Legislature(2013 - 2014)BUTROVICH 205

02/18/2013 03:30 PM RESOURCES


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Audio Topic
03:31:27 PM Start
03:31:53 PM SB21
07:04:50 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
Independent Oil & Gas Companies
-- Testimony <Invitation Only> --
-- 6 p.m. Public Testimony --
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
3:31:53 PM                                                                                                                    
CHAIR GIESSEL announced SB 21 to be up for consideration.                                                                       
                                                                                                                                
3:32:25 PM                                                                                                                    
KARA   MORIARTY,  Executive   Director,   Alaska   Oil  and   Gas                                                               
Association  (AOGA),   Anchorage,  Alaska,  said  they   are  the                                                               
professional trade association  of the oil and  gas industry. She                                                               
said the changes in SB  21 were reviewed and unanimously approved                                                               
by  the  full  membership.  The   Role  of  AOGA  and  individual                                                               
companies should not  be to tell Alaska how to  structure its tax                                                               
system, but to relate how it  is affecting them, so they can make                                                               
informed decisions about how it.                                                                                                
                                                                                                                                
3:34:49 PM                                                                                                                    
She said  the greatest  and most  urgent challenge  facing Alaska                                                               
today is  the decline of  oil production  on the North  Slope and                                                               
that  saying  any  change  in  tax  structure  that  reduces  tax                                                               
revenues below  the projection in  the Revenue Sources Book  is a                                                               
"giveaway" is a red herring about  oil taxes. It's just not true.                                                               
Industry has had  to spend at least $2 billion  each year to slow                                                               
the production decline  from what it would naturally  be in order                                                               
to  even  approach  the  level of  production  published  in  the                                                               
Revenue  Sources Book.  Just like  any other  investment industry                                                               
makes  here,   these  investments   must  beat   the  competition                                                               
elsewhere.                                                                                                                      
                                                                                                                                
Another  false concept  assumes  that production  in the  Revenue                                                               
Sources Book is all that  will be produced; no additional revenue                                                               
or production  resulting from  a tax  reduction is  calculated in                                                               
it. If a  tax reduction makes investments  here more competitive,                                                               
companies  will  want to  make  more  investments here  for  that                                                               
upside and  they will  do so  even though they  lack the  gift of                                                               
prophecy and cannot know beforehand  exactly what the upside will                                                               
turn out to be.                                                                                                                 
                                                                                                                                
3:36:41 PM                                                                                                                    
She said it would be useful  for them to identify principles they                                                               
want  the  tax  system  to embody,  and  AOGA  believes  Governor                                                               
Parnell's'  four principles  offer an  excellent cornerstone.  It                                                               
needs to be  fair to Alaskans, to increase production,  and to be                                                               
simple and  be durable.  They suggest  adding a  fifth principle,                                                               
because the  challenge facing  Alaska is not  that there  are too                                                               
many  companies  pursuing opportunities  here,  but  too few.  So                                                               
Alaska should avoid tax changes  that artificially create winners                                                               
and losers.                                                                                                                     
                                                                                                                                
3:37:39 PM                                                                                                                    
MS.  MORIARTY   said  that   AOGA  wholly   endorses  eliminating                                                               
progressivity,  because  it destroys  one  of  the few  strategic                                                               
advantages  that   Alaska  has,   which  lies  in   its  economic                                                               
remoteness. It  costs about $9.42  to ship  a barrel of  oil from                                                               
the North  Slope to  the West  Coast (WC)  according to  the 2012                                                               
Fall Revenue  Sources Book. This  starts Alaska off with  a $9.42                                                               
disadvantage compared  to outside competition, so  other parts of                                                               
an Alaska investment  must be pretty strong in  order to overcome                                                               
it. If  oil prices turn out  to be higher than  projected, nearly                                                               
100 percent  of each extra dollar  in price flows into  the gross                                                               
value at the point of  production (GVPP) and then after royalties                                                               
and  taxes flows  straight to  the investors'  bottom line.  This                                                               
improves  the  economic  performance  of  an  Alaskan  investment                                                               
relative  to  an equally  competitive  one  outside, because  the                                                               
Alaska baseline was $9.42 a barrel  lower and an additional $1 in                                                               
price  is a  larger  percentage  of that  baseline  than for  the                                                               
percentage of  the outside investment.  This can  be particularly                                                               
significant to potential investors who are bullish on prices.                                                                   
                                                                                                                                
