Legislature(2013 - 2014)SENATE FINANCE 532

03/05/2013 01:30 PM FINANCE


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01:33:52 PM Start
01:35:10 PM SB21
04:08:32 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> --
Bills Previously Heard/Scheduled
SENATE BILL NO. 21                                                                                                            
                                                                                                                                
     "An  Act relating  to  appropriations  from taxes  paid                                                                    
     under the  Alaska Net Income  Tax Act; 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;  relating to the determination                                                                    
     of annual  oil and gas production  tax values including                                                                    
     adjustments  based on  a percentage  of gross  value at                                                                    
     the  point   of  production  from  certain   leases  or                                                                    
     properties;    making   conforming    amendments;   and                                                                    
     providing for an effective date."                                                                                          
                                                                                                                                
1:35:10 PM                                                                                                                    
                                                                                                                                
SCOTT    JEPSEN,   VICE    PRESIDENT,   EXTERNAL    AFFAIRS,                                                                    
CONOCOPHILLIPS, discussed the PowerPoint, "Senate Finance                                                                       
Committee CSSB21" (copy on file).                                                                                               
                                                                                                                                
Mr. Jepsen displayed slide 2, "Topics."                                                                                         
                                                                                                                                
     -Alaska Challenges                                                                                                         
     -CSSB21  vs. ACES  (Alaska  Clear  and Equitable  Share                                                                    
     Act)                                                                                                                       
     -Observations                                                                                                              
                                                                                                                                
Mr. Jepsen spoke to slide 3, "North Slope Investment                                                                            
Challenges."                                                                                                                    
                                                                                                                                
     Challenged oil remains                                                                                                     
     - Complex, high cost wells                                                                                                 
     - Smaller reserve targets                                                                                                  
     - Fault blocks, flank oil                                                                                                  
     - Satellites, viscous oil                                                                                                  
     - Facilities handling ~ three times as much water                                                                          
     as oil                                                                                                                     
     - Significant resource                                                                                                     
                                                                                                                                
     ACES tax structure                                                                                                         
     - High average & marginal tax rates                                                                                        
     - Progressivity eliminates upside                                                                                          
     - Tax credits attempt to offset high tax rates and                                                                         
     high costs. Applies to both new and legacy fields                                                                          
                                                                                                                                
BOB  HEINRICH,  VICE   PRESIDENT,  FINANCE,  CONOCOPHILLIPS,                                                                    
stated   that  ConocoPhillips   saw   many  impediments   to                                                                    
investment  under  ACES.  He remarked  that  ACES  had  high                                                                    
marginal   tax  rates,   and  had   a  negative   impact  on                                                                    
investment.  He pointed  out  the chart  on  slide 3,  which                                                                    
showed  the  state, federal,  and  industry  share across  a                                                                    
range  of prices  on a  marginal  basis. He  also noted  the                                                                    
progressivity  surcharge, which  eliminated the  upside that                                                                    
was traditionally  seen at higher  oil prices. He  looked at                                                                    
the  graph   on  the  bottom  right   corner,  which  showed                                                                    
ConocoPhillips per barrel earnings  since the time that ACES                                                                    
was implemented.  He noted the  changes in crude  oil prices                                                                    
that had an  almost 100 percent swing upward  since ACES was                                                                    
implemented.  He noted  that the  ConocoPhillips Alaska  net                                                                    
income per  barrel only moved from  $22 to $25, which  was a                                                                    
less than  10 percent movement.  He stressed that  the extra                                                                    
money  went  to  the  state, because  of  the  progressivity                                                                    
surcharge in ACES.                                                                                                              
                                                                                                                                
Mr. Heinrich addressed slide 4,  "Changes to ACES to Improve                                                                    
Alaska's Investment Climate."                                                                                                   
                                                                                                                                
     Eliminate progressivity                                                                                                    
                                                                                                                                
     Create a flatter tax rate over a broad range of prices                                                                     
     -Producer and State share proportionately as prices                                                                        
     fluctuate and margins change                                                                                               
                                                                                                                                
     Create a flatter tax rate over a broad range of prices                                                                     
     -Producer and State share proportionately as prices                                                                        
     fluctuate and margins change                                                                                               
                                                                                                                                
          Issues                                                                                                                
          -Tax increase at lower prices - base rate too                                                                         
          high                                                                                                                  
          -GRE will have minimal impact on legacy fields.                                                                       
                                                                                                                                
                                                                                                                                
1:43:03 PM                                                                                                                    
                                                                                                                                
Mr.  Heinrich discussed  slide  5, "ACES  vs.  CSSB 21."  He                                                                    
stated  that the  graph represented  ConocoPhillips modeling                                                                    
work  the  comparison on  a  producer-share  basis across  a                                                                    
range  of prices.  He  explained  that the  "producer-share"                                                                    
meant the percentage of available  cash after cost and taxes                                                                    
that  were  retained by  the  producers.  He felt  that  the                                                                    
representation   was  an   inverse  of   what  the   state's                                                                    
consultant  had  presented  when  discussing  the  state  or                                                                    
federal   take.   He   remarked  that   the   producer-share                                                                    
calculations depended on many  factors including the assumed                                                                    
cost structure  for both a  capital and operating  costs. He                                                                    
stated that the  Fall 2012 Revenue Sources Book  was used in                                                                    
determining  the calculations  for FY14.  He explained  that                                                                    
the graphic  represented the result  of FY14 only, as  if CS                                                                    
SB 12  were in effect for  the full FY14. He  explained that                                                                    
the  first  year was  used,  because  the data  became  less                                                                    
reliable in forecasting. He felt  that the one-year snapshot                                                                    
reflected a  better view  of what  was actually  expected in                                                                    
the  results. He  pointed out  that  the resulting  producer                                                                    
share was represented by the  blue line, which was basically                                                                    
flat across a range of  prices starting at approximately $60                                                                    
per barrel. He stressed  that ConocoPhillips liked the range                                                                    
of the curve,  because it represented a  consistent split of                                                                    
results across  a wide  range of  prices. He  explained that                                                                    
the gross minimum  tax would kick in under both  ACES and CS                                                                    
SB 21.                                                                                                                          
                                                                                                                                
Mr. Jepsen spoke to slide 6, "Gross Revenue Exclusion."                                                                         
                                                                                                                                
     GRE targeted primarily at new fields and extensions of                                                                     
     existing fields                                                                                                            
     -Extensions identified as participating area (PA)                                                                          
     expansions                                                                                                                 
     -Legacy field PA expansions included                                                                                       
     -Increase to 30 percent is an improvement, but less                                                                        
     effective than tax credits                                                                                                 
                                                                                                                                
     GRE will likely not have significant impact on legacy                                                                      
     fields                                                                                                                     
                                                                                                                                
     Legacy Fields are…                                                                                                         
     -Greatest investment opportunity resides inside                                                                            
     existing legacy PAs                                                                                                        
     -About 90 percent of North Slope 2012 production                                                                           
     -Lion's share of estimated future production                                                                               
     -Key to offsetting ANS decline                                                                                             
                                                                                                                                
Mr. Jepsen addressed slide 7, "Observations."                                                                                   
                                                                                                                                
     CSSB21 an improvement over ACES                                                                                            
                                                                                                                                
     -Provides relatively flat tax rate with slightly                                                                           
     progressive nature over a broad price range                                                                                
     -Elimination of progressivity solves the high marginal                                                                     
     tax problem                                                                                                                
    -Makes Alaska more attractive for investment at                                                                             
     $100+ prices                                                                                                               
    -Increase in gross revenue exclusion (GRE) positive                                                                         
                                                                                                                                
     CSSB21 changes for an improved investment climate                                                                          
                                                                                                                                
     -Reduce base tax rate                                                                                                      
     -Create incentives for both new and legacy fields                                                                          
     -Few legacy field projects would qualify for GRE                                                                           
     -Consider tax credits associated with production                                                                           
                                                                                                                                
