Legislature(2011 - 2012)BUTROVICH 205

02/15/2012 03:30 PM RESOURCES

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03:32:16 PM Start
03:32:57 PM SB192
03:33:15 PM Presentation: Overview of Plan of Development by Conocophillips
05:01:37 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ -Overview of Plans of Development TELECONFERENCED
Presentation by BP, ConocoPhillips, and Exxon
<Bill Hearing to Continue 2/17/12>
-- Testimony <Invitation Only> --
            SB 192-OIL AND GAS PRODUCTION TAX RATES                                                                         
PRESENTATION: OVERVIEW OF PLAN OF DEVELOPMENT BY CONOCOPHILLIPS                                                             
3:32:57 PM                                                                                                                    
CO-CHAIR WAGONER announced that SB 192 was up for consideration                                                                 
and that there was a letter from BP in members' packets. He said                                                                
that ConocoPhillips would make a presentation.                                                                                  
^Presentation: Overview of Plan of Development by ConocoPhillips                                                                
3:33:15 PM                                                                                                                    
SCOTT  JEPSEN, Vice  President, External  Affairs, ConocoPhillips                                                               
Alaska, stated  that today's presentation was  on the development                                                               
outlook for ConocoPhillips' operating  assets on the North Slope.                                                               
The presentation  consists of three  topics: the  Greater Kuparuk                                                               
Area (GKA), the  Western North Slope (known as  Alpine), and ACES                                                               
- what can be done to make a better climate for investment.                                                                     
He showed  a slide of GKA  and some of the  surrounding units. He                                                               
related that  the field  was started in  1981 and  currently five                                                               
fields  are  producing:  Kuparuk,  West Sak,  Tarn,  Tabasco  and                                                               
Meltwater. All  the fields are  on water  flood and all  but West                                                               
Sak  are undergoing  an  EOR (enhanced  oil  recovery) process  -                                                               
taking  hydrocarbons  and  NGLs,  mixed  with  natural  gas,  and                                                               
injecting them into the reservoir.  This helps improve the "sweep                                                               
efficiency" and loosen the oil from the rocks.                                                                                  
He  said   that  ConocoPhillips  is  also   considering  doing  a                                                               
viscosity  reducing water  alternating gas  pilot project  in the                                                               
West Sak, which  is currently producing 14,000  to 15,000 barrels                                                               
a day. In  essence, it would take Kuparuk  miscible injectant and                                                               
put it into  the West Sak where it has  the potential of reducing                                                               
the  viscosity. The  injection  of  water allows  for  gas to  be                                                               
better swept out of the field.                                                                                                  
MR. JEPSON  related that there  are three  production facilities,                                                               
47  drill sites,  and 1,149  wells  which to  date have  produced                                                               
about 2.4  billion barrels, of  which, about 2.2  billion barrels                                                               
have come out of GKA. There  is production opportunity for a long                                                               
period of time to come.                                                                                                         
He said  ConocoPhillips processes  Pioneer's oil, gas,  and water                                                               
from the  Oooguruk Field. Pioneer  moves all their  production to                                                               
ConocoPhillips who treats it and  returns some of the watered gas                                                               
back  to  Pioneer. ConocoPhillips  also  has  a number  of  other                                                               
third-party processing agreements that  allow explorers and other                                                               
parties that want  to do business inside the Kuparuk  Unit to use                                                               
parts  of   their  infrastructure,  such  as   roads,  pads,  and                                                               
emergency services.                                                                                                             
3:36:18 PM                                                                                                                    
MR.  JEPSON  turned to  slide  4,  which demonstrates  where  GKA                                                               
production is coming  from. In 2000, about 2,000  barrels per day                                                               
were coming out  of GKA. In 2011, about 50  percent of production                                                               
stems from production work that has been done since 2000.                                                                       
SENATOR FRENCH asked what percent the annual decline is.                                                                        
MR.  JEPSON replied  that it  was about  16 percent  in 2000  and                                                               
about 8 or 9 percent by 2010.                                                                                                   
SENATOR FRENCH concluded  that the current decline  for the whole                                                               
field, including the new production, is at about 8 percent.                                                                     
MR. JEPSON said 6 to 8 percent.                                                                                                 
He  continued to  say that  the top  layer in  the graph  depicts                                                               
production from GKA satellites. He  noted that the small graph on                                                               
slide  4  shows  the  total   water  and  oil  production.  Water                                                               
production is  increasing and drives  up the cost  of production.                                                               
Also depicted is the total oil,  water, and gas production in GKA                                                               
fields in 2011.  Total gas produced per day is  about 600 million                                                               
cubic feet.                                                                                                                     
3:39:09 PM                                                                                                                    
MR. JEPSON explained  that slide 5 outlines GKA's  work plans for                                                               
2012. There are  plans to continue coil tubing  drilling with the                                                               
rig  that was  built  in  2009, as  well  as  to continue  rotary                                                               
drilling.  Also planned  is an  expansion of  water injection  at                                                               