Currently, progressivity  in conjunction  with a 25  percent base                                                               
rate will  take half of each  dollar from higher prices  when the                                                               
WC  price is  $138,  the one  strategic  advantage that  Alaska's                                                               
economic  remoteness provides.  And the  more bullish  one is  on                                                               
prices the  more this advantage  is undone because they  will see                                                               
higher  rates for  progressivity at  those high  prices in  their                                                               
investment analysis.                                                                                                            
                                                                                                                                
3:38:52 PM                                                                                                                    
SENATOR MICCICHE joined the committee.                                                                                          
                                                                                                                                
Secondly,  Ms.  Moriarty  said progressivity  is  extraordinarily                                                               
complicated for  calculating the amount of  progressivity for any                                                               
particular item that affects the  taxpayers' production tax value                                                               
(PTV).  This   complexity  exists   because  the  tax   rate  for                                                               
progressivity  depends on  the taxpayers'  PTV/bbl  and then  the                                                               
resulting rate  is applied to  very PTV  that set the  rate. This                                                               
circularity  in  the  tax  calculation   leads  to  some  bizarre                                                               
effects. For example,  simply the fact that  oil prices fluctuate                                                               
during a year instead of  remaining perfectly flat increases that                                                               
tax  even though  the average  of the  fluctuating prices  is the                                                               
same  as the  flat price.  And  the greater  the fluctuation  the                                                               
greater  the   tax  from  progressivity  becomes.   There  is  no                                                               
objective  economic or  financial reason  for the  tax to  go up,                                                               
instead   this   occurs   entirely  because   the   progressivity                                                               
calculation is circular.                                                                                                        
                                                                                                                                
She said in  general tax credits represent a  direct reduction in                                                               
the amount  that a  potential investor puts  at risk  by spending                                                               
money on  the equipment  and facilities. It  is important  to re-                                                               
enforce that  there is no tax  credit liability for the  state at                                                               
all until an investor invests here,  so it costs nothing to offer                                                               
the credit  until the investment is  made. At that point  the tax                                                               
credit has  already succeeded  in what  it was  supposed to  do -                                                               
attract additional investment.                                                                                                  
                                                                                                                                
3:42:17 PM                                                                                                                    
SENATOR DYSON  said it  was different for  explorers who  have no                                                               
production.                                                                                                                     
                                                                                                                                
3:42:30 PM                                                                                                                    
MS. MORIARY said she  would get to that in a  moment and that the                                                               
first  component the  bill  addresses  the qualified  expenditure                                                               
credit (QCE).  While eliminating progressivity would  improve the                                                               
competitiveness of Alaskan investment,  she said, eliminating the                                                               
QCE credit would claw  back a big chunk of that  money and undo a                                                               
significant  part  of  that   competitive  improvement.  This  is                                                               
because the  benefit of the QCE  credit depends only on  how much                                                               
is  invested here  while the  benefit  from ending  progressivity                                                               
depends  on the  price of  oil relative  to the  producer's lease                                                               
expenditures. So for every producer  there is a price below which                                                               
the lost QCE credit would start  to outweigh the benefit from the                                                               
end of  progressivity and exactly  where that crossover  comes on                                                               
factors  specific  to  each individual  company  is  an  unknown,                                                               
because for  competitive reasons  that isn't talked  within AOGA.                                                               
It would depend  on how much oil they produce,  where it is sold,                                                               
the cost to deliver it and  other expenditures. So they feel that                                                               
repeal of  the QCE  credits is  likely to do  the one  thing that                                                               
they don't  want to  do, which  is to  create winners  and losers                                                               
artificially among the producers. AOGA  doesn't see any sound tax                                                               
policy justification for doing so.                                                                                              
                                                                                                                                
