  government   take.     The                                                               
progressivity   factor  was   criticized,  with   some  companies                                                               
comparing it  to the  federal windfall profits  tax of  the early                                                               
1980s  that caused  many  domestic companies  to  go overseas  to                                                               
explore.  His company is  encouraged the state is making positive                                                               
change  with SB  21 and  is communicating  this to  others.   The                                                               
second most common  thing heard was that  companies are investing                                                               
in Lower  48 source rocks  and shale,  which are much  quicker on                                                               
production and lower cost capital  per reserve.  He reported that                                                               
his company is in final  negotiations with a Lower 48 independent                                                               
that has never invested in  Alaska.  Communication continues with                                                               
this company  about the legislature's  progress in  making Alaska                                                               
more competitive through some of the changes being contemplated.                                                                
                                                                                                                                
1:16:32 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON displayed  a map depicting his  company's acreage on                                                               
the North Slope  (slide 3).  He said his  company's 105,000 acres                                                               
are right next  to the Prudhoe Bay field,  Badami, Point Thomsen,                                                               
Kuparuk River  Unit, the  Coleville area,  and the  Alpine field.                                                               
His  company has  discovered 44  million barrels  of oil  proved,                                                               
plus probable reserves.   So far the possible reserves  on all of                                                               
the company's  projects are  around 150  million barrels.   Using                                                               
three-dimensional  seismic  his   company  has  mapped  potential                                                               
prospects that are  being further assessed, but  the tally, which                                                               
needs  to  be  confirmed  with further  drilling,  is  about  700                                                               
million barrels gross recoverable.                                                                                              
                                                                                                                                
MR.  THOMPSON  discussed  the difference  his  company  can  make                                                               
(slide 4).  Based  on his work on the North Slope  as a major and                                                               
now as an independent, he said  he believes that "new work in the                                                               
existing  fields  to  increase production  above  their  existing                                                               
declines will  not - by  itself - level Alaska's  oil production.                                                               
It  will  also  take production  from  exploration  discoveries."                                                               
Alaska  needs exploration  and production,  not just  production.                                                               
Some  companies,  including  some  of the  majors,  have  stopped                                                               
exploring on  state lands.  While  they do have huge  resource in                                                               
the existing  fields, that alone  is not going to  solve Alaska's                                                               
problem of  increasing production in the  existing legacy fields.                                                               
To  turn the  production  curve  up, it  is  also  going to  take                                                               
exploration and  new discoveries like  those of his company.   As                                                               
legislators decide on  exactly what changes to make,  one size is                                                               
not  necessarily going  to  fit  all.   There  are two  different                                                               
businesses in  Alaska in  the oil industry  - that  of production                                                               
development  and  that of  exploration  -  different players  and                                                               
different risks so different incentives can make the difference.                                                                
                                                                                                                                
1:19:36 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON said  anything included in CSSB  21(FIN) am(efd fld)                                                               
should incentivize the  North Slope majors into what  they do the                                                               
best - safely  and reliably abate the legacy  fields' decline and                                                               
extract the maximum amount of oil  from existing fields.  But the                                                               
legislation must also do a  second thing, and that is incentivize                                                               
the explorers in  what they well - find and  develop the billions                                                               
of barrels of  additional oil still left in smaller  pools on the                                                               
North Slope.   He explained  the production  graph on slide  4 is                                                               
for  the Mustang  discovery, plus  his company's  other potential                                                               
discoveries  of Tofkat,  Beechey Point,  Telemark, and  Appaloosa                                                               
that still require delineation.   Successful delineation of those                                                               
in  the next  couple years  would add  production of  over 50,000                                                               
barrels of  oil per  day.   That is  significant, he  said, given                                                               
that between 2012  and 2011, North Slope  oil production declined                                                               
about  50,768 barrels  per day.    Developments from  exploration                                                               
could replace all of that  production falloff and the state could                                                               
achieve no  decline for a  period of time.   He said  he believes                                                               
that with  two or three  more exploration companies on  the North                                                               
Slope repeating what Brooks Range  Petroleum is doing, and if the                                                               
majors can be incentivized in  additional development in existing                                                               
fields, the production curve could  be turned upward like what is                                                               
being seen in some of the Lower 48 states.                                                                                      
                                                                                                                                
MR. THOMPSON  noted that the  aforementioned fields  belonging to                                                               
Brooks  Range Petroleum  represent  about $2  billion in  capital                                                               
spending, $4-5 billion in state  revenues, and significant Alaska                                                               
hire.   He  reminded  members about  the  testimony provided  [on                                                               
3/25/13]  by Econ  One Research  in  which slide  20 showed  that                                                               
40,000-44,000  new barrels  of oil  per  day would  be needed  to                                                               
offset  the fiscal  impact  of CSSB  21(FIN)  am(efd fld)  versus                                                               
ACES.  Drawing  attention back to the significance of  slide 4 in                                                               
his  own   presentation,  Mr.  Thompson  pointed   out  that  the                                                               
exploration discoveries of Brooks  Range Petroleum, if brought on                                                               
to development, would be above 50,000 new barrels a day.                                                                        
                                                                                                                                
1:22:44 PM                                                                                                                    
                                                                                                                                
MR.  THOMPSON reviewed  the positive  provisions his  "successful                                                               
exploration  company"  sees  in  CSSB  21(FIN)  am(efd  fld)  and                                                               
discussed what could  be changed in the bill to  make Alaska even                                                               
more competitive  and to  help newly  started companies  like his                                                               
that  are in  different financial  circumstances than  the majors                                                               
(slide  5).    Eliminating  progressivity is  very  positive  and                                                               
simplifies the  tax calculation,  he said.   From  his experience                                                               
talking with  over 200  companies over the  last 18  months, this                                                               
will be  a big  public relations  plus for  the State  of Alaska.                                                               
However, raising the base tax rate  from 25 percent to 35 percent                                                               
is a negative;  he suggested a compromise of 30  percent.  The $5                                                               
per barrel produced  credit is positive and an  innovative way to                                                               
help balance producer and state  take at low oil prices, although                                                               
it may be worthwhile for the  Department of Revenue to retest the                                                               
economics to  see if more may  be needed or some  other mechanism                                                               
may be needed at prices below $80 a barrel.                                                                                     
                                                                                                                                
MR.  THOMPSON said  very important  to his  company is  the carry                                                               
forward loss  credits, given the significant  investment required                                                               
prior to  production which  will not  start until  fourth quarter                                                               
2014.  The increase of this  credit from 25 percent to 35 percent                                                               
and interest on  the unused credits is a big  positive.  Pointing                                                               
out that  his company  does not have  current production  and may                                                               
have  these carry  forward  loss  credits for  some  time in  the                                                               
future, he suggested  it would be helpful to allow  the credit to                                                               
be  taken against  any payments  to  the state,  such as  against                                                               
royalties,  or to  be able  to transfer  these credits  to others                                                               
rather than having to defer them.                                                                                               
                                                                                                                                
1:25:39 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON  noted that  in the  original version  of SB  21 the                                                               
small producer credit  of $12 million per year  was extended from                                                               
2016  to  2022,  something  that would  have  really  helped  his                                                               
company because peak  production will not be  reached until after                                                               
2016.  [Because  CSSB 21(FIN) am(efd fld) sunsets  this credit in                                                               
2016], a small  producer like Brooks Range  Petroleum, with first                                                               
production  in fourth  quarter 2014,  will be  unable to  utilize                                                               
these credits.   This negative hurts his  company's economics and                                                               
presents even more challenge in  having to raise even more funds.                                                               
Reinstating this credit  to 2022 would be a positive  for the few                                                               
small producers existing in Alaska  because it would be more cash                                                               
flow to put into facilities and drilling.                                                                                       
                                                                                                                                
MR. THOMPSON  stressed the  qualified capital  expenditure credit                                                               
is  probably the  thing that  has  helped his  company the  most.                                                               
None of these credits have been  put into the owners' pockets, he                                                               
said, this  immediate cash  has been  put into  drilling programs                                                               
and seismic and right now is  helping to fund part of the Mustang                                                               
development facilities  and the  drilling in  2014.   His company                                                               
would not be developing Mustang  right now without these credits;                                                               
development  would have  been deferred  by  about a  year if  his                                                               
company had had to live just  within its capital availability.  A                                                               
negative  in  CSSB 21(FIN)  am(efd  fld)  is that  the  qualified                                                               
capital  expenditure  credit  goes  away  at  the  end  of  2013.                                                               
Extending the  qualified capital  expenditure credit even  to the                                                               
end of 2016  would help his company get pasts  its first project.                                                               
Understanding  the  state's concern  about  the  amount of  these                                                               
credits, he suggested limiting the  credit to small producers and                                                               
limiting  the amount  to $40-$50  million per  year per  company.                                                               
Another way  to continue this  credit without hurting  the state,                                                               
he said,  would be to target  the credit to specific  items where                                                               
companies  must show  there will  be a  production increase.   He                                                               
added he  is unaware of  any companies  that have not  used these                                                               
credits for  anything but production  or reserves, but  has heard                                                               
otherwise from the governor and he  therefore would like to see a                                                               
table of what companies have used them for.                                                                                     
                                                                                                                                
1:29:16 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON  stated the  gross revenue  exclusion (GRE)  is very                                                               
helpful and will  incentivize new oil production  on more leases.                                                               
However, a  negative is that  the GRE was previously  proposed at                                                               
30 percent,  but in CSSB  21(FIN) am(efd  fld) it is  20 percent.                                                               
He  suggested a  GRE of  25  percent as  a balance  to state  and                                                               
producer take.                                                                                                                  
                                                                                                                                
MR. THOMPSON  concluded by pointing  out his  exploration company                                                               
has never had an exploration  incentive credit on the North Slope                                                               
because it  has not drilled  wells more  than 22 miles  away; his                                                               
company  has drilled  closer than  that,  but has  found new  oil                                                               
reserves.  He  said his company is  significantly disturbed [that                                                               
the 30  percent exploration incentive credit  originally included                                                               
in SB  21 for exploration  wells anywhere  on the North  Slope is                                                               
not  included  in CSSB  21(FIN)  am(efd  fld)].   He  urged  this                                                               
provision  be  reinstated,  saying  his company  would  put  this                                                               
credit  to   good  use  in   additional  seismic   and  drilling.                                                               
Reinstating the credit,  even if just for  small producers, would                                                               
be helpful.   He further  suggested this credit could  be limited                                                               
to $25  million per company  per year and  could be run  for five                                                               
years  to see  if it  is  effective.   He predicted  it would  be                                                               
effective in  his company's  case because in  the past  the other                                                               
credits helped his  company drill three wells instead  of two and                                                               
an exploration credit could do the same thing.                                                                                  
                                                                                                                                