1:50:50 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer noted that the  intent of the legislation was                                                                    
to incentivize  more oil  production. He  felt that  the GRE                                                                    
process  already  encouraged  greater  oil  production,  but                                                                    
pointed  out that  GRE  currently only  applied  to new  oil                                                                    
fields. He  wondered if there  would be a  greater incentive                                                                    
to  pursue  development  and production,  if  the  GRE  also                                                                    
applied to the legacy fields.  He further queried if it were                                                                    
better to maintain the capital  cost credits, and attach the                                                                    
credits  to  actual  drilled wells.  He  felt  that  capital                                                                    
credits were too expensive, and  were projected to be almost                                                                    
$900 million  in the  following year.  He remarked  that the                                                                    
capital credits  did not result  in greater  production, but                                                                    
noted that ACES was not  an incentive to produce anyway. Mr.                                                                    
Heinrich  responded that  GRE increased  cash flow  over the                                                                    
long term for  a particular investment. He  pointed out that                                                                    
long-term cash  flow was key to  ConocoPhillips' investment.                                                                    
He furthered  that ACES decreased  the long-term  cash flow.                                                                    
He felt  that the issue  could be  resolved in the  base tax                                                                    
structure,  rather than  creating a  separate tax  structure                                                                    
for a different class of  investment. He remarked that a tax                                                                    
credit tracked  investment, but felt  that the  credit could                                                                    
be  focused on  associations  with  production. He  stressed                                                                    
that the  combination of  the base  tax rate  and investment                                                                    
incentives  were impacts  on  ConocoPhillips willingness  to                                                                    
invest in development and production in Alaska.                                                                                 
                                                                                                                                
Mr.  Jepsen  added  that tax  credits  helped  the  capital-                                                                    
intensive  projects. He  remarked that  some projects  would                                                                    
need  new   roads,  new  pads,   new  facilities,   and  new                                                                    
pipelines.  He  pointed  out  that the  GRE  was  much  less                                                                    
effective for  those projects, than the  capital credits. He                                                                    
stressed  that  the legislature  needed  to  find a  balance                                                                    
between the GRE and capital credits.                                                                                            
                                                                                                                                
1:55:49 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer remarked that  progressivity was not included                                                                    
in  the legislation.  He  wondered  if ConocoPhillips  would                                                                    
like  to see  bracketed progressivity  at very  high prices.                                                                    
Mr. Jepsen replied  that a flat tax rate over  a broad range                                                                    
of  prices  was  most  important,   because  the  state  and                                                                    
industry would share equitably as  the margins fluctuate. He                                                                    
furthered that there  would be an extreme  amount of revenue                                                                    
for the state  at the $200 per barrel price  level with a 65                                                                    
percent share. He                                                                                                               
                                                                                                                                
Senator Dunleavy wondered if  ConocoPhillips would invest in                                                                    
Alaska  to develop  the oil  that proposed  to exist  in the                                                                    
ground,  with  the  proposed  policy  change.  Mr.  Heinrich                                                                    
replied that the chairman  of ConocoPhillips recently stated                                                                    
that if the  investment climate in Alaska were  to change to                                                                    
the   point    where   it   would    differentiate   itself,                                                                    
ConocoPhillips would invest more money in Alaska.                                                                               
                                                                                                                                
Mr.  Jepsen   furthered  that  Alaska   published  extensive                                                                    
information  about ConocoPhillips  operations in  Alaska, so                                                                    
its  changes  in  investment  and  behavior  would  be  very                                                                    
transparent.                                                                                                                    
                                                                                                                                
Co-Chair   Kelly  referred   to   a  previous   presentation                                                                    
regarding  reimbursement  of  the   royalty.  He  asked  for                                                                    
ConocoPhillips'  opinion  regarding that  presentation.  Mr.                                                                    
Jepsen agreed to provide that information.                                                                                      
                                                                                                                                
Senator Bishop inquired how much  it cost to drill per well.                                                                    
Mr. Jepsen  responded that the  cost was variable,  but that                                                                    
it was around $13 million.                                                                                                      
                                                                                                                                
Senator  Bishop queried  how much  the cost  would be  for a                                                                    
standard well,  without any lateral attachments.  Mr. Jepsen                                                                    
replied that ConocoPhillips had a  plot that showed how well                                                                    
costs had increased,  on average, over the  prior ten years.                                                                    
He agreed to provide that information.                                                                                          
                                                                                                                                
2:01:17 PM                                                                                                                    
                                                                                                                                
Senator Bishop  requested some theoretical examples  of what                                                                    
ConocoPhillips might  do to increase production.  Mr. Jepsen                                                                    
replied  that ConocoPhillips  was advancing  and progressing                                                                    
current projects,  and furthered  that longer  term projects                                                                    
could look attractive and they  were already doing work with                                                                    
viscous oil.                                                                                                                    
                                                                                                                                
Co-Chair Kelly remarked that  there were current discussions                                                                    
throughout the  state regarding the opinion  that tax policy                                                                    
could  not  reverse  the  decline   in  oil  production.  He                                                                    
wondered  how ConocoPhillips  felt  about that  perspective.                                                                    
Mr. Jepsen referred  to back up material, not  on file, that                                                                    
reflected the activity over the  ten years prior. He pointed                                                                    
out the new  fields that came on production  since 1997, and                                                                    
the graph  used DNR data.  He noted a significant  amount of                                                                    
investment  and production  from  new  fields. He  explained                                                                    
that the  decline rate  was fairly  significant, but,  on an                                                                    
absolute basis, was slightly more  manageable than ten years                                                                    
prior. He  felt that there  was currently an  opportunity to                                                                    
level the decline, under the  right tax framework, and right                                                                    
set  of opportunities.  He  did not  want  to make  promises                                                                    
regarding decline rates, because  there were various factors                                                                    
that  contributed  to  oil   production.  He  stressed  that                                                                    
approximately  270,000 barrels  had been  produced from  the                                                                    
new fields.                                                                                                                     
                                                                                                                                
2:06:33 PM                                                                                                                    
                                                                                                                                
Co-Chair Kelly queried  the intent of the  graph. Mr. Jepsen                                                                    
replied that  the graph represented  all the  various fields                                                                    
that have been brought on stream since 1997.                                                                                    
                                                                                                                                
Co-Chair Kelly inquired if there  was a policy that prompted                                                                    
the increase.  Mr. Jepsen responded  that during  this time,                                                                    
ELF was  trending toward  zero, and many  of the  fields had                                                                    
zero severance  tax. He stated  that there was  a reasonable                                                                    
tax policy  in the  state, which was  a royalty  regime that                                                                    
provided both an upside and downside to producers.                                                                              
                                                                                                                                
Co-Chair  Meyer requested  that  the slide  be provided  for                                                                    
committee members.                                                                                                              
                                                                                                                                
Senator Hoffman  directed the presentation  back to  slide 7                                                                    
and wondered  if the  first bullet  referred to  a reduction                                                                    
from 35  percent or  from 25 percent  base rate.  Mr. Jepsen                                                                    
stated that  the comments were  in regard to the  35 percent                                                                    
base rate, which was outlined in  CS SB 21. He stressed that                                                                    
the 35 percent base rate was too high.                                                                                          
                                                                                                                                
Senator Dunleavy  queried how  ConocoPhillips felt  about 20                                                                    
percent. Mr. Jepsen  replied that at the end of  the day, it                                                                    
would depend on what the overall tax structure looked like.                                                                     
                                                                                                                                
Mr.  Heinrich interjected  that the  25 percent  rate was  a                                                                    
point at which Alaska could be considered competitive.                                                                          
                                                                                                                                
Vice-Chair Fairclough requested an  explanation of the gross                                                                    
revenue  exclusion (GRE)  versus  the  capital credits.  She                                                                    
inquired how dollars versus production  related to the gross                                                                    
revenue exclusion. Mr. Jepsen asked for clarification.                                                                          
                                                                                                                                
Vice-Chair  Fairclough  wondered   if  ConocoPhillips  would                                                                    
rather have a GRE or  a capital credit. Mr. Jepsen responded                                                                    
that  tax credits  probably provided  the biggest  "bang for                                                                    
the buck." In  terms of addressing the high  cost in Alaska,                                                                    
the capital credits were a better mechanism.                                                                                    
                                                                                                                                
2:12:56 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Fairclough  observed   that  many  thought  that                                                                    
capital  investment and  employment were  high on  the North                                                                    
Slope, and  asked if  that point of  view was  accurate. Mr.                                                                    
Jepsen replied  that there was  a lot  of work going  on the                                                                    
North Slope,  and stated that  the work was  associated with                                                                    
rebuilding  the  oil fields.  He  stated  that most  of  the                                                                    
fields  were  expected  to  have  been  fully  depleted  and                                                                    
abandoned, but  were still active.  He stated that  the work                                                                    
was  also  related  to  maintenance   and  radial  work.  He                                                                    
stressed  that  most  of  the   employment  was  related  to                                                                    
renewal.  He stated  that the  capital investment  was high,                                                                    
because of inflation.  He referred to a slide  (not on file)                                                                    
that  was  presented  to the  House  Finance  Committee.  He                                                                    
stated  that the  slide showed  capital investment  by year,                                                                    
and  then  showed the  capital  investment  on an  inflation                                                                    
adjusted basis. He remarked that  the capital investment was                                                                    
constantly  in   motion,  because  investment   depended  on                                                                    
various factors.                                                                                                                
                                                                                                                                