3:43:59 PM                                                                                                                    
She said  they endorse  extending the  small producer  tax credit                                                               
under AS 43.55.024  from the present sunset date if  2016 to 2022                                                               
and  encourage  the  same  extension   for  the  exploration  tax                                                               
credits. She  reasoned that  the state  had sound  policy reasons                                                               
for  creating those  tax credits  and those  reasons are  just as                                                               
valid today as they were then.  The purpose of the small producer                                                               
tax  credit  was to  attract  new  players  to Alaska  who  might                                                               
otherwise have been deterred from  coming here by its remoteness,                                                               
northern climate and resulting challenges  of higher than average                                                               
costs and expenses. The success of  the credit in doing this is a                                                               
fact  that cannot  be denied.  Testimony has  indicated that  the                                                               
small producer  tax credit  has made  a material  difference both                                                               
for  AOGA members  and  other  companies who  are  here in  their                                                               
decisions to do business and invest in Alaska.                                                                                  
                                                                                                                                
MS. MORIARTY  said the purpose and  justification the exploration                                                               
credits  under  AS 43.55.025  are  equally  plain and  clear.  If                                                               
exploration  is to  occur in  a timely  fashion so  any resulting                                                               
production  can be  transported through  existing infrastructure,                                                               
the exploration  tax credits  are a direct  way of  bringing that                                                               
exploration about and  these types of credits  should be extended                                                               
as well.                                                                                                                        
                                                                                                                                
3:45:37 PM                                                                                                                    
MS.  MORIARTY  said AOGA  had  some  concern about  limiting  the                                                               
transferability  of  the  current carry-forward  annual-loss  tax                                                               
credit. These  credits arise every  year for any  active explorer                                                               
that finds  something and finally  has production that has  a tax                                                               
to  apply the  credit  against. At  present,  explorers can  only                                                               
realize  immediate benefit  from them  by selling  them to  other                                                               
taxpayers  or cashing  them in  with  the state.  Such sales  and                                                               
cash-ins would stop  the North Slope explorers  who instead would                                                               
be able to  hold the credit for  up to 10 years  for possible use                                                               
against tax  on their own  future production, assuming  they find                                                               
some. During  this 10-year  shelf life  the unused  credits would                                                               
compounded annually at  the rate of 15 percent.  This bill's only                                                               
exception  to  this   ban  would  be  for  a   transfer  made  in                                                               
conjunction with the sale or  other transfer. To prevent hoarding                                                               
of credits to get the 15  percent annual increase the bill denies                                                               
the 15 percent  increase for each year when they  could use their                                                               
credits but don't.  This would be an  effective deterrent against                                                               
abuse that  might otherwise  occur. So, in  general if  sales and                                                               
transfers of these  annual loss tax credits are to  be limited at                                                               
all, then the  proposed limitations would be a  reasonable way to                                                               
do it.  Their major concern  is that  the 10-year shelf  life for                                                               
using the  credit is  unrealistically short. It  is not  the norm                                                               
for a producer  to go from lease sale to  production in 10 years;                                                               
15 years is more in line  with actual experience. Without this 15                                                               
percent annual increase in the  unused credits, AOGA would oppose                                                               
the  ban   on  transferability,  because  it   will  destroy  the                                                               
incentives the credit is supposed to provide.                                                                                   
                                                                                                                                
3:47:56 PM                                                                                                                    
MS.  MORIARTY said  AOGA supported  the  gross revenue  exclusion                                                               
(GRE), but was  concerned it wouldn't apply to a  majority of the                                                               
current production. Fields likely to  lose out on getting any GRE                                                               
are  Prudhoe  Bay,  Kuparuk,  Lisburne,  Milne  Point,  Endicott,                                                               
Niakuk, Point McIntyre, Alpine,  the Prudhoe Bay satellite fields                                                               
and the Kuparuk satellite fields.                                                                                               
                                                                                                                                
She referenced  slide 6  from Econ  One's presentation  last week                                                               
that  showed economically  recoverable oil  and gas  resources at                                                               
$90/bbl  (which  totals 29  billion  barrels  of oil  and  barrel                                                               
equivalents of gas). Of this  total the slide showed 10.4 billion                                                               
in ANWR and NPRA, another 9.9  billion in the Chukchi Sea, 5.8 in                                                               
the Beaufort Sea  and 3 billion in the central  North Slope. This                                                               
means that  more than half  of the  resource lies in  the federal                                                               
OCS  outside Alaska's  jurisdiction to  tax. Current  federal law                                                               
does  not allow  for  any  OCS revenue  sharing  even though  the                                                               
congressional delegation is  trying very hard to  change that. So                                                               
the only  direct revenues the  state would  see from the  OCS are                                                               
property  taxes or  for  the  instate portion  of  a pipeline  to                                                               
connect it  to TAPS.  Another 34  percent is  in ANWR  over which                                                               
Congress  gives approval  for development  and the  Department of                                                               
Interior could  turn the NPRA into  a bird sanctuary. So,  of the                                                               
29 billion  barrels on  the slide,  only 3  billion on  the North                                                               
Slope have the potential to  contribute significantly to Alaska's                                                               
wellbeing in the  near and mid-term future. Of  that, 2.5 billion                                                               
comes  from  fields she  didn't  think  would achieve  the  gross                                                               
revenue exclusion.                                                                                                              
                                                                                                                                