1:31:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON inquired about  the plans that Brooks Range                                                               
Petroleum has for production facilities.                                                                                        
                                                                                                                                
MR.  THOMPSON replied  this summer  his company  is in  the final                                                               
engineering design  stages for its  stand-alone facilities.   The                                                               
company  plans to  be self-sufficient,  building its  own modular                                                               
facilities with  a lot of Alaska  hire and then trucking  them to                                                               
the North Slope.  Capacity is  15,000 barrels of oil per day, but                                                               
each facility module can later  be increased if additional oil is                                                               
found.  He said slides 6  and 7 include photographs of the gravel                                                               
pad where the facilities will be installed in 2014.                                                                             
                                                                                                                                
1:32:52 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON, responding to Co-Chair  Saddler, said the estimated                                                               
cost  for the  aforementioned  facility will  be  just over  $200                                                               
million for  total facilities, plus  $340 million  on development                                                               
drilling, with the whole project being over $570 million.                                                                       
                                                                                                                                
CO-CHAIR  SADDLER inquired  whether  the credit  in CSSB  21(FIN)                                                               
am(efd  fld) for  Alaska manufacture  will be  attractive to  Mr.                                                               
Thompson's  company.   He further  inquired  whether the  company                                                               
intends to fabricate these modules in Alaska.                                                                                   
                                                                                                                                
MR. THOMPSON  answered it would,  and said various  equipment and                                                               
components are made that could  be ordered, but the final modular                                                               
construction, as  well as  hauling to the  North Slope,  would be                                                               
done within  Alaska and he  would think  some of that  work would                                                               
qualify for that particular item in the bill.                                                                                   
                                                                                                                                
CO-CHAIR SADDLER asked how important  this credit would be to Mr.                                                               
Thompson's company.                                                                                                             
                                                                                                                                
MR. THOMPSON confessed he does  not fully understand whether this                                                               
particular credit would come to  Brooks Range Petroleum or to the                                                               
companies  that  are building  the  facilities.   He  offered  to                                                               
provide the committee  with a figure in regard to  the portion of                                                               
the  facilities  that  would  qualify  under  this  credit.    He                                                               
presumed the  credit would help  some and would  incentivize that                                                               
the work is done within the state of Alaska.                                                                                    
                                                                                                                                
1:34:45 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK  inquired how  long  Mr.  Thompson has  been                                                               
operating in Alaska.                                                                                                            
                                                                                                                                
MR. THOMPSON  replied the parent company,  Alaska Venture Capital                                                               
Group,  began leasing  acreage in  1999.   Seismic  was run  soon                                                               
after that,  followed by  assessing and  putting together  a good                                                               
exploration portfolio.   Brooks  Range Petroleum  Corporation was                                                               
formed  in 2006,  with  exploration,  engineering, and  operating                                                               
personnel located  in Anchorage.   The company  started operating                                                               
its own  wells in  2006 and  has drilled  every year  except this                                                               
winter in which the focus is on development.                                                                                    
                                                                                                                                
REPRESENTATIVE TUCK  asked how soon Brooks  Range Petroleum might                                                               
be  able to  single-handedly make  up that  loss [equivalent]  of                                                               
40,000-44,000 barrels per day.                                                                                                  
                                                                                                                                
MR.  THOMPSON responded  the  Mustang project  will  be put  into                                                               
production in  third quarter 2014 and  will be ramped up  by 2016                                                               
to about  15,000 barrels a day.   Also being looked  at for first                                                               
quarter 2014 is  Appaloosa, an offset to Mustang,  and the Tofkat                                                               
discovery.   Drawing attention to  slide 4, he said  Brooks Range                                                               
Petroleum could  produce and get  up to roughly 40,000  barrels a                                                               
day just  on its  own by  2017.   The hurdle  of 40,000  could be                                                               
achieved  much faster  with  work  in the  legacy  fields by  the                                                               
majors and by  other independents that are drilling  on the North                                                               
Slope.   It will  take everyone together,  but it  is significant                                                               
what one independent can do and one exploration company can do.                                                                 
                                                                                                                                
REPRESENTATIVE  TUCK  thanked Mr.  Thompson  for  his quote  that                                                               
exploration does  lead to exploration.   Regarding it  being said                                                               
that the  qualifying tax  credits do not  lead to  production, he                                                               
inquired what  could be done  to make  it more accountable  so it                                                               
can be demonstrated it leads to production.                                                                                     
                                                                                                                                
MR. THOMPSON  answered that is  the most puzzling comment  he has                                                               
seen quoted in the newspapers and  by some within the state.  His                                                               
company  has  put  every  dollar of  credit  received  back  into                                                               
seismic  or drilling,  resulting in  these discoveries  which are                                                               
confirmed, proved reserves  by an outside consultant.   The state                                                               
owns  one-sixth of  those  almost 50  million  barrels, plus  the                                                               
taxation on  production.  He is  unaware of which company  is not                                                               
using  credits to  bring  reserves  to the  table  or  not be  in                                                               
production.  His  company is willing to be  held accountable that                                                               
if  it  has  continued  credits  it  shows  proof  it  can  bring                                                               
production and new reserves.                                                                                                    
                                                                                                                                
1:38:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON  inquired   whether  Mr.  Thompson  would                                                               
choose ACES or CSSB 21(FIN) am(efd fld) as written.                                                                             
                                                                                                                                
MR. THOMPSON replied  he would rather see "SB 21"  improved.  For                                                               
a new company without production,  ACES provides a higher rate of                                                               
return because  of the tax  credits.  However, ACES  becomes very                                                               
penalizing  at high  oil prices  and  when his  company is  under                                                               
production the  progressivity under  ACES will be  very negative.                                                               
In trying to attract funding  his company gets nowhere with ACES;                                                               
the progressivity  has turned off  so many companies to  not even                                                               
want to  look at Alaska.   Therefore, his answer would  be for an                                                               
improved "SB 21" with a balance  that both industry and the state                                                               
can feel good about.                                                                                                            
                                                                                                                                
1:40:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE drew  attention  to  the last  point  on slide  2                                                               
regarding the  sending of advertising  materials to 210  firms in                                                               
2011  and today  only  2  remain interested.    He asked  whether                                                               
adoption  of "SB  21" would  affect  investment capital  becoming                                                               
available to producers and explorers within Alaska.                                                                             
                                                                                                                                
MR. THOMPSON responded his company  is in final negotiations with                                                               
a Lower  48 independent  that will not  make its  final decisions                                                               
for  the  closing until  after  the  legislative session.    That                                                               
company wants to know with certainty  what the terms are going to                                                               
be  so economics  can  be  run for  making  a  final decision  to                                                               
invest, which is why he hopes  some of these changes can be made.                                                               
He shared his  experience of being at a meeting  in New York with                                                               
one of  the largest private  equity firms  in the world  that had                                                               
expressed interest in Alaska.  He  said he knew he was in trouble                                                               
for  attracting investment  when  he walked  into the  conference                                                               
room and  saw that the walls  from floor to ceiling  were covered                                                               
with geologic and seismic maps of  the Lower 48 source rock plays                                                               
-  no conventional  prospects, nothing  from Alaska,  just source                                                               
rock plays.   The  equity firm  was candid with  him that  it saw                                                               
that  those  reserves could  be  put  on  faster, could  be  more                                                               
significant for  the firm, and  were lower risk  than exploration                                                               
or development in Alaska.  To  the positive, he continued, he has                                                               
found one company that does  love conventional exploration and is                                                               
very interested  in Alaska,  so he  remains optimistic.   Because                                                               
his  company's   sole  vision  is  to   become  Alaska's  premier                                                               
independent oil and gas company,  it will continue to keep Alaska                                                               
as its only focus.                                                                                                              
                                                                                                                                
1:43:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON inquired how  much capital for Mustang will                                                               
be  expended before  December 31  that would  qualify for  the 20                                                               
percent tax credit.                                                                                                             
                                                                                                                                
MR. THOMPSON  answered he does  not have  that table in  front of                                                               
him  and will  get the  exact number  to the  committee, but  his                                                               
guess is roughly $27 million for  the road and everything that is                                                               
currently  underway.    A  lot of  engineering  and  ordering  of                                                               
equipment remains  to be done  this year.   He guessed  that less                                                               
than 20 percent of the total  $577 million will be spent in 2013.                                                               
Most of it will be  the actual equipment and modular construction                                                               
in 2014 and then  the drilling in 2014 and 2015,  which is why he                                                               
asked if  things could at  least be extended  on some of  this to                                                               
2016, and certainly the small producer credit to 2022.                                                                          
                                                                                                                                
1:44:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER asked whether it  is Mr. Thompson's opinion that                                                               
the  high rates  of government  take under  ACES are  the biggest                                                               
barrier to  entry into Alaska,  or should other things  be looked                                                               
at to improve investment and competition on the North Slope.                                                                    
                                                                                                                                
MR. THOMPSON  replied the high  government take is what  he heard                                                               
most often  in his phone calls  with the 200 companies  that said                                                               
they are  not interested.   The image of  Alaska is hard  to turn                                                               
around.   The start  of ACES  put Alaska in  a negative  image of                                                               
high government  take and the taking  away of the upside  at high                                                               
prices.   He  is one  of several  ambassadors discussing  how the                                                               
state is  working to improve  things and what the  positives are,                                                               
but ACES has certainly made it an uphill battle.                                                                                
                                                                                                                                
1:46:18 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER asked  whether Mr. Thompson would  say Alaska is                                                               
dismissed out of  hand or is dismissed after being  looked at and                                                               
the high government take is seen.                                                                                               
                                                                                                                                
MR. THOMPSON  responded he does not  even get a foot  in the door                                                               
with  many companies  because the  high government  take is  just                                                               
dismissed out of hand.   When he did get in the  door with the 19                                                               
companies, which  were private equity firms  and other producers,                                                               
they realized  the take was high  but wanted to see  the resource                                                               
base and look  at the new conventional exploration.   Some wanted                                                               
to look at the unconventional  shale resource on the North Slope,                                                               
something  his   company  plans  to  pursue   after  getting  its                                                               
conventional prospects  on line.   The resource  base got  the 19                                                               
companies very  interested; 2  are now left  after putting  it to                                                               
pencil.   The 17 that  dropped out  found better rates  of return                                                               
elsewhere, such as the Bakken, Eagle Ford, and Gulf of Mexico.                                                                  
                                                                                                                                