CPF1 and use of a new Shark Tooth appraisal well.                                                                               
3:40:36 PM                                                                                                                    
SENATOR FRENCH asked what type of  oil is expected from the Shark                                                               
MR. JEPSON replied that it is conventional oil.                                                                                 
SENATOR FRENCH inquired what that development might lead to.                                                                    
MR.  JEPSON said  it could  develop into  a new  drill site  with                                                               
multiple wells, depending on production risks and costs.                                                                        
CO-CHAIR WAGONER asked where it is located.                                                                                     
MR. JEPSON said it was located north of Tarn.                                                                                   
3:42:43 PM                                                                                                                    
MR. JEPSON continued to say there  was a plan to evaluate the 220                                                               
square miles of  recently acquired seismic shoot.  He noted there                                                               
have been  five seismic surveys of  GKA. The strategy is  to look                                                               
for  indications where  the  water flood  is  progressing to  the                                                               
He  reported  on  another  plan  to  evaluate  enhanced  recovery                                                               
techniques, such as fresh water injection.                                                                                      
CO-CHAIR asked if  water injection washes oil off  the rocks like                                                               
carbon dioxide would.                                                                                                           
MR. JEPSON said it did not.                                                                                                     
He continued  to explain that another  enhanced recover technique                                                               
used deep penetration polymers which could seal off water zones.                                                                
MR. JEPSON  described GKA's maintenance  and renewal  work plans:                                                               
upgrade the Kuparuk airport, continue  the smart pig program, and                                                               
maintain the external monitoring program to look for corrosion.                                                                 
SENATOR WIELECHOWSKI  asked if the maintenance  and renewal plans                                                               
are eligible for tax credits under ACES.                                                                                        
MR.  JEPSON explained  the category  of capital  improvements for                                                               
SENATOR  WIELECHOWSKI asked  if the  previous examples  would fit                                                               
that definition.                                                                                                                
BOB  HEINRICH, Vice  President,  Finance, ConocoPhillips  Alaska,                                                               
answered  the  question. He  explained  that  the runway  project                                                               
would qualify  as a  capital project. The  smart pig  project has                                                               
both capital and operating components.                                                                                          
MR. JEPSON  continued to  discuss GKA work  plans. He  noted that                                                               
some of the  infrastructure needs to be upgraded  or replaced due                                                               
to the extended life of the fields.                                                                                             
CO-CHAIR WAGONER  asked if  GKA has more  producible oil  than it                                                               
was originally  thought to have, or  if it is just  taking longer                                                               
to produce it.                                                                                                                  
MR.  JEPSON  responded that  there  is  much  more oil  than  was                                                               
He  related the  plan  to use  a workover  rig  to repair  broken                                                               
wells. There is also ongoing operation and maintenance work.                                                                    
CO-CHAIR WAGONER asked  for the total number  of production wells                                                               
in Kuparuk.                                                                                                                     
MR. JEPSON said there were about 600 wells.                                                                                     
He said  he was not in  the position to reveal  the total capital                                                               
budget for  Kuparuk; however,  70 percent of  it is  going toward                                                               
maintenance and 30 percent to development.                                                                                      
3:48:30 PM                                                                                                                    
MR. JEPSEN  turned to a  project that  has been impacted  by ACES                                                               
called  West Sak,  a viscous  oil site.  The West  Sak core  area                                                               
depicted  on slide  6  has about  100 wells,  many  of which  are                                                               
horizontal wells.  He called the  1J area  the best part  of West                                                               
Sak, yet  there were  a lot  of problems with  it, such  as water                                                               
breakthroughs and high costs.                                                                                                   
He related  that the next  best part of  West Sak targeted  to be                                                               
developed is the  Eastern Northeast West Sak  (NEWS). The capital                                                               
cost will be around $1 billion  to $2.5 billion and could lead to                                                               
one or two  new well pads with  up to 115 new wells  with as many                                                               
as 150 million  barrels of incremental gross oil  recovery.  This                                                               
area, however,  is technically challenged  and there may  be sand                                                               
control issues  and matrix bypass  events -  water breakthroughs.                                                               
Several techniques  will be used  to combat  technical challenges                                                               
in Eastern NEWS.                                                                                                                
He  listed issues  the company  will consider  when investing  in                                                               
Eastern NEWS:  technical risk,  production risk,  operation risk,                                                               
and the fiscal environment in Alaska.                                                                                           
SENATOR WIELECHOWSKI  asked if the  reason ConocoPhillips  is not                                                               
moving forward on this project is ACES.                                                                                         