Vice-Chair Fairclough  inquired if  the dotted line  was the                                                                    
actual investment. Mr. Jepsen responded in the affirmative.                                                                     
                                                                                                                                
Vice-Chair Fairclough  wondered if  the spike  in investment                                                                    
was  relative to  the price  of  oil or  whether there  were                                                                    
other factors.  Mr. Jepsen  replied that  the spikes  were a                                                                    
result of large projects and expanded projects.                                                                                 
                                                                                                                                
2:17:17 PM                                                                                                                    
                                                                                                                                
Mr.  Heinrich   interjected  that   the  grey   shaded  area                                                                    
reflected the price  at the particular time.  He pointed out                                                                    
that  ConocoPhillips'  capital  programs had  expanded  over                                                                    
several years.                                                                                                                  
                                                                                                                                
Vice-Chair Fairclough queried  what the inflation adjustment                                                                    
would like in ten or  five year increments. She specifically                                                                    
wondered how much  money was lost over  inflation from price                                                                    
or  costs. She  shared  that steel  costs  were rising,  and                                                                    
wondered  if  the  inflation represented  new  increases  in                                                                    
capital investment,  or if it only  referred to retrofitting                                                                    
and refurbishing. Mr. Jepsen  responded inflation impacts on                                                                    
investment  were  a  mixture   of  capital  investments  and                                                                    
refurbishing.                                                                                                                   
                                                                                                                                
Senator  Bishop referred  to Mr.  Jepsen's earlier  comments                                                                    
regarding the material impact of  GRE and wondered where the                                                                    
capital  credits should  be applied.  Mr. Jepsen  understood                                                                    
the sensitivity regarding the capital  credits. He felt that                                                                    
the  capital credits  should be  targeted towards  well-work                                                                    
related issues.                                                                                                                 
                                                                                                                                
Senator  Hoffman observed  that ConocoPhillips's  camps were                                                                    
full with workers. He wondered  if there was a breakdown for                                                                    
the  numbers  of  rebuilding and  repair,  versus  potential                                                                    
development and new field  development. Mr. Jepsen responded                                                                    
in the negative.                                                                                                                
                                                                                                                                
Senator Hoffman  wondered if the  vast majority  of expenses                                                                    
related to  rebuilding and repair.  Mr. Jepsen  related that                                                                    
the  information could  be determined  by extrapolating  the                                                                    
age of  the fields,  and inferring  what the  activities may                                                                    
have  been.   He  remarked   that,  during   the  particular                                                                    
timeframe, there  was not much  work related  to replacement                                                                    
of pipelines, etc.                                                                                                              
                                                                                                                                
2:22:47 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:28:20 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
TODD ABBOT, PRESIDENT, PIONEER NATURAL RESOURCES ALASKA,                                                                        
began his displayed the PowerPoint, "Senate Finance                                                                             
Committee Testimony re: CS SB 21(RES)" (copy on file).                                                                          
                                                                                                                                
Mr. Abbot discussed slide 2, "Looking Forward Statements."                                                                      
                                                                                                                                
     Except  for  historical information  contained  herein,                                                                    
     the statements, charts and  graphs in this presentation                                                                    
     are forward-looking  statements that are  made pursuant                                                                    
     to   the  Safe   Harbor  Provisions   of  the   Private                                                                    
     Securities  Litigation  Reform  Act of  1995.  Forward-                                                                    
     looking  statements  and   the  business  prospects  of                                                                    
     Pioneer  are   subject  to  a   number  of   risks  and                                                                    
     uncertainties that  may cause Pioneer's  actual results                                                                    
     in  future  periods  to   differ  materially  from  the                                                                    
     forward-looking    statements.    These    risks    and                                                                    
     uncertainties include,  among other  things, volatility                                                                    
     of  commodity   prices,  product  supply   and  demand,                                                                    
     competition,  the ability  to obtain  environmental and                                                                    
     other permits and the  timing thereof, other government                                                                    
     regulation or  action, the ability to  obtain approvals                                                                    
     from third parties and  negotiate agreements with third                                                                    
     parties  on  mutually acceptable  terms,  international                                                                    
     operations and  associated international  political and                                                                    
     economic   instability,  litigation,   the  costs   and                                                                    
     results  of drilling  and  operations, availability  of                                                                    
     equipment, services and  personnel required to complete                                                                    
     the  Company's  operating  activities,  access  to  and                                                                    
     availability   of    transportation,   processing   and                                                                    
     refining  facilities,  Pioneer's   ability  to  replace                                                                    
     reserves, implement its business  plans or complete its                                                                    
     development  activities  as  scheduled, access  to  and                                                                    
     cost   of   capital,    the   financial   strength   of                                                                    
     counterparties   to  Pioneer's   credit  facility   and                                                                    
     derivative  contracts and  the purchasers  of Pioneer's                                                                    
     oil,  NGL  and   gas  production,  uncertainties  about                                                                    
     estimates of  reserves and  resource potential  and the                                                                    
     ability  to  add proved  reserves  in  the future,  the                                                                    
     assumptions  underlying  production forecasts,  quality                                                                    
     of  technical data,  environmental  and weather  risks,                                                                    
     including the  possible impacts of climate  change, and                                                                    
     acts of  war or  terrorism. These  and other  risks are                                                                    
     described in Pioneer's 10-K and  10-Q Reports and other                                                                    
     filings  with the  Securities and  Exchange Commission.                                                                    
     In  addition,  Pioneer  may  be  subject  to  currently                                                                    
     unforeseen  risks that  may have  a materially  adverse                                                                    
     impact on it. Pioneer undertakes no duty to publicly                                                                       
    update these statements except as required by law.                                                                          
                                                                                                                                
Mr. Abbot addressed slide 3, "Presentation Overview."                                                                           
                                                                                                                                
     -Pioneer overview                                                                                                          
                                                                                                                                
     -Importance of a healthy industry                                                                                          
                                                                                                                                
     -Competition for capital                                                                                                   
                                                                                                                                
     -CS SB 21(RES)                                                                                                             
                                                                                                                                
     -Incentives for Alaskan investments                                                                                        
                                                                                                                                
     -Closing thoughts                                                                                                          
                                                                                                                                
Mr. Abbot discussed slide 4, "Pioneer Natural Resources."                                                                       
                                                                                                                                
     Corporate overview:                                                                                                        
     - $19 Billion enterprise value                                                                                             
     - Member of the S&P 500                                                                                                    
     - Investment grade rating                                                                                                  
     - ~3,500 employees                                                                                                         
     - $3 Billion capital budget                                                                                                
     - $2 Billion cash flow from operations                                                                                     
     - Leading performer in peer group                                                                                          
                                                                                                                                
     Alaska Operations Overview:                                                                                                
     - 1st independent operator on North Slope                                                                                  
     - 70+ full-time Alaska employees                                                                                           
     - $14+ million in annual wages (employees)                                                                                 
     - 150 - 300 Alaska contract workers                                                                                        
     - ~$180 million 2013 capital budget                                                                                        
     - ~6,000 BOPD gross production                                                                                             
     - Net investor in Alaska                                                                                                   
                                                                                                                                
Mr. Abbot stated that Pioneer spent more money than it made                                                                     
in Alaska.                                                                                                                      
                                                                                                                                
2:30:34 PM                                                                                                                    
                                                                                                                                
Mr. Abbot addressed slide 5, "Pioneer Alaska Profile:                                                                           
Oooguruk."                                                                                                                      
                                                                                                                                
     Exploration:                                                                                                               
     - 11 exploration wells '02 -'05                                                                                            
     - 1 commercial project                                                                                                     
                                                                                                                                
     Oooguruk Quick Facts:                                                                                                      
     - 70 percent Pioneer (operator) : 30 percent Eni                                                                           
     - ~$1 billion capital invested                                                                                             
     - 12+ million barrels produced                                                                                             
     - ~$270 million in credits received                                                                                        
          (~7percent of total credits issued by the state)                                                                      
                                                                                                                                
Mr.  Abbot  discussed the  timeline  at  the bottom  of  the                                                                    
slide. He  related that the  proposed changes  represented a                                                                    
fourth change in  fiscal structure for Pioneer  since it had                                                                    
been in Alaska.                                                                                                                 
                                                                                                                                