1:47:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SADDLER inquired whether  independents like Brooks Range                                                               
Petroleum need  a lower government  take than do  large producers                                                               
in order  to "make a buck"  in Alaska, given independents  do not                                                               
have downstream refining and transportation interests.                                                                          
                                                                                                                                
MR. THOMPSON answered reasonable  government take would certainly                                                               
help independents, but tax credits  would help companies like his                                                               
the most.   He said  he understands if  the state must  limit how                                                               
much that is per year and if a  time table must be put on it, say                                                               
five years out,  to determine whether it was used  wisely and got                                                               
results  or should  be stopped.   For  small companies  like his,                                                               
credits  are dollars  that  can be  reinvested  quickly and  they                                                               
lessen the  amount of funds  that must  be raised until  there is                                                               
cash  flow from  oil production.   The  percentage of  government                                                               
take is certainly very important and  he knows that in the legacy                                                               
fields a  base rate  of 30  percent instead  of 35  percent would                                                               
help the  majors.  For  small producers/explorers, being  able to                                                               
keep the tax credits for a bit would help overall.                                                                              
                                                                                                                                
1:49:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.   WILSON  related  it  is   being  heard  from                                                               
companies that they want surety, but  now she is hearing from Mr.                                                               
Thompson to  try something for  a while and then  re-evaluate it.                                                               
Because she has  heard so much about surety she  does not want to                                                               
include something  in the bill that  could change later on.   She                                                               
asked how Mr. Thompson would  feel about putting something in the                                                               
bill for five years, period, with no re-evaluation.                                                                             
                                                                                                                                
MR. THOMPSON  replied his  opinion is  it may be  a mix  of both.                                                               
For  example, the  base tax  rate, eliminated  progressivity, and                                                               
establishment  of a  per-barrel  credit are  the fundamental  tax                                                               
structure  that would  hopefully stay  in place  for a  very long                                                               
time.   Other issues,  like the small  producer credit  for small                                                               
producers and  the gross revenue exclusion  for incentivizing new                                                               
oil  production, could  be kept  the same  through 2022  and then                                                               
reviewed for effectiveness.   What hurts is  putting something in                                                               
and then [changing it] two or  three years later.  There has been                                                               
such a flux for quite a  period of time with ACES, the production                                                               
profits  tax (PPT)  before that,  and the  economic limit  factor                                                               
(ELF) before  that.  If the  basic fundamentals were set  and not                                                               
changed for  the foreseeable future,  there may be  some elements                                                               
the state wants to review every  five years for effectiveness.  A                                                               
combination would perhaps be a wise thing to do.                                                                                
                                                                                                                                
1:52:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE inquired whether  the Competitiveness Review Board                                                               
proposed  under CSSB  21(FIN)  am(efd fld)  would  be suited  for                                                               
dealing with the aforementioned by Mr. Thompson.                                                                                
                                                                                                                                
MR. THOMPSON responded the Competitiveness  Review Board could be                                                               
very effective,  in his opinion.   He said he serves  on a number                                                               
of  public company  corporate boards  and a  board does  not have                                                               
time, and  the board members all  do not have expertise,  to deal                                                               
with  certain  topics,  so  committees  are set  up,  such  as  a                                                               
compensation committee  or audit committee.   So, he  thinks this                                                               
Competitiveness Review Board  could play that kind of  role.  The                                                               
board should not be changing  things every year, the fundamentals                                                               
should stay in  place for a long  time, but in five  years such a                                                               
board could look  at things like an  exploration incentive credit                                                               
and whether it  has or has not  worked.  A key thing  is that the                                                               
legislature must trust  the members of that board,  so would need                                                               
to be very  careful who it puts  on the board, and  would need to                                                               
allow the  board to hire  the third-party consultants.   However,                                                               
it  would be  a challenge  if there  was not  that trust  and the                                                               
legislature  or legislative  committees  started  hiring its  own                                                               
consultants.  Also, in his  opinion, anyone serving on that board                                                               
should have  no conflict  of interest or  any economic  gain from                                                               
the oil  and gas industry.   He said he  does think such  a board                                                               
could bring  to the  table the  necessary expertise,  because all                                                               
these matters are very complex and  it is hard even for people in                                                               
the business to  keep up with all the latest  in technologies and                                                               
changes.  So, it could be very positive if done correctly.                                                                      
                                                                                                                                
1:55:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  inquired  whether  the proposed  makeup  of  the                                                               
board, five  members from  the business  community and  four from                                                               
the government, is an appropriate ratio.                                                                                        
                                                                                                                                
MR. THOMPSON answered this is the  first time he has had to think                                                               
about this  issue, so his response  is an off-the-top-of-his-head                                                               
reaction to the question.   In the end, he said,  what is done or                                                               
not  done on  policy for  oil  taxation or  oil incentives  truly                                                               
affects  the rate  of return  to other  areas.   If that  rate of                                                               
return is positive, more capital  and more companies will come to                                                               
the state.   Because of that  business aspect, it may  make sense                                                               
to have five  business and four government  members and hopefully                                                               
they are all folks that can teamwork well together.                                                                             
                                                                                                                                
1:56:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  asked what  price Mr. Thompson  meant when                                                               
he talked about a high-price range.                                                                                             
                                                                                                                                
MR. THOMPSON  drew attention  to slide 3  of Econ  One Research's                                                               
[3/25/13 presentation to  the committee] and said  right now ACES                                                               
is detrimental  when it  gets above $80  West Coast  Alaska North                                                               
Slope  (ANS) price,  and above  $100 the  gap between  government                                                               
take  and producer  take  really widens.    After companies  have                                                               
taken the major  risks, not being able to have  as much upside at                                                               
prices "anywhere north  of $100" is a  fundamental principle that                                                               
needs to be addressed.  The  graph shows CSSB 21(FIN) am(efd fld)                                                               
does a better job of that.                                                                                                      
                                                                                                                                
1:57:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR stated  an idea  behind CSSB  21(FIN) am(efd                                                               
fld) is  that one size  fits all, thus  no winners or  losers are                                                               
picked.   Understanding  Mr. Thompson  is  saying an  exploration                                                               
company is different than the  three majors, she inquired whether                                                               
he therefore thinks  a bill that separates  explorers and majors,                                                               
similar  to what  ACES does,  is better  in terms  of being  more                                                               
specific to the business needs of small versus large companies.                                                                 
                                                                                                                                
MR. THOMPSON replied  he does not think it  necessary to separate                                                               
the bill at all; with some  tweaks [CSSB 21(FIN) am(efd fld)] can                                                               
get there  for both majors and  companies like his.   He recalled                                                               
the 3/26/13  testimony by  "BP, Exxon, and  Conoco" in  which all                                                               
three companies felt  that most of the impact in  Alaska will not                                                               
be  from  exploration but  from  improving  production in  legacy                                                               
fields.  However, he  thinks it is going to take  both.  While he                                                               
understood  their  perspectives  given that  a  small  percentage                                                               
increase in fields as huge as  Prudhoe Bay or Kuparuk will make a                                                               
huge difference for  the state, he said he thinks  the state will                                                               
regret that  10-20 years  down the road  because the  state still                                                               
has to have exploration.  Drawing  attention to slide 5, point 6,                                                               
he said  if the majors are  not going to explore  on state lands,                                                               
which he  heard yesterday, perhaps there  is no need for  them to                                                               
have an  exploration incentive credit.   Perhaps  the exploration                                                               
incentive  credit  could  apply   only  to  small  producers  and                                                               
explorers and  be run for  a few years for  the state to  see how                                                               
effective  it has  been, which  would  limit how  much the  state                                                               
treasury  has to  pay.   Additionally,  it could  be capped;  for                                                               
example,  each company  could  be  limited to  no  more than  $25                                                               
million of  credits per year  for exploration drilling.   A limit                                                               
would prevent  the state from  being harmed by  excessive credits                                                               
and such a credit would  target the small producers and explorers                                                               
that, for  the most part,  are doing exploration on  state lands.                                                               
The big companies are doing  wonderful exploration in other areas                                                               
like the National Petroleum Reserve-Alaska and offshore.                                                                        
                                                                                                                                
2:01:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  observed the Mustang project  was sanctioned                                                               
under ACES  and asked  whether, if  looking back,  elimination of                                                               
some  of the  credits  would have  prevented  Mustang from  going                                                               
forward.  Under  CSSB 21(FIN) am(efd fld) the  carry forward loss                                                               
credit will  be increased, she  continued, but  effectively there                                                               
will  be a  10 percent  decrease  because the  other two  credits                                                               
[will be sunset].   She asked whether this  is significant enough                                                               
that Mr.  Thompson's company will  have to re-evaluate  its plans                                                               
for other projects going forward if this legislation passes.                                                                    
                                                                                                                                
MR.  THOMPSON responded  "exactly  right," but  said his  company                                                               
will continue  trying to  make all these  projects.   Without the                                                               
credits  his  company  will  not have  that  cash  to  re-deploy.                                                               
Additionally, his  company cannot take advantage  of some credits                                                               
right away,  such as  the carry forward  loss credit,  because it                                                               
does not have production to offset  with a tax bill.  His company                                                               
will have to  live within its capital means,  which will probably                                                               
slow  down developments.   The  Mustang project  is a  real world                                                               
example  of   the  difference  made  by   the  qualified  capital                                                               
expenditure  credits,  he continued,  all  of  which his  company                                                               
basically  returned.    In  winter 2011,  the  first  wells  were                                                               
drilled in the Mustang prospect  and discovery was made.  Follow-                                                               
up  wells were  drilled in  2012, enough  oil was  seen, and  now                                                               
things  are underway,  as evidenced  by  slides 6-7.   Had  those                                                               
credits not been  received his company would still  have done the                                                               
work, but not as many wells  would have been drilled every year -                                                               
the  company  would  be  drilling  wells  right  now  instead  of                                                               
building  a gravel  road because  things would  have been  pushed                                                               
out.   For  companies like  his,  being able  to re-deploy  state                                                               
credits into drilling and seismic has been very helpful.                                                                        
                                                                                                                                