MR.  JEPSEN  clarified  that   ConocoPhillips  will  likely  move                                                               
forward with  a portion of the  project, but ACES takes  away the                                                               
SENATOR WIELECHOWSKI asked  how many barrels are  expected out of                                                               
1J per day.                                                                                                                     
MR. JEPSEN replied about 15-20 percent.                                                                                         
SENATOR  WIELECHOWSKI inquired  about the  net present  value and                                                               
internal rates of  return under ACES for the  150 million barrels                                                               
per day expected from Eastern NEWS.                                                                                             
MR.  JEPSEN stated  that  he  can't share  the  numbers with  the                                                               
committee.  He pointed  out  that  ConocoPhillips also  considers                                                               
long-term cash flow and net income, which ACES limits.                                                                          
SENATOR  WIELECHOWSKI  maintained that  the  state  is trying  to                                                               
ensure  that it  receives  maximum value  for  oil resources.  He                                                               
asked if Mr. Jepsen would be  willing to share internal data with                                                               
DOR or  with individual  legislators on  a confidential  basis in                                                               
order to assess the data under various financial scenarios.                                                                     
MR. JEPSEN said  it was problematic to do so  on a project basis.                                                               
He noted he was willing to share data on a portfolio basis.                                                                     
3:54:34 PM                                                                                                                    
MR.   HEINRICH  added   that   ConocoPhillips   does  not   share                                                               
proprietary information with partners, either.                                                                                  
SENATOR  WIELECHOWSKI requested  modeling from  ConocoPhillips in                                                               
order to  strike a fair balance  between the state's and  the oil                                                               
company's  needs.  He  stressed   that  without  information  the                                                               
legislature has a hard time providing tax breaks.                                                                               
MR.  JEPSEN   suggested  that   relevant  information   would  be                                                               
forthcoming in the presentation.                                                                                                
3:56:42 PM                                                                                                                    
MR. JEPSEN concluded  that the ultimate size of  the Eastern NEWS                                                               
project  will  depend  on  if the  upside  offsets  the  downside                                                               
financially under ACES.                                                                                                         
He informed the committee that  ConocoPhillips has an interest in                                                               
heavy and  viscous oil  in many  areas of  the Western  West Sak.                                                               
These areas  are shallower,  heavier, and  colder making  it very                                                               
difficult to  use conventional technology. He  suggested that the                                                               
legislature  look   at  the  prospectivity  of   heavy  oil  very                                                               
cautiously.  The   Ugnu  area  is   even  more   challenged  with                                                               
permafrost issues where thermodynamics are counterproductive.                                                                   
CO-CHAIR WAGONER asked  if UAF is involved in  any joint research                                                               
projects related to heavy oil production.                                                                                       
MR.  JEPSEN  said he  wasn't  aware  of  any heavy  oil  research                                                               
efforts by UAF.                                                                                                                 
3:59:42 PM                                                                                                                    
MR.  JEPSEN moved  on to  Western North  Slope (WNS),  or Alpine,                                                               
Development which first came into  production in 2000. It was the                                                               
largest U.S. onshore  discovery since the 1970's.  There are four                                                               
producing pools, Alpine, Fiord, Nanuq,  and Quannik, all of which                                                               
are  on the  water flood,  and all  except Qannik  are undergoing                                                               
EOR. When the field was  first found, the gross ultimate recovery                                                               
was about  400 million barrels.  Twelve years later, it  is still                                                               
producing about  77,000 barrels per  day and it has  exceeded the                                                               
initial gross ultimate recovery.                                                                                                
MR. JEPSEN  turned to slide  8 in order  to show the  impact that                                                               
ongoing drilling  has on field rate  in the WNS. The  graph shows                                                               
WNS oil production field rates by  year, as well as how much oil,                                                               
gas, and  water is produced from  each site. The total  amount of                                                               
gas handled is 185 million cubic feet per day.                                                                                  
SENATOR FRENCH mentioned that he  toured the Alpine field several                                                               
years  ago and  Sean  Parnell from  ConocoPhillips  was his  tour                                                               
4:02:11 PM                                                                                                                    
MR. JEPSEN  discussed ConocoPhillips'  work plans for  WNS. There                                                               
will be  continued rotary  drilling of  extended-reach horizontal                                                               
wells, an  ongoing stimulation program,  a CD3  facility upgrade,                                                               
and CD5  (Alpine West)  development. He noted  that the  wells in                                                               
WNS are technically difficult.                                                                                                  
SENATOR FRENCH said he was  excited about the development of CD5.                                                               
He requested the estimate of capital costs for the project.                                                                     
MR.  JEPSEN replied  that it  would  be about  $600 million,  but                                                               
there will  be a new  cost estimate by the  end of the  year that                                                               