Mr. Abbot spoke to slide 6, "What's Next?"                                                                                      
                                                                                                                                
     Nuna Project:                                                                                                              
                                                                                                                                
     Nuna-1 well drilled in 2012                                                                                                
                                                                                                                                
     1~50 MMBO of resource potential                                                                                            
                                                                                                                                
     Nuna-2 drilling underway                                                                                                   
                                                                                                                                
     Phase I development overview                                                                                               
     -Q3 2013 sanction decision                                                                                                 
     -~$1 Billion capital required                                                                                              
     -2015 first oil                                                                                                            
     -14 MBOPD peak production                                                                                                  
     -Jobs and economic impact                                                                                                  
                                                                                                                                
     Potential for 2nd drill site                                                                                               
                                                                                                                                
     Must compete for limited capital against low-risk,                                                                         
     fast-cycle projects in Lower 48                                                                                            
                                                                                                                                
Mr.  Abbot  stated  that  the  projects  were  currently  in                                                                    
appraisal.  He shared  that Pioneer  had recently  completed                                                                    
the drilling of  their second appraisal well.  A frack fleet                                                                    
was currently mobilized to complete  that project, and there                                                                    
would be a  production test, once the  project was complete.                                                                    
He stressed that  the resource was a 50  million barrel type                                                                    
of   resource,  with   14,000  barrels   per  day   at  peak                                                                    
production.  He  stressed that  there  would  be $1  billion                                                                    
worth of  capital, and provide  many jobs for the  state. It                                                                    
was a  relatively near-term project,  and had  potential for                                                                    
upside  with  a second  drill  side.  He remarked  that  the                                                                    
project needed to  compete with other projects  in the lower                                                                    
48 states.                                                                                                                      
                                                                                                                                
Mr. Abbot  discussed slide 7, "Pioneer  Competitive Resource                                                                    
Opportunities."  He  stated  that Pioneer  was  planning  to                                                                    
spend $3 billion  in capital in the upcoming  year. He noted                                                                    
that  most of  the  share would  go to  Wolfcamp/Spraeberry,                                                                    
which was an  old and mature basin. It  had continued growth                                                                    
thanks  to technology  and  new ideas.  He  shared that  the                                                                    
Pioneer chairman had recently declared  that he felt that it                                                                    
would become the  largest oil basin in the  world. He stated                                                                    
that  the  2013  production  growth   in  that  basin  would                                                                    
increase by  75,000 to 80,000  barrels per day, which  was a                                                                    
15 to 20 percent production  growth for a very mature field.                                                                    
He stated that the Eagle  Ford Shale would see approximately                                                                    
$575 million in investment, and  the Barnett Shale would see                                                                    
continual aggressive drilling. He  stressed that there was a                                                                    
deep inventory with 20 percent and above growth rates.                                                                          
                                                                                                                                
2:35:26 PM                                                                                                                    
                                                                                                                                
Mr. Abbot spoke to slide 8,  "CSSB 21(RES) Comments."                                                                           
                                                                                                                                
     Governor's Guiding Principles:                                                                                             
     -Tax policy must be fair to Alaskans                                                                                       
     -Any changes to oil taxes should, when taken together,                                                                     
     be geared to foster new production                                                                                         
     -Changes should result in a more simple tax system and                                                                     
     restore balance to our fiscal system                                                                                       
     -Tax policy must make Alaska competitive for the long-                                                                     
     term                                                                                                                       
                                                                                                                                
      Positives:                                                                                                                
     -Elimination of progressivity                                                                                              
     -Small producer credit extension                                                                                           
     -Gross revenue exclusion (GRE)                                                                                             
     -Escalating loss carry forward credit                                                                                      
     -$5 per barrel tax credit                                                                                                  
      Negatives:                                                                                                                
     -Loss of capital credits                                                                                                   
     -Increased base tax rate                                                                                                   
     -Complicated carry-forward loss calculation                                                                                
     -Disadvantages new entrants                                                                                                
                                                                                                                                
                                                                                                                                
Mr. Abbot  discussed slide 9, "Relative  Rankings and Policy                                                                    
Consideration."  He stated  that the  slide represented  the                                                                    
big companies that contribute to  the industry in Alaska. He                                                                    
pointed  out that  there was  a  broad array  of people  and                                                                    
companies. He  remarked that  each company  was a  driver in                                                                    
the   financial  market.   He   stressed  that   traditional                                                                    
independents were  rewarded for  production growth  and debt                                                                    
management. He  stated that while the  smaller independents'                                                                    
production   may  not   seem   significant,   they  have   a                                                                    
significant   economic  impact.   He   stressed  that   many                                                                    
companies may  have moved their investment  to North Dakota,                                                                    
if the small independents were not a part of the industry.                                                                      
                                                                                                                                
2:40:24 PM                                                                                                                    
                                                                                                                                
Mr.  Abbot spoke  to  slide 10,  "Eagle  Ford Operators  and                                                                    
Companies." He  stated that the  slide showed a list  of all                                                                    
of  the  different investors  in  the  Eagle Ford  Shale  in                                                                    
Texas. The companies  that were highlighted in  red and blue                                                                    
were also  businesses in Alaska.  He pointed out  that there                                                                    
was a  large number of  independent businesses on  the list,                                                                    
and furthered  that independent  businesses drilled  over 90                                                                    
percent of  the wells in  the US  in 2010. He  remarked that                                                                    
the large  resource plays were  driven by small  and midsize                                                                    
companies that  were becoming  innovative and  attempting to                                                                    
challenge some of  the harder assets. He  stressed that many                                                                    
of the fields were not  driven by the large companies taking                                                                    
a dominant position.                                                                                                            
                                                                                                                                
Vice-Chair Fairclough  directed the presentation to  slide 9                                                                    
and inquired why the three  companies were in red. Mr. Abbot                                                                    
replied  that those  companies were  considered "small"  and                                                                    
"independent" companies.                                                                                                        
                                                                                                                                
Mr.  Abbot   discussed  slide   11,  "Typical   New  Project                                                                    
Profile."   The  red   bars   were   the  facilities   under                                                                    
construction  and were  usually  a  multi-year process;  the                                                                    
green bars reflected drilling activity;  and the dotted line                                                                    
was project production.                                                                                                         
                                                                                                                                
Mr.  Abbot spoke  to  slide 12,    "Mid-Sized Producer."  He                                                                    
stated that the slide depicted  how Pioneer would evaluate a                                                                    
new project.  He explained that  the hashed bars  showed the                                                                    
discounted, after tax  cash flows for each  year under ACES.                                                                    
He  furthered that  the red  and green  bars reflected  what                                                                    
would  occur under  the current  proposal. He  stressed that                                                                    
the loss of  the credits would result in  greater capital up                                                                    
front. He  stated that Pioneer  was a net investor,  and had                                                                    
not yet turned a profit, so  their taxes would be due in the                                                                    
future.  He  remarked  that  the  benefits  of  the  current                                                                    
proposal would not occur for many years down the line.                                                                          
                                                                                                                                
2:46:42 PM                                                                                                                    
                                                                                                                                
Mr.  Abbot discussed  slide 13,    "New Entrant-Stand  Alone                                                                    
Project." He  pointed out  that a new  entrant would  face a                                                                    
worse situation than  a company like Pioneer,  under the new                                                                    
proposal.  He  remarked  that the  proposal  would  be  more                                                                    
beneficial  to  a large  producer  that  had a  current  tax                                                                    
liability, than to a smaller company.                                                                                           
                                                                                                                                
Mr. Abbot  spoke to slide  14,  "Industry Spending  on North                                                                    
Slope." He stated showcased the  impact of credits directly.                                                                    
He  stated that  the slide  showed  a five  year history  on                                                                    
capital expenditures by category,  and where the credit were                                                                    
applied. He pointed out that  43 percent of the credits were                                                                    
directed at  new wells, and  42 percent of the  credits were                                                                    
directed at facilities  to allow those wells  to produce. He                                                                    
stressed  that the  production was  declining, but  that did                                                                    
not mean that the credits did not have a positive impact.                                                                       
                                                                                                                                
Mr. Abbot  discussed slide 15,   "Fostering  New Production:                                                                    
Why Credits Matter."                                                                                                            
                                                                                                                                