3:50:21 PM                                                                                                                    
MS.  MORIARTY said  AOGA  is  continuing to  search  for ways  to                                                               
include the GRE with the legacy  fields in a manner that would be                                                               
acceptable  to the  state and  the legislature.  It may  turn out                                                               
that  a different  approach  may be  necessary  to encourage  new                                                               
production from  legacy fields. So  for now  all they can  say is                                                               
not enough  is being  done in  the bill  to improve  the economic                                                               
competitiveness of the legacy fields.                                                                                           
                                                                                                                                
3:51:08 PM                                                                                                                    
MS. MORIARTY said  there are some components not  addressed in SB
21 that  they believe would make  a better tax policy.  The first                                                               
would  be to  repeal  the  minimum tax  in  AS 43.55.011(f)  that                                                               
targets North  Slope production. That  tax is based on  the gross                                                               
value of the production instead of  the regular tax that is based                                                               
on the  net. The  rationale for  adopting it  was to  protect the                                                               
state against  low petroleum  revenues when  prices are  low. The                                                               
minimum tax  only complicates  potential new  investors' analysis                                                               
of what  their tax would be  if they were to  invest here instead                                                               
of  someplace  else.  So consequently,  it  has  probably  driven                                                               
investments away.                                                                                                               
                                                                                                                                
3:52:05 PM                                                                                                                    
Next  she noted  that the  statute of  limitations and  statutory                                                               
interest provisions  are interrelating,  but sometimes not  in an                                                               
obvious way. The  statute of limitations under .075  is six years                                                               
from the  date when the  tax return was  filed for the  tax being                                                               
audited  while the  limitation  period for  other  taxes is  only                                                               
three   years.  The   statutory   rate  of   interest  under   AS                                                               
43.05.225(1) for  tax underpayments is 5  percentage points above                                                               
the annual  rate charged  member banks for  advances by  the 12th                                                               
Federal Reserve  District as of  the 1st  day of that  quarter or                                                               
the annual rate  of 11 percent. Because the  Federal Reserve rate                                                               
is  very  low,  the  11  percent  is  the  applicable  rate.  So,                                                               
taxpayers  are required  to make  monthly estimated  tax payments                                                               
for each calendar  month's taxable production, but  the final tax                                                               
amount  for the  entire  year  is reported  on  March  31 of  the                                                               
following  year and  it requires  that any  additional tax  to be                                                               
paid at  that time.  The statutory interest  starts to  accrue on                                                               
any  underpayment  from  that  March  31 true  up  date.  So,  in                                                               
practical terms there  are two different formulas.  The first one                                                               
at three years  is $.38; the second one, the  six-year statute of                                                               
limitations  increases  that to  $.92.  So,  for each  dollar  of                                                               
uncertainty there is about $.38  of additional uncertainty due to                                                               
the  difference  between  the  two.   So,  she  said  it  is  the                                                               
combination  of  the six-year  statute  of  limitations plus  the                                                               
interest rate  of 11 percent that  is harmful for a  taxpayer and                                                               
any would-be taxpayer.                                                                                                          
                                                                                                                                
3:54:25 PM                                                                                                                    
When speaking  about uncertainty and audit  assessments six years                                                               
after filing  the tax  returns, she said  many people  think that                                                               
oil companies  could calculate their correct  tax liability under                                                               
the  ACES  tax, and  she  thought  so,  too, before  she  started                                                               
working with  AOGA's tax  committee. But in  reality, due  to the                                                               
complexity of ACES  it is impossible to know  beforehand what the                                                               
department's calculation will  turn out to be. They  don't want a                                                               
statutory fix to  the regulations, but if  the department chooses                                                               
to defer making calculations and  similar determinations that are                                                               
necessary in order to be able  to calculate the correct amount of                                                               
tax,  they would  want to  either shorten  the period  for making                                                               
those determinations  from six years  back to three  or eliminate                                                               
the 11 percent minimum interest rate or both.                                                                                   
                                                                                                                                