will be more.                                                                                                                   
SENATOR FRENCH asked how much more it might be.                                                                                 
MR. JEPSEN did not know.                                                                                                        
He  pointed out  the artist's  rendering of  what the  new bridge                                                               
might look like - slide 9.                                                                                                      
CO-CHAIR WAGONER asked about the cost of the bridge project.                                                                    
MR. JEPSEN did not have that number.                                                                                            
MR.  HEINRICH  added  that  the bridge  is  being  engineered  to                                                               
accommodate conditions of the permit.                                                                                           
MR. JEPSEN said permit requirements have increased the cost.                                                                    
SENATOR FRENCH asked  for an estimate of  the expected production                                                               
from CD5.                                                                                                                       
MR. JEPSEN  replied that ConocoPhillips  has not  publicly talked                                                               
about the reserve estimate for CD5.                                                                                             
He discussed  development plans for  CD5, which could lead  to up                                                               
to  33 well  slots  with  production starting  in  late 2015.  He                                                               
addressed the decision to develop  CD5 long before ACES came into                                                               
play. ConocoPhillips  decided that  if they  were to  receive the                                                               
permit for CD5, they would develop it.                                                                                          
SENATOR STEDMAN requested the capital costs for CD5.                                                                            
MR. JEPSEN  reiterated the  cost estimate  of $600  million which                                                               
would be revised by the end of the year.                                                                                        
MR. HEINRICH added  that there were changes in  the rate markets,                                                               
SENATOR STEDMAN requested the net costs.                                                                                        
MR. HEINRICH said he didn't have that information.                                                                              
SENATOR  STEDMAN asked  if it  would be  substantially less  than                                                               
$600 million.                                                                                                                   
MR.  HEINRICH replied  that it  would be  reduced by  the capital                                                               
credit program.                                                                                                                 
CO-CHAIR  WAGONER requested  that Mr.  Jepsen provide  those cost                                                               
MR.  JEPSEN asked  if Senator  Wagoner was  looking for  a number                                                               
related to the 20 percent capital credit.                                                                                       
CO-CHAIR  WAGONER  said the  request  includes  any credits  that                                                               
apply to the project.                                                                                                           
SENATOR STEDMAN addressed the progressivity  rate, the 20 percent                                                               
capital credit,  federal income tax  deductions, and  others that                                                               
could  result  in  90  percent write-offs  for  the  project.  He                                                               
stressed the need  for balance when evaluating  costs and credits                                                               
when trying to adjust the fiscal environment.                                                                                   
4:09:16 PM                                                                                                                    
MR. HEINRICH offered to provide  an illustrative example of final                                                               
SENATOR STEDMAN  opined that it  would be good to  understand the                                                               
basic mechanics without the need for specific numbers.                                                                          
MR.  HEINRICH  pointed  out  that  one  of  the  challenges  with                                                               
progressivity in  ACES is  that the  "front end"  capital credits                                                               
provide benefits, but the production  is burdened with the higher                                                               
tax rates over time.                                                                                                            
SENATOR  FRENCH voiced  appreciation for  the testimony  from Mr.                                                               
Jepson  and  Mr.  Heinrich.  He stressed  the  intense  need  for                                                               
information  in order  to make  the best  decisions possible  for                                                               
CO-CHAIR WAGONER noted BP will have a presentation next week.                                                                   
SENATOR WIELECHOWSKI inquired  how long it would  take for start-                                                               
up in  CD5, what the  "ramp up" would be,  and how long  it would                                                               
MR.  JEPSEN reiterated  that CD5  would come  on stream  in about                                                               
2015. He said he did not have a detailed production profile.                                                                    
CO-CHAIR WAGONER added that Exxon  would also have a presentation                                                               
next week.                                                                                                                      
MR.  HEINRICH pointed  out that  the production  estimate is  not                                                               
intended  to be  the  ramp up  range; it  is  the estimated  peak                                                               
SENATOR WIELECHOWSKI asked if CD5  is going forward regardless of                                                               
a proposed tax change.                                                                                                          
MR.  JEPSEN reiterated  that the  engineering is  currently being                                                               
done  and  then the  project  would  be  taken  to the  board  of                                                               
directors  and management  to decide  whether to  go forward.  He                                                               
said they are not recommending not doing it because of ACES.                                                                    
SENATOR WIELECHOWSKI  asked if there  are projects that  have not                                                               
been recommended because of ACES.                                                                                               
MR.  JEPSEN explained  that ConocoPhillips  has  an inventory  of                                                               
projects  that  are  being  considered   based  on  a  number  of                                                               