      Benefits to State                                                                                                         
     -Credits directly encourage activity in Alaska                                                                             
     -Jobs, direct and indirect (9x multiplier)                                                                                 
     -More wells                                                                                                                
     -More oil                                                                                                                  
     -More royalties, taxes and throughput                                                                                      
                                                                                                                                
      Benefits to Developer                                                                                                     
     -Reduces investor risk                                                                                                     
     -Improves small project economics                                                                                          
     -Improves financial performance                                                                                            
     -Doesn't increase debt                                                                                                     
     -Builds healthy industry                                                                                                   
     -Strengthens competitiveness                                                                                               
                                                                                                                                
2:51:45 PM                                                                                                                    
                                                                                                                                
Mr.  Abbot   spoke  to  slide  16,   "CSSB  21(RES)  Closing                                                                    
Thoughts."                                                                                                                      
                                                                                                                                
      Pros                                                                                                                      
     -Eliminates progressivity                                                                                                  
     -Shares upside potential                                                                                                   
     -Improves competitiveness                                                                                                  
     -GRE reduces tax for new oil                                                                                               
     -Extends small producer credit                                                                                             
                                                                                                                                
      Cons                                                                                                                      
     -Elimination of credits increases investor risk                                                                            
     Requires more upfront capital                                                                                              
     -Increased base tax rates                                                                                                  
     -Does not simplify tax calculations                                                                                        
     Complex carry-forward loss calculations                                                                                    
     -Does not strongly motivate additional investment                                                                          
                                                                                                                                
      CS SB 21(RES) suggestions                                                                                                 
     -Targeted credits for new facilities/well related                                                                          
     costs                                                                                                                      
     -Allow targeted credits to be redeemable/ transferable                                                                     
     -Allow credits to be taken against any payment to the                                                                      
     state                                                                                                                      
                                                                                                                                
Mr.  Abbot  stressed that  credits  were  important for  the                                                                    
smaller  oil  companies. He  stated  that  a healthy  debate                                                                    
needed to  be held regarding  how the credits  were targeted                                                                    
and added that the credits should be transferable.                                                                              
                                                                                                                                
2:55:09 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer  pointed out that capital  credits had gotten                                                                    
the desired result  in the past and asked  how the committee                                                                    
could make sure that a  similar mechanism would get more oil                                                                    
in the pipeline.  Mr. Abbot responded that for  a company to                                                                    
claim  the credits  it had  to  be moving  forward with  new                                                                    
development and production.                                                                                                     
                                                                                                                                
Senator  Bishop  noted  that,  according  to  slide  14,  42                                                                    
percent  of  the  credits were  for  facilities.  Mr.  Abbot                                                                    
agreed.                                                                                                                         
                                                                                                                                
Senator Bishop  inquired what  those percentages  equated to                                                                    
barrels of oil produced. Mr. Abbot did not have that data.                                                                      
                                                                                                                                
Senator  Bishop noted  that was  the important  question and                                                                    
thanked Mr. Abbot for Pioneer's effort to hire Alaskans.                                                                        
                                                                                                                                
Co-Chair  Meyer  asked  if  Pioneer   had  built  their  own                                                                    
processing plant.  Mr. Abbot replied  that Pioneer  shared a                                                                    
facility with KRE.                                                                                                              
                                                                                                                                
Co-Chair Meyer  recalled that there  were five  producers in                                                                    
Pioneer's location.                                                                                                             
                                                                                                                                
2:59:37 PM                                                                                                                    
                                                                                                                                
Senator  Hoffman inquired  if  Pioneer  was suggesting  that                                                                    
there should  be changes  to the  way the  credits currently                                                                    
apply.  Mr. Abbot  responded that  some of  the credits  for                                                                    
projects encouraged  new production,  but some were  not. He                                                                    
felt that the  focus for credits should be on  new wells and                                                                    
facilities.                                                                                                                     
                                                                                                                                
Senator  Hoffman   stated  that  the  goal   should  be  new                                                                    
exploration and  that without exploration there  would be no                                                                    
new oil.  He inquired  if exploration  was a  priority among                                                                    
the  three categories.  Mr. Abbot  replied that  exploration                                                                    
was extremely risky  and that a large amount  of capital was                                                                    
spent on a project.                                                                                                             
                                                                                                                                
Senator Hoffman  observed that the  purpose was to  get more                                                                    
oil  in the  pipeline. He  acknowledged that  the costs  for                                                                    
explorers was  high and noted  that the governor's  goal was                                                                    
to get  new barrels of oil  on the line. He  inquired if the                                                                    
credits  were  more  valuable  to  Pioneer  than  the  other                                                                    
options  in the  resources  committee.  Mr. Abbot  responded                                                                    
that the  credits were more  valuable to Pioneer.  He opined                                                                    
that development, and not exploration,  would get new oil in                                                                    
the pipe line.                                                                                                                  
                                                                                                                                
3:05:01 PM                                                                                                                    
                                                                                                                                
Senator   Hoffman  wondered   if  the   well  drilling   and                                                                    
development dollars add more oil  to the pipeline. Mr. Abbot                                                                    
replied in the affirmative.                                                                                                     
                                                                                                                                
Senator Hoffman  asked how facilities encouraged  new oil in                                                                    
the line.  Mr. Abbot replied  that he was unsure,  but noted                                                                    
that a large investment applied to most projects.                                                                               
                                                                                                                                
Vice-Chair  Fairclough observed  that new  exploration could                                                                    
put new  oil in the  pipeline eventually. She  stressed that                                                                    
the most  immediate oil  was in  currently fields,  but felt                                                                    
that  it  was  merely   a  short-term  solution.  Mr.  Abbot                                                                    
responded that  slide 11  showed that  the capital  cost was                                                                    
post-sanction  dollars. He  remarked that  the capital  cost                                                                    
did  not  include the  exploration  or  appraisal phase.  He                                                                    
remarked that there were many years of appraisal and                                                                            
exploration before the investment return could be obtained.                                                                     
He felt that the credits should be focused on the near-                                                                         
term, mid-term, and long-term.                                                                                                  
                                                                                                                                
Vice-Chair Fairclough noted that there were different                                                                           
investment   strategies   for   different   forms   of   oil                                                                    
production.                                                                                                                     
                                                                                                                                
3:09:48 PM                                                                                                                    
                                                                                                                                
ED KERR, VICE PRESIDENT OF LAND AND BUSINESS DEVELOPMENT,                                                                       
ARMSTRONG OIL AND GAS, read from a prepared testimony (copy                                                                     
on file):                                                                                                                       
                                                                                                                                
     Thank you for  giving me the opportunity  to speak with                                                                    
     the Senate  Finance Committee today  about the  oil and                                                                    
     gas  industry  on the  North  Slope.  We are  a  strong                                                                    
     supporter of SB 21 we  believe that the passage of this                                                                    
     bill will not only  result in significant investment on                                                                    
     the  North  Slope,  it  will serve  as  a  catalyst  to                                                                    
     increasing  production as  well. Some  of you  may have                                                                    
     heard Bill Armstrong make a  presentation to the Senate                                                                    
     Resources  Committee  a couple  of  weeks  ago. If  you                                                                    
     heard that presentation you  probably already know that                                                                    
     it has  been our  opinion that you  in the  Senate have                                                                    
     been inundated  with so much information  that I cannot                                                                    
     begin to  imagine how  you can process  it all.  I have                                                                    
     been in this  business for more than 30  years and have                                                                    
     experience in  numerous states  and some  various other                                                                    
     regions in  the world  and I  have to  tell you,  it is                                                                    
     incredibly  difficult  to  keep  up  with  all  of  the                                                                    
     information that  is being provided  with regard  to SB
     21.                                                                                                                        
                                                                                                                                
     For this reason I will not  have a power point, I would                                                                    
     rather  talk  to  you  and  see if  you  think  I  have                                                                    
     anything  to  add  with  respect   to  how  Alaska  can                                                                    
     increase its  production in  a manner  that is  fair to                                                                    
     Alaskans and  is something that  the oil  companies can                                                                    
     work with.  Today I  would like  to keep  things pretty                                                                    
     simple  and keep  to the  fundamentals. The  only thing                                                                    
     that really tells the story  on the North Slope is what                                                                    
     does  its production  profile look  like  and is  there                                                                    
     anything on the horizon that will help it.                                                                                 
                                                                                                                                
     As I  was trying to  get ready  to talk with  you about                                                                    
     this I had an internal  fight with myself.  It reminded                                                                    
     me of  my high  school English class  when we  read the                                                                    
     Dickens classic, A  Tale of Two Cities.  The first part                                                                    
     of opening  line of  the book  is "It  was the  best of                                                                    
     times, it was the worst  of times." Guys this describes                                                                    
     the  oil industry  on North  Slope and  where it  is at                                                                    
     this point  in time  better than  anything I  can think                                                                    
     of.                                                                                                                        
                                                                                                                                