3:55:32 PM                                                                                                                    
MS. MORIARTY  said joint  interest billings  is still  a concern,                                                               
because the DOR regulations reflect  an assumption that each non-                                                               
operating partner  has information in addition  to the operator's                                                               
billings   to  them   that  allows   them   to  determine   which                                                               
expenditures  are deductible  as allowed  lease expenditures  and                                                               
which  are  not  instead  of starting  with  the  joint  interest                                                               
billings that  participants in a  unit or other  joint operations                                                               
receive from  the operator. This  assumption is  unrealistic. And                                                               
even if  there was  some merit  to it,  the regulations  ought to                                                               
audit  each participant  separately regarding  that participant's                                                               
interpretation  of which  expenditures are  deductible and  which                                                               
are  not.  They are  not  asking  to  put  the regulations  on  a                                                               
different  track, but  some in  the department  believe that  the                                                               
repeal of  two sections,  .165(c) and  (d), in  ACES specifically                                                               
authorizes the department to rely  on joint interest billings and                                                               
means that  the department can't  legally rely on them  now. AOGA                                                               
disagrees with  that position  and it  is at  odds with  what the                                                               
department testified  to in 2007, but  they do think it  would be                                                               
appropriate  to restore  language that  allows the  department to                                                               
rely on joint interest billings if they choose to do so.                                                                        
                                                                                                                                
3:58:35 PM                                                                                                                    
SENATOR  FRENCH said  he was  glad  she ended  with a  production                                                               
slide, because  he was wondering if  AOGA had an estimate  of the                                                               
number of  additional barrels  of production  that would  come on                                                               
line   should  they   embrace  the   changes  to   ACES  in   her                                                               
presentation.                                                                                                                   
                                                                                                                                
MS. MORIARY  answered it's  hard to  predict what  the additional                                                               
barrels  would be.  If investors  can make  more money  in Alaska                                                               
they would  want to invest more  here, but she couldn't  say what                                                               
that would translate into in terms of barrels.                                                                                  
                                                                                                                                
SENATOR  BISHOP   asked  if  all  AOGA's   member  companies  are                                                               
represented on the tax committee.                                                                                               
                                                                                                                                
MS. MORIARY answered yes.                                                                                                       
                                                                                                                                
4:00:16 PM                                                                                                                    
BILL  ARMSTRONG,  President  and  CEO,  Armstrong  Oil  and  Gas,                                                               
Denver, Colorado, said  their subsidiaries 70 and 148  LLC are in                                                               
Alaska as  well as in  Cook Inlet. He  supported SB 21  saying he                                                               
still sees big potential  in Alaska. He put a lot  of time into a                                                               
power  point  presentation  and   had  some  slides  showing  the                                                               
inevitable  day  when  TAPS becomes  obsolete  and  Alaska's  tax                                                               
regime being  sandwiched somewhere between Venezuela  and Russia,                                                               
but  he  had  positive  ones   as  well  showing  the  North  Sea                                                               
resurgence  in  1993  when  the  tax  laws  were  reformed  there                                                               
(something that could happen to Alaska if it was done).                                                                         
                                                                                                                                
He  had a  map of  the Permian  Basin (located  in Texas  and New                                                               
Mexico) in the 1950s (with about  5,500 wells) that would be very                                                               
similar to  the North Slope  today, which would show  about 5,000                                                               
wells. Well,  today the  Permian Basin has  150,000 wells  and he                                                               
sees  big potential  outside of  the legacy  fields on  the North                                                               
Slope to do lots and lots  of drillings particularly with the new                                                               
technology. He  also had  slides showing how  the energy  boom is                                                               
happening  in   Lower  48  has  totally   resurrected  production                                                               
declines in North Dakota, New Mexico and Texas.                                                                                 
                                                                                                                                