4:14:58 PM                                                                                                                    
SENATOR   WIELECHOWSKI  requested   a   list   of  projects   not                                                               
recommended because of ACES.                                                                                                    
MR.  JEPSEN referred  to a  letter that  discussed projects  that                                                               
would go forward if ACES was changed.                                                                                           
SENATOR  STEDMAN  requested  an  explanation  of  the  processing                                                               
facilities  and  the  constraints  faces  both  above  and  below                                                               
ground. He wanted information on throughput bottlenecks.                                                                        
MR. JEPSEN  used Kuparuk to  explain wells  with high gas  to oil                                                               
ratios  and  high water  to  oil  ratios, which  both  negatively                                                               
impact production. The  solution is to drill new  wells that have                                                               
4:18:18 PM                                                                                                                    
MR. JEPSEN  reported on drilling  challenges that lead  to higher                                                               
well  costs -  slide  11.  The graph  shows  well  costs in  2011                                                               
dollars, now, and in the past.  Today, wells are more complex and                                                               
the targets aren't as large, which  has resulted in a 340 percent                                                               
average increase in well costs.                                                                                                 
CO-CHAIR  WAGONER  asked  how  thick the  seam  is  on  laterally                                                               
drilled wells.                                                                                                                  
MR. JEPSEN replied that they are typically 10 to 15 feet wide.                                                                  
SENATOR WIELECHOWSKI asked where  the $350 million ConocoPhillips                                                               
invested last year went.                                                                                                        
MR.  JEPSEN  thought Senator  Wielechowski  was  referring to  an                                                               
earlier presentation  by Mr.  Garland and said  he stood  by that                                                               
SENATOR WIELECHOWSKI repeated the question.                                                                                     
MR.  JEPSEN explained  that  ConocoPhillips  does not  publically                                                               
provide that information; however, DOR has it.                                                                                  
SENATOR WIELECHOWSKI  concluded that  even though  drilling costs                                                               
increased by  340 percent,  ConocoPhillips invested  $350 million                                                               
in 2011, all at very good returns.                                                                                              
4:21:33 PM                                                                                                                    
MR. HEINRICH  suggested that the  statement should be  taken from                                                               
the perspective  of the corporate  viewpoint. Over 50  percent of                                                               
production  comes from  gas business,  and gas  prices have  been                                                               
substantially  lower than  in prior  years. Returns  from Alaska,                                                               
relative  to   the  corporate  average,   are  higher   and  make                                                               
corporations look  good. He  explained cash  margins to  make his                                                               
SENATOR WIELECHOWSKI stated  that ConocoPhillips produces 240,000                                                               
barrels  of oil  equivalent a  day with  strong cash  margins. He                                                               
asked if Mr. Heinrich agreed.                                                                                                   
MR.  HEINRICH agreed,  relative to  the corporate  average, which                                                               
includes gas production.                                                                                                        
SENATOR  WIELECHOWSKI summarized  that ConocoPhillips  has strong                                                               
cash margins and very good rates of return in Alaska.                                                                           
MR.  HEINRICH again  agreed, relative  to the  corporate average,                                                               
which includes gas production.                                                                                                  
SENATOR  WIELECHOWSKI asked  how much  profit ConocoPhillips  has                                                               
made in Alaska  since ACES went into effect. He  suggested it was                                                               
about $10 billion.                                                                                                              
MR. JEPSEN said that was correct.                                                                                               
SENATOR  WIELECHOWSKI  asked  if 13  percent  of  ConocoPhillips'                                                               
worldwide  production and  30 percent  of their  worldwide profit                                                               
comes from Alaska.                                                                                                              
MR. HEINRICH  said with last  year's higher oil prices  and lower                                                               
gas prices, those figures sound correct.                                                                                        
MR. JEPSON added that ConocoPhillips  also paid a large amount in                                                               
severance taxes and royalties.                                                                                                  
MR. HEINRICH stated  that for every $1  of income, ConocoPhillips                                                               
pays about  $2 in  production taxes and  royalties, so  over that                                                               
same time frame, ConocoPhillips paid about $20 billion.                                                                         
MR. JEPSEN  returned to development  outlook and  summarized that                                                               
drilling costs have  increased and what was easy oil  is now hard                                                               
He turned  to slide 12  to summarize  the development of  GKA and                                                               
WNS. The near term focus is on  light oil and some of the viscous                                                               
oil in West Sak. The  technology regarding light oil is available                                                               
and there is greater potential to add near term rate.                                                                           
He  said that  technical  advancements have  been made  regarding                                                               
viscous  oil; however,  the right  balance of  risks and  rewards                                                               
must be  present in order to  develop the viscous oil.  Heavy oil                                                               