2:03:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SADDLER asked  for Mr.  Thompson's  thoughts about  the                                                               
third category gross revenue exclusion qualification.                                                                           
                                                                                                                                
MR. THOMPSON  answered about  60 percent of  his career  was with                                                               
the large major,  ARCO, focusing on the North Slope.   He said he                                                               
is unsure what the language means  so he agrees there needs to be                                                               
some  clarity  in  that  third provision  around  the  issues  of                                                               
metered and  measured, as well  as exactly  what it is  that will                                                               
receive that  element.   North Dakota,  for example,  has special                                                               
tax incentives  that are very  specific for  qualifying secondary                                                               
and  tertiary recovery  projects.   Montana gives  reductions for                                                               
horizontal wells.   Also, when a new project  starts, Montana has                                                               
a  decline curve  and  once production  goes  above that  decline                                                               
curve for new major projects,  like tertiary recovery or enhanced                                                               
oil recovery,  the producer gets  reduced tax rates.   The United                                                               
Kingdom  brownfields  also  have  clarifications.   It  would  be                                                               
helpful to  everybody if  industry and the  state could  sit down                                                               
under that  third element  - which does  not affect  Brooks Range                                                               
Petroleum much  at this time  - and  really define what  types of                                                               
work would qualify to get that  exclusion.   These three examples                                                               
could  be looked  at  and put  into  the bill  as  examples.   In                                                               
further response,  he agreed to  provide by electronic  mail more                                                               
information about North Dakota, Montana, and the United Kingdom.                                                                
                                                                                                                                
2:07:29 PM                                                                                                                    
                                                                                                                                
KARA MORIARTY,  Executive Director, Alaska Oil  & Gas Association                                                               
(AOGA), provided  a PowerPoint presentation and  paraphrased from                                                               
the  following written  testimony [original  punctuation provided                                                               
with some formatting changes]:                                                                                                  
                                                                                                                                
          AOGA is the professional trade association that                                                                       
     represents  15 member  companies  who  account for  the                                                                    
     majority  of  oil  and  gas  exploration,  development,                                                                    
     production, transportation and refining  of oil and gas                                                                    
     onshore  and  offshore  in   Alaska  [slide  1].  These                                                                    
     comments  regarding Senate  Bill  21, and  specifically                                                                    
     Committee Substitute Senate Bill  21 (FIN) am(efd fld),                                                                    
     have  been  reviewed  by  all  members  and  have  been                                                                    
     approved unanimously.                                                                                                      
          In short Mr. Chairman, my members believe the                                                                         
     proposed  Committee Substitute  represents  a base  for                                                                    
     significant and  crucial tax  structure reform  of ACES                                                                    
     that will  help move  the State's fiscal  policy toward                                                                    
     Governor  Parnell's four  "core  principles". While  we                                                                    
     are  encouraged by  the  Committee  Substitute and  the                                                                    
     efforts by the Legislature  and the Administration thus                                                                    
     far to  try and significantly improve  Alaska's overall                                                                    
     global   attractiveness,   AOGA   believes   additional                                                                    
     changes are still  needed for the bill  to truly change                                                                    
     investment behaviors to the benefit of Alaskans.                                                                           
                                                                                                                                
2:08:51 PM                                                                                                                    
                                                                                                                                
          The industry's greatest challenge today, which we                                                                     
     share with the  State is the decline  of oil production                                                                    
     from the North  Slope [slide 3]. A healthy  oil and gas                                                                    
     industry  is one  that sees  the  economic benefits  of                                                                    
     continuing to invest in projects  in Alaska and keeping                                                                    
     its employees  here, where  they volunteer  their time,                                                                    
     talent and  treasure to make  Alaska a better  place to                                                                    
     live for  us all.  Corrections to  the ACES  tax regime                                                                    
     will remove impediments  to development and exploration                                                                    
     and assist  the industry in investing  in projects that                                                                    
     could  both extend  the life  of TAPS  and open  up new                                                                    
     resources to  long term development. We  want to create                                                                    
     developments that will last  for decades more, creating                                                                    
     jobs  for  our  children   and  opportunities  for  our                                                                    
     communities to flourish.                                                                                                   
          If a restructuring and tax rate reduction make                                                                        
     investments  here  more  competitive,  or  better  yet,                                                                    
     "attractive",   companies  will   want  to   make  more                                                                    
     investments  here for  that  upside.  Deciding to  make                                                                    
     long term investments in  Alaska's North Slope requires                                                                    
     the  industry   to  see   potential  upside   to  their                                                                    
     investments and  assessing that the essential  risks of                                                                    
     those  investments  are  offset  by  the  opportunities                                                                    
     afforded   in    success.   Without    that   potential                                                                    
     opportunity  in  Alaska,  investment  dollars  will  be                                                                    
     spent elsewhere,  where risks are less  and opportunity                                                                    
     is greater.                                                                                                                
                                                                                                                                
2:10:18 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following                                                                         
written testimony [original punctuation provided with some                                                                      
formatting changes]:                                                                                                            
                                                                                                                                
     Core  Principles  to  Address  North  Slope  Production                                                                
     Decline [slides 4-5]                                                                                                 
          Throughout my testimony today, I will reference                                                                       
     Governor  Parnell's four  "core  principles"  so it  is                                                                    
     important  to  restate  them  here  as  they  offer  an                                                                    
     excellent   cornerstone  for   you   as  you   consider                                                                    
     potential   solutions  to   the  challenge   production                                                                    
     decline creates for Alaska:                                                                                                
         "First, tax reform must be fair to Alaskans."                                                                          
          "Second, it must encourage new production."                                                                           
          "Third, it must be simple, so that it restores                                                                        
          balance to the system."                                                                                               
          "Fourth, it must be durable for the long term."                                                                       
          We believe the addition of a fifth such principle                                                                     
     would be  required to meet Alaska's  goals, because the                                                                    
     challenge  is not  that there  are  too many  companies                                                                    
     pursuing  opportunities, but  that there  are too  few.                                                                    
     Alaska   should  therefore   avoid  tax   changes  that                                                                    
     artificially create "winners" and "losers."                                                                                
          Our goal today is to offer insights into how the                                                                      
     CSSB21 impacts  industry and we  have ideas of  how the                                                                    
     current tax  structure can be  modified to  better suit                                                                    
     the needs of the State.                                                                                                    
                                                                                                                                
2:11:20 PM                                                                                                                    
                                                                                                                                
     1. Repealing Progressivity. [slide 6]                                                                                  
     AOGA endorses the elimination of progressivity.                                                                          
          Impact of Progressivity as part of the ACES tax                                                                       
     rate  in industry  investment  decision  making is  the                                                                    
     single  most  influential  component  of  Alaska's  tax                                                                    
     structure  negatively  impacting  investment  decisions                                                                    
     related  to Alaskan  projects. Taxes  are  paid by  the                                                                    
     industry in  virtually every  jurisdiction in  which we                                                                    
     function  and so  we are  very familiar  with how  they                                                                    
     work.  But  the  uniformity   and  consistency  in  the                                                                    
     application   of  tax   impacts  as   they  relate   to                                                                    
     investment  decision  making   found  in  almost  every                                                                    
     jurisdiction  is  missing  in   Alaska.  As  my  member                                                                    
     companies  have  testified   in  the  past,  investment                                                                    
     decisions  are driven  by combining  high and  low case                                                                    
     scenarios where  costs and  revenues are  estimated and                                                                    
     best  case cash  flows and  worst case  cash flows  are                                                                    
     measured, risked and  analyzed. Each potential project,                                                                    
     in  every jurisdiction,  is measured  and compared  and                                                                    
     only  some  are  funded.  As  one  of  the  legislative                                                                    
     consultants,  Roger Marks,  pointed  out recently,  the                                                                    
     international  investment climate  is characterized  by                                                                    
     plenty  of  opportunities,  fluid capital,  but  finite                                                                    
     capital.  To  choose what  they  can  and cannot  fund,                                                                    
     companies  have  compared  each potential  project,  no                                                                    
     matter the  jurisdiction, by  application of  a uniform                                                                    
     investment  decision measuring  formula. When  Alaska's                                                                    
     tax system is quantified and  added to this measure for                                                                    
     proposed  Alaskan projects  the best  cases are  always                                                                    
     burdened with an  excessively high tax rate  and as the                                                                    
     assumed  high   cases  get  better,  the   burden  only                                                                    
     increases.  We can  find almost  no other  jurisdiction                                                                    
     that so burdens investment  return where the better the                                                                    
     cases  assumed for  the decision,  the  higher the  tax                                                                    
     burden that applies.                                                                                                       
          And as I have testified to before, progressivity                                                                      
     brings extraordinary  complexity to  the tax,  not only                                                                    
     in calculating what  the tax is, but  also in analyzing                                                                    
     what  the  amount  of  the  progressivity  is  for  any                                                                    
     particular  item that  affects a  taxpayer's Production                                                                    
     Tax Value (PTV).                                                                                                           
          The repeal of progressivity is consistent with                                                                        
     all   the  principles   outlined  above.   Its  removal                                                                    
     improves  fairness  because   operators  that  increase                                                                    
     margins   through  efficiency   would   no  longer   be                                                                    
     automatically  penalized.  Its removal  encourages  new                                                                    
     production  because  it  reduces   the  tax  burden  on                                                                    
     investment,  as  discussed  above.  Its  removal  is  a                                                                    
     significant  step toward  simplicity. And,  lastly, its                                                                    
     removal  enhances durability  because it  satisfies the                                                                    
     three preceding core principles.                                                                                           
                                                                                                                                
2:14:27 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following written                                                                 
testimony [original punctuation provided with some formatting                                                                   
changes]:                                                                                                                       
                                                                                                                                