4:04:14 PM                                                                                                                    
But then  he saw  other industry  presentations and  decided he'd                                                               
rather just  come up here  and talk  about Alaska from  the heart                                                               
and what  he sees:  "I think what  we really need  is a  lot more                                                               
common sense."                                                                                                                  
                                                                                                                                
MR.  ARMSTRONG said  he didn't  do these  kinds of  presentations                                                               
very often,  so he wanted  to open a  dialogue with them  to kick                                                               
around ideas.  First he wanted  to give them a  little background                                                               
on  his company.  Armstrong  is the  most  active and  successful                                                               
independent  oil company  in  Alaska. Three  of  the most  recent                                                               
developments in Alaska  - two on the North Slope  and one in Cook                                                               
Inlet - originated in his  office. The Oooguruk field operated by                                                               
Pioneer was generated  and created by Armstrong  before they went                                                               
to Dallas, Texas, became Pioneer  Natural Resources and came back                                                               
up to Alaska.  The same thing goes for the  Nikiatchuq field that                                                               
is operated  by Eni; Armstrong  originated the idea, did  all the                                                               
geophysical and engineering work, et  cetera - and brought Eni up                                                               
here. Most recently  they brought in a different  set of partners                                                               
and are the recent developers of  the North Fork Field, the sixth                                                               
largest field in Cook Inlet.                                                                                                    
                                                                                                                                
MR.  ARMSTRONG said  they are  the most  active explorers  on the                                                               
North Slope today  and are currently partnered  with Repsol. They                                                               
drilled $200  million worth of  wells last year and  are drilling                                                               
another  $200  million  worth  of wells  this  year.  He  thought                                                               
Armstrong was the largest lease holder  in the state on the North                                                               
Slope  outside of  the legacy  fields.  He and  his partners  put                                                               
"their  own dough"  on the  table.  He has  one of  the best  oil                                                               
finding  companies   in  the  country   and  they   are  "big-big                                                               
believers" in  what the state  could be. Armstrong has  found oil                                                               
all over  the world and had  been successful all through  the US;                                                               
they  are  in  the  Bakken,  Louisiana,  the  Rockies,  Michigan,                                                               
California and now in Alaska.                                                                                                   
                                                                                                                                
4:07:39 PM                                                                                                                    
He said their business model is  pretty simple: they go to a play                                                               
where they  see big  time potential, do  all the  geophysical and                                                               
hard work -  "really get our hands dirty with  the data." Most of                                                               
the time these  are dead-end runs, but if they  find something to                                                               
worth pursuing they  lease it try to make land  trades and put it                                                               
together; then they go out and  look for partners. He said Alaska                                                               
is  "so wickedly  expensive" that  he  has decided  to defer  his                                                               
business model and look for  bigger more capitalized companies he                                                               
can talk into  coming here and teaming  up with him. So  in a way                                                               
he  said  he is  a  "walking  talking  Chamber of  Commerce"  for                                                               
Alaska.  He is  a member  of a  group of  oil and  gas executives                                                               
called "All  American Wildcatters"  and they derisively  now call                                                               
him the  "new Mr. Alaska" after  Robert Anderson of ARCO  who had                                                               
passed  away. This  group always  asks him  how much  oil he  has                                                               
found and  how much money he  has made (because of  the perceived                                                               
difficulties up here):  how can you possibly  get into facilities                                                               
because the  guy who controls  them doesn't  want you to  plan up                                                               
there, and even  if you solve all the  regulatory, permitting and                                                               
headaches  - not  to mention  the cold  weather and  remoteness -                                                               
when  you find  something,  the  state takes  a  majority of  the                                                               
profits.                                                                                                                        
                                                                                                                                
He  said  the Lower  48  boom  is  unprecedented. All  other  oil                                                               
producing states  were facing the  same production  decline curve                                                               
as Alaska, and  they have all reversed them  by actively pursuing                                                               
the new  technologies that  make heretofore  non-commercial lousy                                                               
fields commercial again, and he  said, "that boom has completely,                                                               
utterly totally skipped Alaska."                                                                                                
                                                                                                                                