technologies are being evaluated but  are not near term projects.                                                               
ConocoPhillips is doing exploration  and satellite development in                                                               
Alaska,  which  will  also require  consideration  of  risks  and                                                               
rewards.  He  mentioned  that  ConocoPhillips  bought  additional                                                               
leases in the state lease sale.  He hoped that the fiscal climate                                                               
would change enough to allow for new investments.                                                                               
4:28:44 PM                                                                                                                    
CO-CHAIR   WAGONER  asked   if  ConocoPhillips   is  looking   at                                                               
developing Beaufort Sea leases.                                                                                                 
MR.  JEPSEN  related  that   the  company  recently  relinquished                                                               
several Beaufort Sea  leases. He did not know  what remained. The                                                               
focus is currently on the Chukchi Sea.                                                                                          
SENATOR STEDMAN  inquired about expected capital  expenditures in                                                               
FY 2013 through FY  2016. He asked if there was  much of a change                                                               
since the last submission of data.                                                                                              
MR. JEPSEN reported  that ConocoPhillips has been  fairly flat in                                                               
terms of total capital investment  in 2010 and 2011. He predicted                                                               
that the next data would show a similar result.                                                                                 
SENATOR STEDMAN  rephrased the  question. He  stated that  he has                                                               
the  aggregate  number  for  FY  13  of  $3,018,000,000  expected                                                               
statewide  from all  companies. He  asked if  there has  been any                                                               
change  of course  in  recent  months, or  if  the projection  is                                                               
MR.  HEINRICH  explained  that  ConocoPhillips  has  historically                                                               
spent in the $700 million to  $800 million range the last several                                                               
years for  capital expenditures  in Alaska.  He pointed  out that                                                               
within the  FY 13  to FY  15 estimate  is the  increment addition                                                               
from the CD5 project.                                                                                                           
SENATOR STEDMAN concluded  that not much has changed  in the last                                                               
six  months. In  the past  there has  been conflicting  testimony                                                               
regarding that issue.                                                                                                           
4:33:39 PM                                                                                                                    
MR.  HEINRICH discussed  aspects  of ACES  the  industry sees  as                                                               
impediments  to investment  -  slide  13. He  showed  a chart  of                                                               
government and industry average share  in Alaska. He said he used                                                               
the price  of $30  per barrel  of oil as  the cost  structure. He                                                               
related that he used DOR data  accounting for tax credits from an                                                               
industry perspective.  The increase of  total take is due  to the                                                               
progressivity feature in ACES.                                                                                                  
SENATOR FRENCH asked  if ConocoPhillips pays about  30 percent as                                                               
an effective tax rate.                                                                                                          
MR. HEINRICH said that sounds correct for ACES.                                                                                 
SENATOR FRENCH asked if ConocoPhillips  pays a 35 percent federal                                                               
tax rate.                                                                                                                       
MR. HEINRICH  said absolutely. ConocoPhillips  happens to  be one                                                               
of the largest  taxpayers in the U.S. Its corporate  tax rate for                                                               
2010 was a little over 42  percent and included state and federal                                                               
taxes, but excludes production taxes.                                                                                           
SENATOR STEDMAN said he would  wait to see how those calculations                                                               
come out. He predicted they would  be closer to 25 or 30 percent.                                                               
He  noted   testimony  in   previous  hearings   which  suggested                                                               
adjusting the progressivity.                                                                                                    
4:38:12 PM                                                                                                                    
SENATOR STEVENS joined the committee.                                                                                           
MR. HEINRICH opined that the competitive  rate is found at a much                                                               
lower price than  $120 oil. He added that it  is hard to pinpoint                                                               
a particular price  without the context of  other levers embedded                                                               
in ACES.                                                                                                                        
SENATOR STEDMAN thought the problem  was the continuous lessening                                                               
of  the industry's  share  and that  the  industry thought  there                                                               
should be a flat marginal rate such as in Norway.                                                                               
MR. HEINRICH agreed that progressivity is the problem.                                                                          
4:40:51 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if there  were points under ACES where                                                               
the government take is fair.                                                                                                    
MR.  JEPSEN replied  that at  the $60  and $70  lower end  of the                                                               
range, where  it is closer to  the 25 percent statutory  rate, is                                                               
where ConocoPhillips  is making large investments.  He maintained                                                               
that the governor's  proposal of bracketing takes  away the issue                                                               
of progressivity  and is simple and  straightforward. Legislation                                                               
such as  HB 110 would  serve to allow  the industry to  look more                                                               