     2. Increasing the base tax rate from 25 to 35%.                                                                        
     AOGA does not  endorse increasing the base  tax rate to                                                                  
     35%. [slide 7]                                                                                                         
          Let's go back to the industry investment decision                                                                     
     process again.  Increasing the  base tax  rate, burdens                                                                    
     every  investment  case with  a  higher  tax rate.  The                                                                    
     burden of a  35% versus a 25% rate is  easy to envision                                                                    
     as every middle  case and every worst  case scenario is                                                                    
     burdened with an additional 10%  tax rate. This assumed                                                                    
     cost  will  negatively  impact  the  potential  returns                                                                    
     deemed  available for  any  Alaskan  project and  drive                                                                    
     investments to  be made elsewhere. Increasing  the base                                                                    
     tax  rate is  contrary  to the  second core  principle;                                                                    
     there  is not  any  reasonable  argument that  suggests                                                                    
     increasing  the  base  tax  rate  would  encourage  new                                                                    
     production. Indeed, using  the progressivity formula as                                                                    
     a benchmark,  the ten percentage point  increase in the                                                                    
     base  tax  rate could  be  viewed  as equivalent  to  a                                                                    
     sustained  reduction in  oil price  of $25  per barrel,                                                                    
     all else being equal.   In other words, a sustained $25                                                                    
     per  barrel   price  change   would  be   needed  under                                                                    
     progressivity to  get the same  10% change in  the base                                                                    
     tax rate. Under progressivity,  each $1 increase in PTV                                                                    
     (or price, all  else equal) per barrel  would result in                                                                    
     a 0.4% increase  in the tax rate surcharge.  Thus, a 10                                                                    
     percentage  point   change  in   the  tax   rate  under                                                                    
     progressivity would  be equivalent  to a $25  change in                                                                    
     PTV or price because 25 = 10% divided by 0.4%.                                                                             
     3. Tax Credits [slide 8]                                                                                             
          Industry makes investments to seek returns. In                                                                        
     general,  tax credits,  because  they act  to offset  a                                                                    
     part  of  the costs  of  certain  investments when  the                                                                    
     expenditure is  made are an important  tool in reducing                                                                    
     the deemed risks of those expenditures.                                                                                    
          It is important to reinforce that there is no tax                                                                     
     credit  liability  for  the   State  at  all  until  an                                                                    
     investor invests  here. So it  costs the  State nothing                                                                    
     to offer  the credit until  the investment is  made and                                                                    
     at that point  the tax credit has  already succeeded in                                                                    
     what  it  is  supposed  to   do  -  namely  to  attract                                                                    
     investment dollars here.                                                                                                   
                                                                                                                                
2:16:10 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following written                                                                 
testimony [original punctuation provided with some formatting                                                                   
changes]:                                                                                                                       
                                                                                                                                
     A. Repeal of the  Qualified Capital Expenditure ("QCE")                                                                
     Tax Credit. [slide 8]                                                                                                  
     AOGA  does  not support  the  repeal  of the  Qualified                                                                  
     Capital Expenditure Tax Credit.                                                                                          
          Even while the elimination of progressivity would                                                                     
     improve  the  competitiveness  of  Alaskan  investments                                                                    
     from the present  ACES tax, the elimination  of the QCE                                                                    
     Credit   would  claw   back  one   important  financial                                                                    
     incentive  and a  part of  ACES that  actually acts  to                                                                    
     improve  the competitive  environment.  The QCE  Credit                                                                    
     depends  entirely on  how much  is  invested here,  and                                                                    
     provides benefits for investments  even when oil prices                                                                    
     are    lower.   While    the   benefit    from   ending                                                                    
     progressivity,  which  depends  on  the  price  of  oil                                                                    
     relative  to  a  producer's lease  expenditures,  helps                                                                    
     when oil  prices are higher  the QCE  provides benefits                                                                    
     across all  price levels.  At low  to mid-range  of oil                                                                    
     prices  the  loss  of QCE  Credit  would  outweigh  the                                                                    
     benefit from the end of progressivity.                                                                                     
          Repeal of the QCE credit is contrary to the                                                                           
     second  core  principle.   Furthermore,  because  every                                                                    
     producer's costs  are different and prices  will impact                                                                    
     them differentially,  AOGA fears the repeal  of the QCE                                                                    
     Credit is  worse than  creating "winners"  and "losers"                                                                    
     because  it only  creates  "losers" artificially  among                                                                    
     producers,   and   we   see   no   sound   tax   policy                                                                    
     justification for doing so.                                                                                                
          For these reasons, AOGA believes the elimination                                                                      
     of the QCE  tax credits would not serve  to attract new                                                                    
     business to  Alaska. Instead  of that,  one possibility                                                                    
     might  be  to  expand  the scope  of  the  "well  lease                                                                    
     expenditure" tax credit under  AS 43.55.023(l) so it is                                                                    
     available to producers on the  North Slope. This credit                                                                    
     has  several meaningful  advantages. First,  it focuses                                                                    
     investment   incentives   on   subsurface   intangible-                                                                    
     drilling  expenditures, which  are  a reasonable  proxy                                                                    
     for  direct spending  on well  activity  and, in  turn,                                                                    
     production.  Second, the  credit  is  clear because  it                                                                    
     uses  already  established   concepts  in  the  federal                                                                    
     Internal  Revenue Code.  Third, it  is fair  because it                                                                    
     applies equally  to well-related spending in  all areas                                                                    
     of  the  state,  without creating  winners  and  losers                                                                    
     merely on the basis of geography.                                                                                          
                                                                                                                                
2:18:53 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following written                                                                 
testimony [original punctuation provided with some formatting                                                                   
changes]:                                                                                                                       
                                                                                                                                
     B. The $5 dollar per barrel tax credit. [slide 9]                                                                      
     AOGA is  concerned that the  potential benefit of  a $5                                                                  
     dollar  per barrel  tax  credit  under AS  43.55.024(i)                                                                  
     will be offset by other burdens.                                                                                         
          There are multiple issues to balance when taking                                                                      
     in the  numerous proposed changes found  in CSSB21. The                                                                    
     removal of  progressivity, the  increase in  base rate,                                                                    
     elimination of  the QCE credit all  create interrelated                                                                    
     issues  and while  a $5  dollar per  barrel tax  credit                                                                    
     would provide  benefits both in  real tax costs  and in                                                                    
     investment decision  making, the weight of  the benefit                                                                    
     in respect  to the  other changes  is hard  to measure.                                                                    
     AOGA applauds  the concept of  tying incentives  to the                                                                    
     goal  of increased  production and  as such  allowing a                                                                    
     tax credit per barrel.                                                                                                     
     C. Small-Producer and Exploration Credits. [slide 10]                                                                
     AOGA  supports amending  CSSB21  to  extend the  small-                                                                  
     producer tax credit under  AS 43.55.024 and exploration                                                                  
     tax credits under AS 43.55.025  from the present sunset                                                                  
     dates in 2016 to a later date.                                                                                           
          The State had sound policy reasons for creating                                                                       
     these small  producer and exploration tax  credits, and                                                                    
     those  reasons are  just as  valid today  as they  were                                                                    
     then.  The current  CSSB21 does  not extend  the sunset                                                                    
     dates  beyond 2016,  even  though  AOGA believes  these                                                                    
     credits have increased  the likelihood of participation                                                                    
     by  new  industry  players  and  act  to  increase  the                                                                    
     opportunities   that  could   be  found   by  expanding                                                                    
     exploration.  The  purpose  of the  small-producer  tax                                                                    
     credit was to  attract new players to  Alaska who might                                                                    
     otherwise  have  been  deterred  from  coming  here  by                                                                    
       presumptions of increased risks and of higher-than-                                                                      
     average costs  and expenses. The success  of the credit                                                                    
     in attracting  new participants is  a fact  that cannot                                                                    
     be  denied.   AOGA  sees  this   success  in   its  own                                                                    
     membership, and in other companies  that have come here                                                                    
     and  are now  active.  Smaller producers  often have  a                                                                    
     different  perspective about  the opportunities  around                                                                    
     them, and  as such  can bring with  them new  ideas and                                                                    
     opportunities.  New  participants  with new  ideas  can                                                                    
     only  strengthen  and  improve  the  Alaskan  petroleum                                                                    
     industry  and  help  the  state  stem  the  decline  in                                                                    
     production.  We know  from  testimony  that the  small-                                                                    
     producer tax  credit has made a  material difference in                                                                    
     individual  companies'  decisions  to do  business  and                                                                    
     invest in Alaska.                                                                                                          
          The purpose and justification for the exploration                                                                     
     tax credits under AS 43.55.025  are equally clear. Huge                                                                    
     parts    of   this    state   remain    unexplored   or                                                                    
     underexplored.  Again,  these   tax  credits  are  only                                                                    
     earned when actual  expenditures for exploration occur.                                                                    
     The  credits  tangibly reduce  the  risks  faced by  an                                                                    
     explorer and  as such  incentivize them  to go  out and                                                                    
     search for oil and gas  that is much needed.  Increased                                                                    
     exploration  leads to  increased development  and these                                                                    
     credits  act  to  increase exploration  and  should  be                                                                    
     extended  as well.  Just as  with the  QCE credits  for                                                                    
     capital  investments,  there   is  no  exploration  tax                                                                    
     credit without  real money having  first been  spent on                                                                    
     exploration work that qualifies for these tax credits.                                                                     
                                                                                                                                
2:22:01 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following written                                                                 
testimony [original punctuation provided with some formatting                                                                   
changes]:                                                                                                                       
                                                                                                                                
     D.  Maintaining   transferability  of  "carried-forward                                                                
     annual loss" tax credits. [slide 11]                                                                                 
     AOGA supports the transferability of these losses.                                                                       
          We applaud that the CSSB21 maintains the                                                                              
     transferability of the  current "carried-forward annual                                                                    
     loss"   tax   credits   under  AS   43.55.023(b).   New                                                                    
     participants and  new explorers are many  times not yet                                                                    
     producing in the state or  only producing small volumes                                                                    
     of  oil  and  gas  and   as  such  have  little  or  no                                                                    
     production  tax liabilities.  The  ability to  transfer                                                                    
     their  losses to  others allows  them  to monetize  the                                                                    
     investments  they  have  already  made,  both  reducing                                                                    
     their  cost exposure  on the  original expenditure  and                                                                    
     hopefully  at   the  same  time   acquiring  additional                                                                    
     capital for more investment.                                                                                               
     E. New credit for Manufacturing [slide 12]                                                                           
     AOGA supports the new proposed manufacturing credit.                                                                     
          Although this credit is directed to the                                                                               
     incentivizing   of  development   and  manufacture   of                                                                    
     drilling and exploration methods  and materials, it may                                                                    
     not  have  a  great  impact on  the  reduction  of  the                                                                    
     current production  decline. However,  it is a  step in                                                                    
     the right direction to  incentivize jobs and additional                                                                    
     investment,  and having  more  jobs  and investment  in                                                                    
     Alaska is never a bad thing.                                                                                               
     4. Gross Revenue Exclusion. [slide 13]                                                                                 
     AOGA endorses the proposed  20% gross revenue exclusion                                                                  
     or GRE, but has concerns on breadth of applicability.                                                                    
          The GRE would, in calculation of the taxable                                                                          
     Production Tax  Value, exclude 20%  of the  Gross Value                                                                    
     at the  Point of  Production of  what we'll  call "non-                                                                    
     legacy" production,  and attempts  to apply to  new oil                                                                    
     within legacy  fields. AOGA supports  the concept  of a                                                                    
     GRE, and  initially we were  concerned that it  was too                                                                    
     narrowly focused because it would  have only applied to                                                                    
     those areas outside existing Units.                                                                                        
          The Governor's second "core principle" for tax                                                                        
     legislation   is   that    "it   must   encourage   new                                                                    
     production."  But, in  order to  get results  from such                                                                    
     encouragement,  the  tax legislation  must  incentivize                                                                    
     the  best opportunities  that  Alaska  has for  getting                                                                    
     results.  The current  CSSB21  attempts  to expand  the                                                                    
     application  of the  GRE and  tries  to include  legacy                                                                    
     fields, which is where at least  80 - 90 percent of the                                                                    
     3  billion-barrel  opportunity  in  the  central  North                                                                    
     Slope   that  Econ   One  identified   as  economically                                                                    
     recoverable earlier this session.                                                                                          
                                                                                                                                