     I  know revenues  to the  State have  been up  over the                                                                    
     last few  years and I know  that you as members  of the                                                                    
     legislature  have an  important  duty  to make  certain                                                                    
     that the  State gets its  fair share and  maximizes the                                                                    
     state's fiscal position. The hard  part of the story is                                                                    
     when you  look to  the future and  the fact  that while                                                                    
     the  North   Slope  is  one  of   the  most  remarkable                                                                    
     petroleum  provinces  in  the  world, it  is  the  only                                                                    
     petroleum province in  the US that is  not enjoying the                                                                    
     benefit  of the  amazing technological  advancements in                                                                    
     horizontal drilling and stage  frack technology. I know                                                                    
     you have seen the same  graph in probably ten different                                                                    
     presentations of  the North Slope's  production decline                                                                    
     while   Texas   and   North  Dakota   have   production                                                                    
     increases. Last  Friday the ADN  reported on  the front                                                                    
     page that Texas has  doubled its production since 2010,                                                                    
     doubled its production in  3 years, amazing (especially                                                                    
     given the  fact that Alaska  has experienced about  a 6                                                                    
     percent annual decline during that  period), and we all                                                                    
     know  North Dakota  passed Alaska  last year  to become                                                                    
     the  second largest  producer in  the United  States. I                                                                    
     never  thought I  would see  that. I  know someone  can                                                                    
     look at that  data set and feel that this  is the worst                                                                    
     of times because  as we all know the  states revenue is                                                                    
     only as  good as the  production and if  the production                                                                    
     keeps dropping at  this rate, soon the  state will have                                                                    
     big issues with its budget.                                                                                                
                                                                                                                                
     I  don't know  how long  TAPS can  last at  the current                                                                    
     decline  rate  and  frankly  that's  not  the  question                                                                    
     anyone should be  asking, we should be  asking, "How in                                                                    
     the  heck can  we have  one of  the greatest  petroleum                                                                    
     provinces  in  the world  and  get  beat out  by  North                                                                    
     Dakota in daily production.  Guys as a petroleum system                                                                    
     North  Dakota  is  a  Jr.   High  team  and  Alaska  is                                                                    
     Professional team, there is no  way this should happen,                                                                    
     but it has and we have  to ask ourselves how did we get                                                                    
     to this spot  and what will it take for  Alaska to take                                                                    
     its rightful  spot as  the top  producing state  in the                                                                    
     nation.                                                                                                                    
                                                                                                                                
     Before  I give  you any  more of  my thoughts  I should                                                                    
     probably  take a  second  to tell  you  a little  about                                                                    
     Armstrong Oil  & Gas and  what we have done  in Alaska.                                                                    
     We are  an independent oil and  gas company headquarter                                                                    
     in Denver, Colorado. We would  probably be considered a                                                                    
     bit of  new type of company  for the North Slope  as we                                                                    
     are privately  owned, we carry  no debt and as  such we                                                                    
     do everything  out of our  own pockets,  every decision                                                                    
     we make is  based on the bottom line and  not what some                                                                    
     stock analyst on Wall Street thinks or says.                                                                               
                                                                                                                                
     I  am  a minority  owner  in  Armstrong and  have  been                                                                    
     involved  in  Alaska  since  the  beginning.  We  began                                                                    
     studying the  North Slope diligently  in the  late 90s,                                                                    
     we  made  our  first  lease acquisition  in  the  early                                                                    
     2000s.  Our business  model is to establish significant                                                                    
     exploration  and   development  projects   through  the                                                                    
     utilization of  all of the technology  available to our                                                                    
     industry.  It is  our  opinion that  we  have the  best                                                                    
     scientist  in  the  world   these  scientists  have  an                                                                    
     extremely  broad  and  diverse  experience  level  that                                                                    
     affords us a perspective that  most people do not have.                                                                    
     Most of  our Geoscientist spent their  early years with                                                                    
     Exxon.                                                                                                                     
                                                                                                                                
     At any  rate the  first concept  we pulled  together on                                                                    
     the  North Slope  was what  is today  the O3  field. We                                                                    
     initially established  the concept  through acquisition                                                                    
     of leasehold and technical data  and then we brought in                                                                    
     Pioneer to  help us develop the  field. Subsequently we                                                                    
     brought a  company called  Kerr McGee  into to  help us                                                                    
     define  and   develop  what  is  today   known  as  the                                                                    
     Nikaitchuq field that is operated  by ENI. We currently                                                                    
     operate  the  North Fork  Gas  Field  in South  Central                                                                    
     Alaska  and on  the North  Slope we  are partners  with                                                                    
     Repsol E&P USA  where we currently have  3 rigs running                                                                    
     on the North Slope.                                                                                                        
                                                                                                                                
     If I can  I would like to take second  to apologize for                                                                    
     the  lack of  a  polished presentation  for you  today.                                                                    
     The fact is I am not  that good of a public speaker and                                                                    
     I didn't know  I was coming here until a  few days ago,                                                                    
     so  my  apologies.  What  you will  hear  from  me  are                                                                    
     observations of what we as  a company have found is the                                                                    
     number one  critical attribute any area  needs in order                                                                    
     to  have a  successful  thriving oil  and gas  industry                                                                    
     that will either sustain itself or grow even larger.                                                                       
                                                                                                                                
     The  most  critical  barometer  for  the  health  of  a                                                                    
     producing region is the rig  count (it is the canary in                                                                    
     the  mine). Depending  on the  week,  you see  Alaska's                                                                    
     fluctuate  between  6  and  14.  Let  me  put  that  in                                                                    
     perspective, the  Permian Basin not all  of Texas, just                                                                    
     the Permian  Basin is at  430. That is around  43 times                                                                    
     greater  than all  of Alaska  by itself.  Assuming each                                                                    
     area drills and completes a  well in a couple of months                                                                    
     that means in  one year the Permian Basin  brings on an                                                                    
     additional 2580  wells while all of  Alaska would bring                                                                    
     on about  60. With this  metric in  mind it is  easy to                                                                    
     see  how Alaska  is drifting  the wrong  direction with                                                                    
     its production. You can apply  this metric to any basin                                                                    
     or  state  and you  will  get  the same  answer  (North                                                                    
     Dakota is at 178 rigs,  Oklahoma has 190), in order for                                                                    
     Alaska  to continue  to be  considered relevant  in the                                                                    
     petroleum industry  something must  be done to  make it                                                                    
     competitive with  the other states  and regions  of the                                                                    
     world.                                                                                                                     
                                                                                                                                
     When I look at some of  the public companies I see such                                                                    
     amazing results. Pioneer recently  reported it had over                                                                    
     36,000 net resource locations  with potential in excess                                                                    
     of 8BBO.  EOG Resources  has had  oil production growth                                                                    
     of  35 percent  in  2010,  52 percent  in  2011 and  39                                                                    
     percent in  2012, they have  a drilling  inventory that                                                                    
     will keep them busy for the  next 15 years even if they                                                                    
     do  no new  business. My  point is  that this  story is                                                                    
     occurring in  tons of companies  all through  the lower                                                                    
     48, states  like Pennsylvania are  on the rise  and the                                                                    
     state of  Alaska needs to  do something to  make itself                                                                    
     more competitive.  We feel like  SB 21 is a great start                                                                    
     to  getting Alaska  competitive  with the  rest of  the                                                                    
     world.                                                                                                                     
                                                                                                                                
     I think it is important to  note that SB 21 needs to be                                                                    
     passed  as   it  is  and   possibly  with   some  minor                                                                    
     improvements in  order to  make certain  Alaska becomes                                                                    
     competitive  with the  rest of  the world.  We need  to                                                                    
     make certain  the GRE stays  in place  as it is  and is                                                                    
     not limited  to the first 7  years. A study of  the new                                                                    
     fields on the  North Slope show how  time consuming and                                                                    
     difficult it  is to  bring fields on  line and  as such                                                                    
     you need  the GRE to  be effective throughout  the life                                                                    
     of the field.  The monetizing  of the EIC will serve to                                                                    
     continue to  encourage new entrants  with new  ideas to                                                                    
     come to the North Slope.                                                                                                   
                                                                                                                                