favorably upon the risk/reward balance.                                                                                         
SENATOR WIELECHOWSKI  requested clarification  of the $60  to $70                                                               
MR. JEPSEN  noted that area was  closer to the statutory  rate of                                                               
ACES and is similar to the balance found in other regimes.                                                                      
SENATOR WIELECHOWSKI pointed out that  the government take is not                                                               
that low in HB 110.                                                                                                             
MR. JEPSEN  corrected that he  was describing what he  would like                                                               
to see. The governor's bill is a good first step.                                                                               
4:43:03 PM                                                                                                                    
MR.  HEINRICH described  slide 14,  the  government and  industry                                                               
marginal share in Alaska. The marginal  rate is the impact of the                                                               
incremental dollar. For  example, at the $110 mark  on the graph,                                                               
the  increase in  price from  $110 to  $111 results  in about  80                                                               
percent  of the  incremental dollar  going to  taxing authorities                                                               
and 20 percent remaining for the investor.                                                                                      
SENATOR  STEDMAN  disagreed. He  noted  that  the previous  slide                                                               
shows the effective tax rate at 25 percent to 30 percent.                                                                       
MR. JEPSEN asked if Senator  Stedman was referring to ACES versus                                                               
the total tax burden.                                                                                                           
SENATOR STEDMAN said yes.                                                                                                       
MR. HEINRICH  clarified that the  graph shows the total  tax, but                                                               
the increases are driven by the progressivity element of ACES.                                                                  
MR. JEPSEN pointed  out that when ConocoPhillips  looks at taxes,                                                               
they look at the entire tax  burden. He agreed that the PPT value                                                               
is less  than 80 percent, but  ACES drives the marginal  tax rate                                                               
so high.                                                                                                                        
4:45:40 PM                                                                                                                    
MR. HEINRICH drew attention to  slide 15 which shows how industry                                                               
earnings  in Alaska  are limited.  Using DOR  data, the  industry                                                               
created  a model  to show  how earnings  are affected  over price                                                               
ranges.  The  graph  includes  all   taxes  and  shows  that  the                                                               
differences  are  driven  by   the  progressivity  element  which                                                               
changes  tax rates  over prices.  At $80  to $120  oil, which  is                                                               
where oil  prices have recently  been, the industry  earnings are                                                               
essentially flat.  ConocoPhillips' earnings mirror that  line. As                                                               
oil prices  increase, the earnings  should increase, and  that is                                                               
not happening under the current structure.                                                                                      
MR.  JEPSEN noted  that  the graph  also  includes the  predicted                                                               
earnings under HB 110, which  are slightly better under ACES, but                                                               
enough to change the balance of risk/reward.                                                                                    
MR. HEINRICH  said the company recognizes  that SB 192 is  just a                                                               
placeholder.  Slide   16  demonstrates   why  marginal   take  is                                                               
important. At  $135, oil industry earnings  become negative under                                                               
SB 192.                                                                                                                         
4:48:51 PM                                                                                                                    
MR.  HEINRICH  discussed why  progressivity  is  the problem  and                                                               
showed how  investment has remained flat.  He compared investment                                                               
spending in  Alaska with that  in the Lower  48, which was  up by                                                               
104  percent. He  noted that  2012 is  predicted to  have a  flat                                                               
capital expenditure  profile in Alaska.  ConocoPhillips continues                                                               
to invest about $9 million in  Alaska each year, but could invest                                                               
more under an improved fiscal structure.                                                                                        
SENATOR  STEDMAN recalled  that it  has been  recommended to  the                                                               
Senate  Finance Committee  that  the state  adjust  the ACES  tax                                                               
structure  to  deal  with  light   oil.  He  questioned  if  that                                                               
adjustment should be structured to  include heavy oil, similar to                                                               
heavy  oil  plays  in  Alberta and  North  Dakota,  according  to                                                               
yesterday's testimony.                                                                                                          
MR. JEPSEN  answered that Bakken  and Eagle Ford are  not similar                                                               
to the  heavy oil found  in Alaska,  but are similar  to Alaska's                                                               
light oil.                                                                                                                      
CO-CHAIR WAGONER  clarified that yesterday's  discussion centered                                                               
on the  cost of fracking  shale plays  and the suggestion  was to                                                               
lower the  tax structure.  He agreed that  Bakken and  Eagle Ford                                                               
had light oil and Alberta had heavy oil.                                                                                        
MR.  JEPSEN pointed  out  that  what is  produced  in Alberta  is                                                               
entirely different than what is produced on the North Slope.                                                                    
He agreed that Alaska should have  a tax structure similar to the                                                               
one at Eagle Ford and Bakken.                                                                                                   