2:24:40 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following                                                                         
written testimony [original punctuation provided with some                                                                      
formatting changes]:                                                                                                            
                                                                                                                                
          However, the current language causes concern                                                                          
     because of  the uncertain  nature of  the applicability                                                                    
     and the problem  that companies won't know  if they get                                                                    
     the  GRE until  after  the investment  is  made, so  in                                                                    
     essence, companies  cannot utilize the GRE  in modeling                                                                    
     economics   of  future   projects  in   legacy  fields.                                                                    
     Additionally, we  have concerns that  the determination                                                                    
     methodology will  be defined  after the bill  is passed                                                                    
     and be placed in future regulations.                                                                                       
          AOGA believes our concerns can be addressed by                                                                        
     additional  language to  provide clarity  and certainty                                                                    
     so the GRE is effective for industry.                                                                                      
     Oil and Gas Competitiveness Review Board [slide 14]                                                                    
     AOGA   does   not   support  the   formation   of   the                                                                  
     Competitiveness Review Board.                                                                                            
          The proposed Board provides an oversight and                                                                          
     review process  that we believe would  be burdensome to                                                                    
     the industry and  contravenes the Governor's principles                                                                    
     relating durability  in the long term.  The perspective                                                                    
     that  the  proposed changes  found  in  the Bill  would                                                                    
     provide a long term solution  to problems we know exist                                                                    
     are placed in jeopardy  because the very certainty that                                                                    
     is required for sound  investment decision making would                                                                    
     be placed  in question with  each annual report  of the                                                                    
     Board.  Instead of  moving forward  with projects  that                                                                    
     might help  stem decline,  industry resources  would be                                                                    
     used   to   assist   the  Board   in   collecting   and                                                                    
     understanding   complex   information  of   long   term                                                                    
     consequence.    Finally,    the    documentation    and                                                                    
     information the  Board might request  or require  is of                                                                    
     the highest proprietary value to  oil and gas companies                                                                    
     and confidentiality  concerns and  related complexities                                                                    
     would hinder  the efforts  of the  industry as  well as                                                                    
     the  Board.   While  we   appreciate  the   ability  to                                                                    
     represent industry on the  proposed board, our concerns                                                                    
     cause  AOGA  to question  both  the  viability and  the                                                                    
     effectiveness  of the  proposed  Board and  as such  we                                                                    
     cannot support its proposed formation.                                                                                     
                                                                                                                                
2:26:49 PM                                                                                                                    
                                                                                                                                
     Reduction in Statutory Interest Rate [slide 15]                                                                        
     AOGA supports  the lowering  of the  statutory interest                                                                  
     rate.                                                                                                                    
          As we have testified to in the past, the statute                                                                      
     of limitations under AS 43.55.075(a)  is six years from                                                                    
     the  date when  the tax  return was  filed for  the tax                                                                    
     being audited,  while the limitations period  for other                                                                    
     taxes  under AS  43.05.260(a) is  three years  from the                                                                    
     filing  date of  the tax  return. Under  both statutes,                                                                    
     the period  may be  extended by  mutual consent  of the                                                                    
     taxpayer and the Department of Revenue (DOR).                                                                              
          The current statutory rate of interest under AS                                                                       
     43.05.225(1) for tax  underpayments is "five percentage                                                                    
     points above  the annual rate charged  member banks for                                                                    
     advances  by the  12th Federal  Reserve District  as of                                                                    
     the  first day  of  that calendar  quarter,  or at  the                                                                    
     annual  rate  of  11  percent,  whichever  is  greater,                                                                    
     compounded  quarterly  as  of  the  last  day  of  that                                                                    
     quarter[.]" Currently the Federal  Reserve rate is very                                                                    
     low, so 11% APR is the applicable rate.                                                                                    
          A lower statutory interest rate is very much                                                                          
     supported  by   industry,  because  it   provides  some                                                                    
     certainty to taxpayers.                                                                                                    
                                                                                                                                
2:27:42 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following written                                                                 
testimony [original punctuation provided with some formatting                                                                   
changes]:                                                                                                                       
                                                                                                                                
     Issues that the current draft does not address.                                                                        
     [slide 16]                                                                                                                 
     There are  several significant problems in  the present                                                                    
     ACES tax that  are not addressed in CSSB21,  and I will                                                                    
     address a few of them this morning.                                                                                        
          A. Minimum tax for North Slope production. AS                                                                     
     43.55.011(f)  sets  a  minimum  tax  that  is  targeted                                                                    
     solely  against North  Slope  production.  That tax  is                                                                    
     based on the gross value  of that production instead of                                                                    
     the regular  tax based on  "net" Production  Tax Value.                                                                    
     The rationale for adopting it  was to protect the State                                                                    
     against low petroleum revenues when prices are low.                                                                        
          The minimum tax only complicates potential new                                                                        
     investors' analyses of what their  tax would be if they                                                                    
     invest   here   instead    of   someplace   else,   and                                                                    
     consequently  it has,  if anything,  driven investments                                                                    
     away.   AS   43.55.011(f)   should   be   repealed   or                                                                    
     consideration given to  significantly reducing the rate                                                                    
     of the minimum tax.                                                                                                        
          B. Joint-interest billings. Instead of starting                                                                   
     with the  joint-interest billings that  participants in                                                                    
     a  unit  or  other  joint operation  receive  from  the                                                                    
     operator,  DOR regulations  reflect an  assumption that                                                                    
     each  non-operating  participant  has  information,  in                                                                    
     addition  to  the  operator's billings  to  them,  that                                                                    
     allows  them   to  determine  which   expenditures  are                                                                    
     deductible  as allowed  "lease  expenditures" under  AS                                                                    
     43.55.165 and  which are not.  Instead of one  audit of                                                                    
     the expenses by  a joint venture for  any given period,                                                                    
     the Department  audits each participant  separately for                                                                    
     its respective share of the same pool of expenses.                                                                         
          We are not asking for legislation to put the                                                                          
     Department's  regulations  on  a different  track.  But                                                                    
     there are some  in the Department who  believe that the                                                                    
     repeal by the 2007  ACES legislation of AS 43.55.165(c)                                                                    
     and (d) - which  specifically authorized the Department                                                                    
     to  rely   on  joint-interest  billings  -   means  the                                                                    
     Department cannot  legally rely  on them now.  While we                                                                    
     disagree  with this  position (which  is  also at  odds                                                                    
     with  what  the  Department  testified  to  during  the                                                                    
     enactment of  the 2007 ACES  legislation), we  do think                                                                    
     it   would   be   appropriate   to   restore   language                                                                    
     specifically  authorizing  the  Department to  rely  on                                                                    
     joint-interest billings if it chooses to do so.                                                                            
                                                                                                                                
2:30:20 PM                                                                                                                    
                                                                                                                                
MS. MORIARTY continued, paraphrasing from the following written                                                                 
testimony [original punctuation provided with some formatting                                                                   
changes]:                                                                                                                       
                                                                                                                                
     Conclusion. [slide 17]                                                                                                 
          If I leave you with one thing today, it would be                                                                      
     the word "enormous". While  AOGA believes that Alaska's                                                                    
     potential is  enormous we are  grounded by  the reality                                                                    
     that our competition is enormous  as well, and they are                                                                    
     just  starting to  heat up.  It is  estimated that  the                                                                    
     fields  of South  and West  Texas  alone could  produce                                                                    
     over FOUR MILLION barrels of  oil equivalent per day by                                                                    
     2020.  That's more  than  some  OPEC countries.  Alaska                                                                    
     should ask themselves if they  really believe a "middle                                                                    
     of  the pack"  policy for  the state  will attract  new                                                                    
     investment capital against that type of competition.                                                                       
          [slide 18] We believe it is up to you, and the                                                                        
     Governor,  to shape  an  attractive  oil fiscal  policy                                                                    
     that is  supported by strong  principles that  will win                                                                    
     additional  capital,  arrest   North  Slope  production                                                                    
     decline  and  will  lead Alaska  towards  a  prosperous                                                                    
     future for the long-term.                                                                                                  
          As I mentioned at the beginning of our testimony,                                                                     
     overall, AOGA's  members believe the Bill  represents a                                                                    
     base for  significant and crucial tax  structure reform                                                                    
     that   move  toward   Governor  Parnell's   four  "core                                                                    
     principles"  - fairness  for Alaskans,  encouraging new                                                                    
     production,  simplicity  with balance,  and  durability                                                                    
     for the long  term, but as I have  outlined today, AOGA                                                                    
     members believe  additional changes should  be included                                                                    
     for this  bill to truly change  investment behaviors to                                                                    
     the  benefit of  Alaskans.  You have  a difficult  task                                                                    
     ahead and  AOGA stands  ready to assist  you throughout                                                                    
     this process.                                                                                                              
                                                                                                                                
2:32:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE requested  further  elaboration regarding  AOGA's                                                               
confidentiality concerns with the Competitiveness Review Board.                                                                 
                                                                                                                                