     The  fact   is  the   North  Slope  is   remote,  cold,                                                                    
     expensive, with tremendous regulatory  issues and SB 21                                                                    
     is needed or Alaska  will not be considered competitive                                                                    
     with the  rest of the  world. It is next  to impossible                                                                    
     to convince a substantial company  to come to the North                                                                    
     Slope  to  develop  new  fields  when  the  states  own                                                                    
     experts rate the state of  Alaska worse than Kazakhstan                                                                    
     for  new field  development.  It is  important to  note                                                                    
     that  by supporting  SB  21  as a  new  entrant we  are                                                                    
     actually helping  the state's  fiscal position.  We are                                                                    
     walking  away  from  the cash  reimbursement  from  the                                                                    
     state of the LCF and QCE,  so that we can have a stable                                                                    
     tax regime.   At the end of the day  the state has only                                                                    
     upside with regard to the new field portion of SB 21.                                                                      
                                                                                                                                
     We do think SB 21 simplifies  the tax code, we think it                                                                    
     is fair  to Alaskans,  that it is  durable and  that it                                                                    
     makes Alaska  competitive. I believe that  you need all                                                                    
     parts  of SB  21 for  the state  to be  successful. The                                                                    
     state needs  the legacy  field provisions  of SB  21 to                                                                    
     pass so  that the fields  like Prudhoe Bay and  KRU can                                                                    
     provide quick immediate barrels  into TAPS and keep the                                                                    
     transportation costs on TAPS from increasing.                                                                              
                                                                                                                                
     The state also desperately needs  SB 21 to pass so that                                                                    
     new entrants will  be encouraged to come to  the NS and                                                                    
     invest,  this  is  the  future   of  the  North  Slope.                                                                    
     Currently 92  percent of all production  from the North                                                                    
     Slope  comes  from 2  operators,  I  know of  no  other                                                                    
     significant petroleum  province in  the world  that has                                                                    
     this fact  set.  As  a comparison the top  20 operators                                                                    
     in Permian make up 47  percent of the basins production                                                                    
     and when I asked our research  guys how many make up 92                                                                    
     percent, I  was told that  the number was so  high that                                                                    
     it would  take a  tremendous amount  of time  to figure                                                                    
     that  out. On  the North  Slope the  top two  operators                                                                    
     drilled 86  percent of all  of the wells in  the basin,                                                                    
     in the  Permian Basin the  top 20 operators make  up 35                                                                    
     percent of all wells drilled.                                                                                              
                                                                                                                                
     None  of this  is the  operators fault  they are  doing                                                                    
     their job, but  it does show that there  is a desperate                                                                    
     need for more  players on the North Slope  and in order                                                                    
     to have  any impact this  change needs to be  done now.                                                                    
     As an  example from the  time we started working  on O3                                                                    
     until the  first production  came out  of the  field it                                                                    
     took 10 years, so as you  can see something needs to be                                                                    
     done right now.                                                                                                            
                                                                                                                                
     Further  evidence   of  the   North  Slope   not  being                                                                    
     competitive can be found within  its lease sales. Since                                                                    
     we  made  our first  bid  in  Alaska  in 2001,  a  very                                                                    
     successful  sale would  be one  that  is considered  to                                                                    
     bring  in   around  $10MM  with  around   6  successful                                                                    
     bidders, compare  this against the GOM  sales that have                                                                    
     more bidders and as an  example on the last Central GOM                                                                    
     sale  had one  tract that  brought in  $157MM that  one                                                                    
     tract being well  in excess of the last  10 state North                                                                    
     Slope Lease  sales. This is  evidence of a  system that                                                                    
     needs fixing.                                                                                                              
                                                                                                                                
     So enough about  the negative news. The good  news is I                                                                    
     can tell you  from the perspective of  the company that                                                                    
     brought  Pioneer, ENI  and Repsol  to  the North  Slope                                                                    
     that  there   are  a  lot   of  companies   that  would                                                                    
     desperately like to do business  on the North Slope but                                                                    
     they have  shied away because  of the ACES  tax system.                                                                    
     To  be sure  the costs  concern them  and I  believe we                                                                    
     need  to  work hard  to  streamline  the permitting  of                                                                    
     projects on the North Slope,  but I believe the primary                                                                    
     thing  that keeps  them away  is the  current ACES  tax                                                                    
     system.                                                                                                                    
                                                                                                                                
     SB 21 is a huge step  in the right direction to getting                                                                    
     new  entrants on  the North  Slope as  well as  getting                                                                    
     production from  new fields up and  running, increasing                                                                    
     the life  of TAPS  and providing  high paying  jobs for                                                                    
     Alaskans in  the process. There  is an  incredible step                                                                    
     function change in our industry  that is going on right                                                                    
     before our eyes and if  Alaska doesn't make the changes                                                                    
     provided  for in  the Governor's  bill this  revolution                                                                    
     has the potential to pass  over Alaska. So these are my                                                                    
     thoughts, but  I would really  like to talk  about this                                                                    
     with  all  of you.  This  is  an  amazing time  in  our                                                                    
     business and I  want to make certain that  you guys ask                                                                    
     any question at all that  you feel should be discussed.                                                                    
     I love this business and think  that is the best way to                                                                    
     get the  heart of the  discussion so please ask  me any                                                                    
     questions you  want about taxes,  permitting, potential                                                                    
     of the  North Slope (it  is huge) or anything  else you                                                                    
     want to talk about.                                                                                                        
                                                                                                                                
3:31:38 PM                                                                                                                    
                                                                                                                                
Senator  Dunleavy wondered  how the  landscape of  the North                                                                    
Slope would  look like in  5 years, if  the bill were  to be                                                                    
adopted.  Mr.  Kerr  responded  that  Armstrong  would  move                                                                    
forward with new projects, if the bill was adopted.                                                                             
                                                                                                                                
Senator Dunleavy  inquired if  Armstrong would  be producing                                                                    
more  oil if  the bill  passed.  Mr. Kerr  responded in  the                                                                    
affirmative, but  stressed that  there were  many permitting                                                                    
issues that must be addressed.                                                                                                  
                                                                                                                                
Co-Chair Meyer noted that the  state was trying to deal with                                                                    
permitting issues.                                                                                                              
                                                                                                                                
3:34:33 PM                                                                                                                    
                                                                                                                                
Senator Bishop wondered  if the Baakan or  Eagleford had any                                                                    
tax credits. Mr.  Kerr responded that they did  not have tax                                                                    
credits.  He   remarked  that  those  locations   had  quick                                                                    
turnover   time,   and   made  money   relatively   quickly.                                                                    
Conversely,  the North  Slope presented  challenges, because                                                                    
of its remoteness. He furthered  that Armstrong would rather                                                                    
forgo the credit in favor of a more reasonable tax rate.                                                                        
                                                                                                                                
Senator Bishop  queried the turnaround time  in North Dakota                                                                    
from the deal  with the landowner to the  drilling time. Mr.                                                                    
Kerr replied  that the turnaround  time could be a  short as                                                                    
three months.                                                                                                                   
                                                                                                                                
Senator Bishop requested slide 4  of Econ One's presentation                                                                    
and offered that he felt  that the committee substitute made                                                                    
Alaska competitive with the other states.                                                                                       
                                                                                                                                
Co-Chair  Kelly requested  a description  of Texas'  oil tax                                                                    
regime. Mr. Kerr  replied that that it was a  flat tax rate.                                                                    
He  stated  that  Armstrong  did   not  currently  have  any                                                                    
production in Texas.                                                                                                            
                                                                                                                                
Co-Chair  Kelly  queried  Mr.  Kerr's  opinion  about  a  63                                                                    
percent  government   take.  Mr.  Kerr  asked   for  further                                                                    
clarification.                                                                                                                  
                                                                                                                                
Co-Chair  Kelly wondered  how he  felt about  replacing ACES                                                                    
with  a   flat  government   take  across  all   prices  and                                                                    
production. Mr.  Kerr stated that it  would be inappropriate                                                                    
for him to  respond, because he did not  have the parameters                                                                    
in order to form a responsible opinion.                                                                                         
                                                                                                                                
3:39:07 PM                                                                                                                    
                                                                                                                                
Senator  Dunleavy  inquired  if   Armstrong  was  saying  it                                                                    
accepted the  committee substitute. Mr. Kerr  responded that                                                                    
if he had to choose between  the proposal and ACES, he would                                                                    
choose  the  proposal. He  stated  that  pioneer had  40,000                                                                    
locations  and   that  he  looked  through   Alaska  with  a                                                                    
different lens.                                                                                                                 
                                                                                                                                