4:55:03 PM                                                                                                                    
MR. HEINRICH  concluded by reaffirming  statements ConocoPhillips                                                               
CEO, Jim  Mulva, and ConocoPhillips Alaska  President, Trond-Erik                                                               
Johansen, made about capital investments  to be made in Alaska if                                                               
the  business  environment  improves. The  following  commitments                                                               
were made:  more effort  to bring challenged  oil to  market from                                                               
increased   drilling   activity,   pursuit  of   more   satellite                                                               
developments  at  Alpine  and  Kuparuk,   and  pursuit  of  major                                                               
projects in existing  fields. He stated that $5  billion would be                                                               
invested  in  the  next  three  to  five  years  if  there  is  a                                                               
meaningful fiscal change.                                                                                                       
SENATOR  WIELECHOWSKI  countered that  after  Mr.  Mulva came  to                                                               
Alaska  and made  that statement,  Senator Wielechowski  ran some                                                               
numbers on the  proposal to invest $5 billion  and concluded that                                                               
it would  result in a  60 percent tax credit  deduction resulting                                                               
in a  $2 billion investment.  Also, ConocoPhillips would  make $3                                                               
billion in  profits at a 92.58  percent rate of return.  He asked                                                               
Mr. Jepsen if he agreed.                                                                                                        
MR. JEPSEN opined  that the proposed projects did  not have those                                                               
rates of return. He stated that it  was not possible to do a one-                                                               
to-one comparison due  to the proprietary nature  of the numbers.                                                               
He offered to look into it.                                                                                                     
SENATOR WIELECHOWSIK  said the analysis  was done under  ACES. He                                                               
requested  more  information if  Mr.  Jepsen  disagreed with  the                                                               
SENATOR  FRENCH  asked if  the  $5  billon was  a  ConocoPhillips                                                               
pledge or an industry pledge by the Big Three.                                                                                  
MR. JEPSEN said it was a gross number.                                                                                          
He  addressed Senator  Stedman's previous  question about  making                                                               
fiscal frameworks  in Alaska the same  as those in the  Lower 48.                                                               
He said  that ConocoPhillips  looks at the  total tax  burden and                                                               
there are  differences in royalty  rates and severance  taxes. He                                                               
emphasized that  when he talks  about a similar  fiscal framework                                                               
he is not talking about a  single component, but rather about the                                                               
total tax burden.                                                                                                               
CO-CHAIR WAGONER requested clarification  of the timeframe of the                                                               
$5 billion pledge.                                                                                                              
MR. JEPSEN  clarified that it was  $5 billion over three  to five                                                               
years, in addition to what ConocoPhillips is currently spending.                                                                
SENATOR  STEDMAN agreed  the  legislature needs  to  look at  the                                                               
"entire puzzle", but  also at the prospectivity of  the basin, in                                                               
addition to the tax structure.                                                                                                  
MR. JEPSEN  agreed. He observed  that the average field  size has                                                               
decreased and costs have increased in Alaska.                                                                                   
SENATOR FRENCH  opined that the  reason some are  legislators are                                                               
considering  state  direct  financial  participation  is  because                                                               
under HB 110 it's hard to see how the state wins.                                                                               
MR.  JEPSEN  said  he  believes  if the  state  changes  the  tax                                                               
structure there  will be a near  term drop in state  revenue, but                                                               
higher  production and  revenues in  the future  with a  stronger                                                               
economy and more jobs.                                                                                                          
CO-CHAIR WAGONER thanked the presenters.                                                                                        
SB 192 was held in committee.                                                                                                   

Document Name Date/Time Subjects
1- SB 176 Hearing Req Pkt 020212.pdf SRES 2/15/2012 3:30:00 PM
SB 176
8 - SB176-FN-DOR-TAX-02-01-12.pdf SRES 2/15/2012 3:30:00 PM
SB 176
2 - DRAFT CSSB 176.pdf SRES 2/15/2012 3:30:00 PM
SB 176
3 - SB 176 Explanation of DRAFT CS Changes.pdf SRES 2/15/2012 3:30:00 PM
SB 176
4 - SB 176 Sponsor Stmt DRAFT CS 021312.pdf SRES 2/15/2012 3:30:00 PM
SB 176
5 - SB 176 Sectional DRAFT CS.pdf SRES 2/15/2012 3:30:00 PM
SB 176
6 - SB 176 GravelProducts.pdf SRES 2/15/2012 3:30:00 PM
SB 176
7 - SB176-FN-DNR-DMLW-2-10-12.pdf SRES 2/15/2012 3:30:00 PM
SB 176
9 - SB 176 Support Email Colaska CPA, VP Fin.pdf SRES 2/15/2012 3:30:00 PM
SB 176
10 - SB 176 Support Email Eklutna.pdf SRES 2/15/2012 3:30:00 PM
SB 176
11 - SB 176 Support Email Twin Peaks Construction.pdf SRES 2/15/2012 3:30:00 PM
SB 176
12 - SB 176 Support email COLASKA Controller.pdf SRES 2/15/2012 3:30:00 PM
SB 176
13 - SB 176 Support Letter COLASKA Pres.pdf SRES 2/15/2012 3:30:00 PM
SB 176
14 - SB 176 Support Letter COLASKA VP.pdf SRES 2/15/2012 3:30:00 PM
SB 176
15 - SB 176 Support Letter HC Contractors FB.pdf SRES 2/15/2012 3:30:00 PM
SB 176
16 - SB 176 Support Letter Secon.pdf SRES 2/15/2012 3:30:00 PM
SB 176
17 - SB 176 Support Letter Sheep Creek Dev.pdf SRES 2/15/2012 3:30:00 PM
SB 176
18 - SB176 Support Letter Excl Pav_Univ Redi Mix.pdf SRES 2/15/2012 3:30:00 PM
SB 176
19 - SB176 Support Letter AGC Exec Dir.pdf SRES 2/15/2012 3:30:00 PM
SB 176
20 - SB 176 Support testimony AS&G VP Contrl.pdf SRES 2/15/2012 3:30:00 PM
SB 176
21 - SB 176 Support testimony AS&G VP GM.pdf SRES 2/15/2012 3:30:00 PM
SB 176
22 - SB 176 Support Letter Browns Hill Quarry.pdf SRES 2/15/2012 3:30:00 PM
SB 176
ConocoPhillips SB192 Senate Resources Testimony.pdf SRES 2/15/2012 3:30:00 PM
SB 192
BP -- Fitzpatrick Letter to Senate Resources_02-15-2012.pdf SRES 2/15/2012 3:30:00 PM
SB 192
Exxon - Pittman Letter to Senate Resources - 2-15-12.pdf SRES 2/15/2012 3:30:00 PM
SB 192
Back-Up_ConocoPhillips_News.pdf SRES 2/15/2012 3:30:00 PM
SB 192
Back-Up_ConocoPhillips_Restructuring Analyst presentation 7-14-11.pdf SRES 2/15/2012 3:30:00 PM
SB 192