MS. MORIARTY replied AOGA imagines  that to determine whether the                                                               
state is  competitive, the board  is likely to ask  for documents                                                               
from  different   industry  players  that  are   of  the  highest                                                               
confidentiality  nature.    A  concern   for  AOGA  is  how  that                                                               
information  will be  shared and  protected  by a  board that  is                                                               
outside   any  other   industry  or   agency  that   already  has                                                               
confidentiality provisions,  and other members of  the public who                                                               
do not normally have the access  to that type of information.  If                                                               
the  board moves  forward  it  needs to  be  considered how  that                                                               
information will be  shared to the public, members  of the board,                                                               
and  how confidentiality  will be  protected, especially  between                                                               
industry players.                                                                                                               
                                                                                                                                
2:34:54 PM                                                                                                                    
                                                                                                                                
J. PATRICK  FOLEY, Manager, Land  and External  Affairs, Incoming                                                               
President,  Pioneer Natural  Resources  Alaska,  Inc., began  his                                                               
PowerPoint presentation by noting  that Pioneer Natural Resources                                                               
is  a large  independent  with about  a  $19 billion  [enterprise                                                               
value] and $3 billion annual  capital worldwide budget (slide 4).                                                               
Pioneer  Natural  Resources  Alaska  was  the  first  independent                                                               
operator on  the North  Slope to  have a  successful development.                                                               
Today it has  about 70 Alaska employees and  over 200 contractors                                                               
working for  it on  the North  Slope at Oooguruk  and Nuna.   The                                                               
Alaska operations capital budget for  2013 is about $180 million.                                                               
Current  production at  Oooguruk, Pioneer's  sole development  in                                                               
Alaska, is about 6,000 barrels  per day, with total production of                                                               
about 12 million  barrels.  Alaska operations began  in 2003 with                                                               
the original  project sanctioned under the  economic limit factor                                                               
(ELF) regime, but it has changed  many times since then.  Pioneer                                                               
has an  investment decision  to make for  third quarter  2013 for                                                               
the Nuna  project, an  on-shore development that  is part  of the                                                               
Oooguruk  Unit.   Nuna is  a 50  million barrel  opportunity with                                                               
total capital expenditure of $800 million to $1 billion.                                                                        
                                                                                                                                
MR. FOLEY  explained slide 5 is  a general impression slide.   He                                                               
pointed out that Pioneer's core  business is in the Permian Basin                                                               
of the  Eagle Ford  in Texas,  with business  also being  done in                                                               
Colorado, Kansas, and Alaska.  He  drew attention to a listing on                                                               
the left  side of  the slide  of all  of the  companies currently                                                               
operating in the Eagle Ford, noting  that written in blue are the                                                               
majors operating there  and in Alaska and written in  red are the                                                               
independents operating there  and in Alaska.   Every name written                                                               
in black is not in Alaska and the  question is why not.  What can                                                               
be done  to attract  every one  of these  companies?   The reason                                                               
they are  not here is because  the cost to do  business in Alaska                                                               
is  higher than  elsewhere.   The cycle  time is  higher and  the                                                               
amount of company take is lower because of the fiscal system.                                                                   
                                                                                                                                
2:38:05 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  said the  core principles of  the governor's  bill, as                                                               
introduced, included the desire  to change the current production                                                               
tax system  in a way  that was:   fair, fostered  new production,                                                               
simple  and  balanced, and  competitive  and  durable (slide  6).                                                               
Every industry  representative speaking before the  committee has                                                               
supported  these goals.   As  the bill  has started  and evolved,                                                               
legislators are doing  a wonderful job in building  a system that                                                               
makes Alaska more  competitive.  However, he  continued, the bill                                                               
is not quite there.                                                                                                             
                                                                                                                                
MR. FOLEY  praised the provision  to eliminate  progressivity and                                                               
said  the gross  revenue exclusion  (GRE) works  very well  for a                                                               
company like  Pioneer.   Being able  to immediately  monetize the                                                               
"loss carry-forward"  credit is  huge, he  continued.   A company                                                               
like  Pioneer that  is  not  currently making  a  profit and  not                                                               
currently  paying taxes  does not  get  the benefit  of the  loss                                                               
carry-forward credit  until many years down  the road; therefore,                                                               
changing that  credit so a  company can immediately get  the cash                                                               
value of that loss is huge and  is a very attractive piece of the                                                               
new  bill.   The  $5  per barrel  credit  is  also an  attractive                                                               
feature  and helps  to keep  the total  tax relatively  flat over                                                               
various oil prices.                                                                                                             
                                                                                                                                
2:39:52 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  stated there are still  a few negatives he  would like                                                               
the committee to  work on.  Loss of the  capital credits is huge.                                                               
When a  company like Pioneer  looks at a project  under different                                                               
systems, the project that has  credits associated with it is more                                                               
attractive.   He agreed with  Mr. Thompson that  credits minimize                                                               
the amount  of cash necessary to  fund a project.   A company may                                                               
spend all the  money it has, but  it can do more  with that money                                                               
with the  state's assistance through  the credits.   He addressed                                                               
why credits  matter (slide  7), saying  credits are  important to                                                               
the  state because  they will  stimulate work  and activity,  and                                                               
that work  and activity  results in jobs,  more wells,  more oil,                                                               
and ultimately  more royalties and  taxes.  Credits are  good for                                                               
the developer because  they reduce risk by  minimizing the amount                                                               
of cash necessary to fund a project.                                                                                            
                                                                                                                                
2:41:29 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  moved to  slide 8, which  he noted may  not be  in the                                                               
committee's packet and which depicts  a hypothetical project with                                                               
the assumptions  of $1  billion in capital  expenditure and  a 50                                                               
million  barrel field,  very similar  to Pioneer's  Nuna project.                                                               
He  then  compared the  current  system  of  ACES  to SB  21,  as                                                               
originally  introduced, and  CSSB  21(FIN) am(efd  fld) for  this                                                               
hypothetical project if  it was being done by a  new entrant with                                                               
no  base  production  (slide  9,  but  labeled  slide  8  in  the                                                               
committee packet).   The red bars depict the loss  of the credits                                                               
and the  green bars  depict the  upside gain  from the  lower tax                                                               
rate, the GRE, and  the $5 credit.  A brand  new entrant would be                                                               
$87 million,  total net present  value (NPV) 10, worse  off under                                                               
SB 21  than it would  be under ACES.   Under CSSB  21(FIN) am(efd                                                               
fld), this same  new entrant would be $16 million  worse off than                                                               
it would be under ACES.                                                                                                         
                                                                                                                                
2:43:42 PM                                                                                                                    
                                                                                                                                
MR. FOLEY made this same comparison  for a mid-sized producer - a                                                               
company like Pioneer  that has existing base  production and base                                                               
operating  expenses  that  look  like  Pioneer's  Oooguruk  field                                                               
(slide 10, but  labeled slide 9 in the committee  packet).  Under                                                               
SB  21 as  originally  introduced, Pioneer  would  have been  $52                                                               
million worse  off than it  was under  ACES.  Under  CSSB 21(FIN)                                                               
am(efd fld), Pioneer  will be $8 million worse off.   If the goal                                                               
is to at least put a  company like Pioneer in a neutral position,                                                               
no better off  under the new program than under  the old program,                                                               
the committee  has some knobs  at its disposal.   One knob  is to                                                               
extend the small producer credit  until 2022, which would make it                                                               
a 15-year  credit instead of a  10-year credit.  That  knob would                                                               
make this current version of  the bill more attractive to Pioneer                                                               
for this hypothetical project.                                                                                                  
                                                                                                                                
2:45:05 PM                                                                                                                    
                                                                                                                                
MR. FOLEY  discussed notes  he had written  to himself,  one note                                                               
stating, "healthy  big three," his  point being  that legislators                                                               
cannot  pick winners  and losers;  legislators need  to help  the                                                               
entire  industry be  winners.   All Alaska  citizens are  reliant                                                               
upon a healthy  North Slope oil industry, he said,  and he cannot                                                               
imagine a  healthy North Slope  industry that was  not prosperous                                                               
for the current big legacy producers.   The state needs to have a                                                               
tax system  that motivates  the legacy  producers to  keep making                                                               
significant expenditure within their fields.   He agreed with Mr.                                                               
Thompson's  statement that  they by  themselves cannot  solve the                                                               
fiscal  problems in  Alaska; the  state also  needs new  players,                                                               
explorers,  and  new  producers.   He  further  agreed  with  Mr.                                                               
Thompson  that  one system  is  needed,  but  there needs  to  be                                                               
elements in  that system that  are attractive to the  current big                                                               
legacy  producers   and  also  are  attractive   to  new  smaller                                                               
producers,  explorers, and  developers that  want to  establish a                                                               
business in Alaska.                                                                                                             
                                                                                                                                
MR. FOLEY said  another note to himself is "canary."   Pioneer is                                                               
the canary  in the coal  mine in that  it is an  independent that                                                               
came  to  Alaska before  any  of  the  tax  change.   Pioneer  is                                                               
struggling to build a business,  having spent about $1 billion at                                                               
Oooguruk and  spending $100  million trying  to advance  the Nuna                                                               
project, which  the company  hopes to  sanction in  third quarter                                                               
[2013].   Pioneer has been in  Alaska since 2003, but  has yet to                                                               
turn a  profit.   If Pioneer  does not do  Nuna it  will probably                                                               
make a profit and start to pay  production tax in the next two or                                                               
three years.  If  Nuna is done, that will be  pushed out three to                                                               
five years.  He said his point  is that Pioneer will have been in                                                               
Alaska for 10-15  years without having made a profit.   Alaska is                                                               
a  difficult place  for a  new company  to come  and establish  a                                                               
successful  business.   Having Pioneer  be  successful in  Alaska                                                               
might not  mean there  will be  10-20 other  independents behind;                                                               
however,  legislators must  pause and  think about  the opposite.                                                               
If Pioneer fails, what message is  sent to others wanting to come                                                               
to Alaska?                                                                                                                      
                                                                                                                                