Vice-Chair Fairclough  inquired if  the bill had  a positive                                                                    
effect  on "wildcat"  companies. Mr.  Kerr replied  that the                                                                    
proposal was  better than ACES. He  furthered that Armstrong                                                                    
was trying to plan for long-term full-cycle economics.                                                                          
                                                                                                                                
Vice-Chair  Fairclough queried  if  Armstrong was  currently                                                                    
producing in  Alaska. Mr. Kerr responded  that Armstrong was                                                                    
producing  in Southcentral  Alaska, with  approximately 13.5                                                                    
million cubic feet per day.                                                                                                     
                                                                                                                                
Vice-Chair  Fairclough  wondered  if Armstrong  usually  saw                                                                    
development  and production  through, or  if Armstrong  sold                                                                    
locations.  Mr. Kerr  responded that  Armstrong did  both of                                                                    
those things.                                                                                                                   
                                                                                                                                
Vice-Chair  Fairclough  inquired  what  the  best  component                                                                    
under CSSB 21 (RES) compared  to ACES. Mr. Kerr replied that                                                                    
it was the elimination of  progressivity and how the tax was                                                                    
calculated.                                                                                                                     
                                                                                                                                
Co-Chair  Meyer  wondered if  Armstrong  or  Repsol was  the                                                                    
operator on  the North Slope.  Mr. Kerr replied  that Repsol                                                                    
was the operator on the North Slope.                                                                                            
                                                                                                                                
Co-Chair  Meyer stated  that Armstrong  was the  operator in                                                                    
Cook Inlet,  and therefore was  an operator and  a producer.                                                                    
Mr. Kerr agreed with that summation.                                                                                            
                                                                                                                                
3:43:24 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
3:48:45 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
KEN THOMPSON, PRESIDENT, ALASKA VENTURE CAPITAL GROUP (via                                                                      
teleconference), introduced himself.                                                                                            
                                                                                                                                
3:50:37 PM                                                                                                                    
                                                                                                                                
Mr. Thompson spoke to slide 2, "Why Consider Our Company's                                                                      
Perspectives?"                                                                                                                  
                                                                                                                                
     1)  Most  active   exploration  company  exploring  and                                                                    
     developing sole on North Slope state lands                                                                                 
          a) Drilled 10 of 36 exploration wells on state                                                                        
          lands in 2007-12 (more than COP, BP, XOM, ENI,                                                                        
          Repsol, Armstrong combined)                                                                                           
          b) 105,000 leased acres in 3 core areas in JV                                                                         
          partnership with Ramshorn Exploration (affiliate                                                                      
          of large Nabors Industries)                                                                                           
                                                                                                                                
     2)  ~$200 MM  invested to  date in  Alaska North  Slope                                                                    
     projects…3 discoveries, acquired discovery                                                                                 
                                                                                                                                
     3) Mustang development  project under construction…$577                                                                    
     MM capital, 44 MMBO                                                                                                        
                                                                                                                                
     4)    Three     other    development     projects    in                                                                    
     permitting/conceptual    engineering   stages.    >$1.5                                                                    
     billion capital                                                                                                            
                                                                                                                                
     5)  First production  and cash  flow to  state and  our                                                                    
     companies…startup of Mustang in 3Q 2014                                                                                    
                                                                                                                                
     6)  On investment  of $200  MM,  received refunded  tax                                                                    
     credits  totaling $69  MM but  State will  receive back                                                                    
     this amount  in the  first year of  Mustang production,                                                                    
     and $1.2 billion over field life.                                                                                          
                                                                                                                                
     7) Experience in bringing  other independents to Alaska                                                                    
     and in raising capital for Alaska                                                                                          
                                                                                                                                
Mr.  Thompson  discussed  slide  3,  "North  Slope  Drilling                                                                    
Results  and Success."  He explained  that the  slide showed                                                                    
the activity  since 1999,  which was the  year of  the first                                                                    
lease.  He shared  that most  of the  drilling had  occurred                                                                    
during the recent three to four years.                                                                                          
                                                                                                                                
Mr. Thompson  spoke to  slide 4,   "What Difference  can Our                                                                    
Company make?"  He shared that  it was interesting  that the                                                                    
smaller fields could add up to  over 50,000 barrels of oil a                                                                    
day. He pointed out that  the developments he was showing on                                                                    
the slide could offset decline.  He stated that if the major                                                                    
companies had incentives in legacy  fields, the Alaska curve                                                                    
would turn upward. He opined  that Alaska needed exploration                                                                    
and production.                                                                                                                 
                                                                                                                                
3:59:10 PM                                                                                                                    
                                                                                                                                
Mr. Thompson discussed slide 5,   "We See Positives in SB 21                                                                    
CS to Help Grow Production."                                                                                                    
                                                                                                                                
     1) Increases "Carry Forward Loss Credit (CFL)" from 25                                                                     
     percent to 35 percent and interest on unused credits.                                                                      
                                                                                                                                
          Positive: incrementally  more future cash  flow to                                                                    
          re-deploy into facilities and drilling                                                                                
                                                                                                                                
     2)Extends "Small Producers" credits from 2022, reduces                                                                     
     small producers' tax bill by $12 MM/yr.                                                                                    
                                                                                                                                
          Positive: more  cash flow  for small  producers to                                                                    
          re-deploy into facilities and drilling                                                                                
                                                                                                                                
     3) Specifies 20 percent QCE tax credit certificate                                                                         
     payment in single year vs. 2 but does eliminate QCE on                                                                     
     12/31/13                                                                                                                   
                                                                                                                                
          Positive: more immediate cash  to put into Mustang                                                                    
         development facilities and drilling 2014                                                                               
                                                                                                                                
          Negative:  no QCE  payment  in  2015 to  re-deploy                                                                    
          into Mustang development drilling                                                                                     
                                                                                                                                
     4) Eliminates progressivity factor, increases base tax                                                                     
     rate from 25 percent to 35 percent but provides $5/bbl                                                                     
     produced bbl credit                                                                                                        
                                                                                                                                
          Positive:  Eliminating   progressivity  simplifies                                                                    
          tax  calculation and  will be  a public  relations                                                                    
          plus for AK                                                                                                           
                                                                                                                                
          Negative:  Increase  in  base  tax  rate  from  25                                                                    
          percent to 35 percent  not expected, but partially                                                                    
          offset by…                                                                                                            
                                                                                                                                
          Positive: $5/bbl produced bbl credit better                                                                           
          balances relative state/producer takes at low oil                                                                     
          prices                                                                                                                
                                                                                                                                
     5)  For  new oil,  increases  "20  percent GRE"  to  30                                                                    
     percent GRE  and amends definition  of leases  that can                                                                    
     be included for this GRE                                                                                                   
                                                                                                                                
          Positive: Should incentivize new oil production                                                                       
          on more leases, also help during low oil price                                                                        
          cycles                                                                                                                
                                                                                                                                
     6) Removes  old distance  limitations and allows  for a                                                                    
     30   percent   "Exploration   Incentive   Credit"   for                                                                    
     exploration   wells  drilled   that   target  new   oil                                                                    
     discoveries regardless of location                                                                                         
                                                                                                                                
          Huge Positive: For exploration companies like                                                                         
          ours-will result in more companies and more oil                                                                       
          on State lands                                                                                                        
                                                                                                                                
     7)  Overall, thanks  for the  changes in  the CS,  this                                                                    
     should help in attracting  new capital and leveling oil                                                                    
     production                                                                                                                 
                                                                                                                                
4:04:50 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer wondered  if the  $5/bbl was  a good  offset                                                                    
against  the  rise  from  25  percent  to  35  percent.  Mr.                                                                    
Thompson  replied   that  it   only  partially   offset  the                                                                    
decrease, but furthered  that the CS was  more attractive at                                                                    
oil prices.                                                                                                                     
                                                                                                                                
SB 21 was HEARD and HELD in committee for further                                                                               
consideration.                                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
SB 21 AVCG BRPC Senate Finance Hearing Thompson 030513 FINAL SLIDES.pdf SFIN 3/5/2013 1:30:00 PM
SB 21
SB 21 Conoco Phillips Senate Finance Committee 2013-03-05 Final.pdf SFIN 3/5/2013 1:30:00 PM
SB 21
SB 21 Pioneer Testimony 0305 FINAL.pdf SFIN 3/5/2013 1:30:00 PM
SB 21
SB 21 Kerr Testimony.docx SFIN 3/5/2013 1:30:00 PM
SB 21