4:11:44 PM                                                                                                                    
MR. ARMSTRONG stated  that a rig count is when  a rig is actually                                                               
running and drilling in a given  region and as of three weeks ago                                                               
Alaska had  six. Rig counts  have always  been used as  a "report                                                               
card" of an area's health; right  now Texas has 819 rigs running,                                                               
North  Dakota  has  178,  and   Oklahoma  has  190.  "Alaska  has                                                               
six...it's pathetic!"  He said, "running  six rigs is  so anemic!                                                               
There is no way you are going  to turn that curve around with six                                                               
rigs running."  That shows  you exactly  what industry  thinks of                                                               
Alaska and this body should ask why.                                                                                            
                                                                                                                                
4:13:27 PM                                                                                                                    
CHAIR GIESSEL asked how he thought SB 21 will help that.                                                                        
                                                                                                                                
MR. ARMSTRONG  said Alaska has  to change  the game, not  just on                                                               
tax reform,  although that  is "a  massively great  first start."                                                               
But  he explained  when you  get right  down to  it, oil  and gas                                                               
companies  are  not about  finding  and  producing oil  and  gas;                                                               
"they're  about  making  money."  And  being  sandwiched  between                                                               
Venezuela and Russia  is not where they want to  be. So, they are                                                               
drilling in the Eagleford, the  Bakken, in Oklahoma and the Great                                                               
Wash. "That  deafening silence you  hear is the number  of people                                                               
that are up here."                                                                                                              
                                                                                                                                
MR. ARMSTRONG  said there  are certain  things about  Alaska that                                                               
you can't change. It's cold,  the weather sucks especially on the                                                               
North  Slope  and  it's  remote. It  will  always  be  expensive,                                                               
although not as  expensive as it is now, and  it will always take                                                               
longer to  do things  because it  is so  remote. But  the playing                                                               
field could be a lot more  attractive from a tax and a regulatory                                                               
permitting standpoint.                                                                                                          
                                                                                                                                
4:15:08 PM                                                                                                                    
SENATOR MICCICHE asked if any  states that were primary producers                                                               
hadn't turned around their production.                                                                                          
                                                                                                                                
MR. ARMSTRONG replied  California was doing "a pretty  bad job of                                                               
it"  and has  the  same environmental  regulatory  issues not  to                                                               
mention  their "massive  tax rates."  New York,  which is  a very                                                               
tiny producer, is still flat-lined  because they don't allow this                                                               
technology to be applied in their state.                                                                                        
                                                                                                                                
4:16:33 PM                                                                                                                    
SENATOR BISHOP said he was "a  breath of fresh air" and asked him                                                               
to elaborate on the facilities access issue.                                                                                    
                                                                                                                                
MR. ARMSTRONG said he supported  SB 21 although it's not perfect.                                                               
He thought the guys in the  legacy fields needed a break, too. He                                                               
wasn't  saying  that  because  they are  buddies,  in  fact  it's                                                               
probably the opposite. His relationship  with ConocoPhillips is a                                                               
little bit like Ike and Tina  Turner (he being Tina Turner). They                                                               
don't make it easy.                                                                                                             
                                                                                                                                
4:19:09 PM                                                                                                                    
SENATOR DYSON  noted that the  decline curve was very  steep long                                                               
before the  tax regime was changed.  In fact it had  the economic                                                               
limit factor  (ELF) which  made the second  largest oil  field in                                                               
North America - Kuparuk.                                                                                                        
                                                                                                                                
MR. ARMSTRONG  responded that he came  up because of ELF,  but he                                                               
wouldn't have come up under ACES.                                                                                               
                                                                                                                                
SENATOR DYSON  said his point  was that the decline  curve looked                                                               
even steeper  with ELF  (that reduced taxes)  than it  does after                                                               
ACES. He  asked if  he thought  the decline  curve would  head up                                                               
instead  of  down  if  the  state  did  everything  it  could  on                                                               
permitting and change the tax  regime to something more favorable                                                               
to the explorers and the legacy fields.                                                                                         
                                                                                                                                