2:47:59 PM                                                                                                                    
                                                                                                                                
MR. FOLEY summarized, saying CSSB  21(FIN) am(efd fld) on balance                                                               
has some very  favorable attributes, such as the  flat 35 percent                                                               
tax rate, although  a lower tax rate would be  helpful.  When the                                                               
flat  tax rate  is combined  with the  $5 per  barrel credit,  it                                                               
makes for  a flat tax system  over a very broad  range of prices,                                                               
which  helps Pioneer  predict its  business.   The gross  revenue                                                               
exclusion is another  helpful attribute.  Making  the loss carry-                                                               
forward  credit  cashable  is  also  helpful  because  it  allows                                                               
Pioneer to take  advantage of the credit nearly  immediately.  On                                                               
the negative  side, the  credits under ACES  are a  very valuable                                                               
attribute and  he encourages committee  members to find a  way to                                                               
keep some  element of  that credit program.   He  appreciated the                                                               
fiscal  challenge  that that  presents  to  the state,  but  said                                                               
perhaps there could be a way to  cap the credits or to target the                                                               
projects that would qualify for the credits.                                                                                    
                                                                                                                                
2:49:36 PM                                                                                                                    
                                                                                                                                
MR.  FOLEY suggested  changes to  CSSB 21(FIN)  am(efd fld)  that                                                               
would make  investments in  Alaska more  attractive to  a company                                                               
like Pioneer  and to all of  the oil industry.   One change would                                                               
be to extend the small producer  credit.  He reminded members the                                                               
small producer credit is "use it or  lose it" - if no tax is paid                                                               
there is no benefit.  Pioneer has  not yet made a profit, has not                                                               
yet made a tax  payment, and the odds are very  high that if this                                                               
credit  is  not extended  Pioneer  will  never  be able  to  take                                                               
advantage of it.   He offered his belief that  the small producer                                                               
credit is  a knob  that has  very small  cost to  the state.   He                                                               
asked  the committee  to consider  increasing  the gross  revenue                                                               
exclusion to  25 percent,  saying it  is not  a large  number but                                                               
would have a dramatic impact on  projects.  He also requested the                                                               
committee  consider targeted  credits  that could  be focused  on                                                               
projects that members  wish to incent to go forward.   Right now,                                                               
those credits are immediately cashable  and if the credit program                                                               
was extended  there are  changes that  could be  made to  make it                                                               
more  acceptable to  the state.   For  example, credits  could be                                                               
used to  reduce a company's  state royalty obligation  net profit                                                               
payment  or any  other  liability  a company  has  to the  state;                                                               
rather than the  state writing a check it  would instead minimize                                                               
the payments a company makes to the state.                                                                                      
                                                                                                                                
2:52:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON drew  attention to the quote on  slide 7 by                                                               
Roger Marks  when he was  before the Senate Finance  Committee on                                                               
3/4/13:  "Recommend targeted tax  credits as being preferable [vs                                                               
GRE], they  provide incentive to  invest."  Presuming  this would                                                               
be significant,  he inquired how  those would work for  a company                                                               
like Pioneer.                                                                                                                   
                                                                                                                                
MR. FOLEY  replied it is  more than  just the credit.   Currently                                                               
under ACES  there are two  ways that  Pioneer can have  the state                                                               
help  with the  company's investments:   a  20 percent  qualified                                                               
capital expenditure  credit and  a 25 percent  loss carry-forward                                                               
credit.   It is  not as simple  as adding 20  and 25  together to                                                               
come up with 45 percent as  the value of the credit and comparing                                                               
that against the  35 percent [carry forward  loss credit proposed                                                               
under CSSB 21(FIN) am(efd fld)] ...                                                                                             
                                                                                                                                
REPRESENTATIVE  SEATON inquired  whether  a  targeted tax  credit                                                               
would be something like the  United Kingdom brownfield versus the                                                               
gross revenue exclusion (GRE).                                                                                                  
                                                                                                                                
MR.  FOLEY, shaking  his  head no,  responded  a targeted  credit                                                               
would  be something  that extends  the current  qualified capital                                                               
[expenditure]  credit  program  for specific  things  legislators                                                               
would  like  to  motivate,  such as  new  wells,  new  production                                                               
facilities,  new roads,  or new  gravel pits.   For  Pioneer, the                                                               
company would  ask members to look  at credits that apply  to new                                                               
exploration wells and  new development wells.  He  said a comment                                                               
often made  is that these credits  are not resulting in  new oil.                                                               
He said he  guarantees, however, that every well  that is drilled                                                               
results in new oil.                                                                                                             
                                                                                                                                
2:54:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON understood  Mr.  Foley to  be saying  that                                                               
targeted  tax  credits  for certain  activities  would  get  what                                                               
legislators  want more  than would  the gross  revenue exclusion,                                                               
which might not  be invested in Alaska because it  is a reduction                                                               
in tax that might go someplace else.                                                                                            
                                                                                                                                
MR. FOLEY  answered neither the  credit nor the  program proposed                                                               
under "SB 21" makes payments until  the expenditure is made.  So,                                                               
a company does not get the  benefit of the credit, the state does                                                               
not fund a  company's program, until the  company actually spends                                                               
the money to drill that well.                                                                                                   
                                                                                                                                
REPRESENTATIVE  SEATON,  noting the  committee  has  not had  Mr.                                                               
Marks explain this quote, said  the gross revenue exclusion (GRE)                                                               
just  lowers the  tax  rate  and does  not  target  the money  to                                                               
something  legislators are  trying  to incentivize;  it does  not                                                               
necessarily get well production.                                                                                                
                                                                                                                                
MR. FOLEY encouraged  that Mr. Marks be asked to  come before the                                                               
committee so he  can be asked this question.   Mr. Foley said the                                                               
GRE affects  different players differently.   It reduces  the tax                                                               
liability for  a current  taxpayer.  For  a company  like Pioneer                                                               
that  is not  now paying  tax, it  generates a  tax loss,  a loss                                                               
carry forward, which the company can also monetize.                                                                             
                                                                                                                                
REPRESENTATIVE SEATON commented  he would like to  have Mr. Marks                                                               
come before the committee so this topic can be discussed.                                                                       
                                                                                                                                
2:57:28 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON  inquired   whether  Mr.  Foley,  when                                                               
talking about  a targeted  credit, is saying  to target  the loss                                                               
carry forward credit  or to provide another credit  that would be                                                               
a targeted one.                                                                                                                 
                                                                                                                                
MR. FOLEY replied  that when speaking of a targeted  credit he is                                                               
really referring back  to the current ACES program  under which a                                                               
company  qualifies  for a  20  percent  credit  when it  makes  a                                                               
capital  expenditure,  and the  company  gets  that money  nearly                                                               
immediately -  half this  year and  half next  year.   That helps                                                               
Pioneer  to immediately  reduce  its capital  outlay because  the                                                               
state helps  Pioneer finance  its project.   He said  he believes                                                               
there  are  projects for  which  the  state could  grant  credits                                                               
without breaking the bank.  If  the fear is that the state cannot                                                               
have a  capital credit that  is spent  in Prudhoe Bay,  there are                                                               
things  that  could be  done  to  have  a different  program  for                                                               
Prudhoe Bay.   If the state  is fearful of very  large shale play                                                               
expenditures  taking  up too  much  in  credits, those  could  be                                                               
excluded from being eligible for the credits.                                                                                   
                                                                                                                                
2:59:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK recalled  that in  past testimony  Mr. Foley                                                               
talked about  how ACES rewards  investment, how Pioneer  has been                                                               
more focused  on the  credit than on  the progressivity,  and how                                                               
Pioneer would enjoy paying some  tax because the state guarantees                                                               
a company is profitable  before it has to pay any  tax.  He asked                                                               
whether  Mr.  Foley   believes  it  is  fair  to   say  that  the                                                               
investments being  seen in Alaska  over the past seven  years are                                                               
not leading to production.                                                                                                      
                                                                                                                                
MR. FOLEY  responded he  has to  scratch his  head when  he hears                                                               
that statement  because he  simply does not  understand it.   The                                                               
credits that  have been  extended have  been for  drilling wells,                                                               
building facilities,  and expanding production  capability within                                                               
the big  fields.   He said  he cannot imagine  that any  of those                                                               
expenditures  did not  result  in either  new  production or  the                                                               
ability of the  current production to stay at  its current level.                                                               
Every investment  dollar the state  has made through  credits has                                                               
resulted in new oil.                                                                                                            
                                                                                                                                
3:01:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TUCK, drawing  attention  to  slide 10,  observed                                                               
that CSSB 21(FIN)  am(efd fld) is a  significant improvement over                                                               
SB 21  [as introduced], but is  still not as good  as the current                                                               
tax  regime.   Looking  at  the history  of  Alaska, he  inquired                                                               
whether Mr. Foley would rather have  had the tax regime in effect                                                               
prior to ACES in terms of getting Pioneer's projects developed.                                                                 
                                                                                                                                
MR. FOLEY answered Pioneer came  and sanctioned its project under                                                               
the economic limit factor (ELF)  and under ELF the production tax                                                               
rate for  a field  like Oooguruk  would have  been zero.   Within                                                               
months of  sanctioning that  project, there was  a new  bill with                                                               
the production profits  tax (PPT) and a new tax  system.  Pioneer                                                               
met with Governor  [Frank] Murkowski at the time  and was advised                                                               
that  it might  actually be  better  off under  this new  system.                                                               
Doubting  how anything  could be  better than  zero, Pioneer  did                                                               
some discounting and  analyzing and came to  understand the value                                                               
of the credits  and how the state helps the  company up front and                                                               
the company  pays the state  back later  down the road.   Pioneer                                                               
was  actually better  off  under  the original  PPT  - the  state                                                               
helped  subsidize Pioneer's  project.   However,  the world  very                                                               
swiftly became  different than it  was under the  original "20/20                                                               
PPT proposal."                                                                                                                  
                                                                                                                                
3:02:51 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE held over CSSB 21(FIN) am(efd fld).                                                                              

Document Name Date/Time Subjects
HRES SB21 AVGC - BRP 3.27.13.pdf HRES 3/27/2013 1:00:00 PM
SB 21
HRES SB21 Pioneer Natural Resources 3.27.13.pdf HRES 3/27/2013 1:00:00 PM
SB 21
HRES SB21 Savant Alaska 3.27.13.pdf HRES 3/27/2013 1:00:00 PM
SB 21
HRES SB21 AOGA 3.27.13.pdf HRES 3/27/2013 1:00:00 PM
SB 21
HRES SB21 AOGA Written Testimony 3.27.13.pdf HRES 3/27/2013 1:00:00 PM
SB 21
HRES SB21 ASRC Testimony 3.27.13.pdf HRES 3/27/2013 1:00:00 PM
SB 21