4:21:03 PM                                                                                                                    
MR. ARMSTRONG responded  that almost every state in  the Lower 48                                                               
had a  decline curve that looked  like ours prior to  2009. A lot                                                               
of it was because of low  oil prices and those years were without                                                               
the new technological  advances in the last half  dozen years. He                                                               
said the big  guys want them to  believe that all the  oil on the                                                               
North  Slope  is in  the  legacy  fields,  but he  disagreed.  He                                                               
thought  instead  of  having  isolated  fields  at  Prudhoe  Bay,                                                               
Kuparuk and Alpine and a couple  others, the North Slope could be                                                               
one gigantic  green blob of  production. He explained that  it is                                                               
hard to  find a well on  the North Slope that  was non-commercial                                                               
in 1985  when it was drilled  that would not be  commercial using                                                               
today's  new  technology.  He  didn't   know  if  you  could  get                                                               
production up  over 1  million barrels a  day, but  flattening it                                                               
out  and  extending   the  life  of  that  pipeline   is  a  real                                                               
possibility.  There  has  been  only  one  version  of  a  modern                                                               
frac/horizontal well on the North  Slope in the Oooguruk Field so                                                               
far,  and  it  was  a  massive success.  It's  showing  that  the                                                               
technology is going to work up here.                                                                                            
                                                                                                                                
4:23:19 PM                                                                                                                    
SENATOR FAIRCLOUGH said she had  heard that the legacy fields are                                                               
the only  ones that could  create the quickest return  on dollars                                                               
as far  as putting  more oil in  the pipe in  the short  term and                                                               
asked how to get more holes in the ground.                                                                                      
                                                                                                                                
MR. ARMSTRONG said he totally  agreed with that and answered that                                                               
Commissioner   Sullivan  was   doing   a  pretty   good  job   of                                                               
streamlining the  permitting and  regulations, and  that couldn't                                                               
be  done overnight.  Making the  tax laws  positive for  the guys                                                               
outside of the  big legacy fields was another piece.  He said oil                                                               
companies  come  up  here  for  money; when  the  tax  laws,  the                                                               
regulatory environment, and facilities  access are better and you                                                               
see the  success of a  Pioneer or  his partnership with  Repsol -                                                               
people  follow those  successes. He  didn't predict  a thundering                                                               
herd coming  to the  North Slope  right away,  but he  thought it                                                               
would be  a lot better  than six active  rigs. There needs  to be                                                               
65, 70 or 100 rigs up here  to keep that decline curve flat. It's                                                               
not that  much when  you think  of other  places that  have three                                                               
times that amount.                                                                                                              
                                                                                                                                
SENATOR FAIRCLOUGH asked if anything  else specific was happening                                                               
in other regimes that incentivize production.                                                                                   
                                                                                                                                
MR. ARMSTRONG said he was okay  with the state getting out of the                                                               
way. A  majority of these  other states  have a very  low, simple                                                               
tax structure  typically on  the gross and  below 10  percent. He                                                               
said Alaska has to be  better than being competitive; there isn't                                                               
a magic  number; there is  no sweet  spot in terms  of government                                                               
take. You  just need to  find a way to  get these people  up here                                                               
with  tax credits,  reasonably small  takes,  and royalty  relief                                                               
until you get your money back  or corporate tax relief. He wasn't                                                               
going to  make any  specific proposals other  than the  fact that                                                               
the bill is at least a step in the right direction.                                                                             
                                                                                                                                
4:27:56 PM                                                                                                                    
SENATOR  MICCICHE said  he thought  Mr. Armstrong  was refreshing                                                               
and he  like the fact that  he was a privately  owned company and                                                               
hadn't  gone  through  the  school   of  "corporate  speak."  Mr.                                                               
Armstrong had done some great things  in this state and he wanted                                                               
Alaska to  be invited to the  party. He asked how  nimble the All                                                               
American Wildcatters are  and expressed the fear is  that we make                                                               
a change and put a lot of cupcakes  out there and no one comes to                                                               
the party.  The people of  Alaska worry about making  that change                                                               
without seeing any results.                                                                                                     
                                                                                                                                
MR. ARMSTRONG said  there is no guarantee, "but if  you ain't got                                                               
nothing  you  got  nothing  to lose."  They  were  talking  about                                                               
production  that is  not there  now and  outside of  the existing                                                               
units. If  you lay out the  cupcakes and no one  comes - although                                                               
he  liked  to think  they  would  - you  are  no  worse off.  For                                                               
instance,  Prudhoe Bay  was a  Lisburne idea  when they  stumbled                                                               
into the  Sadle-Rochit; Kuparuk  River Unit  was a  Lisburne idea                                                               
when they stumbled into the Kuparuk  sand; and Alpine Field was a                                                               
Kuparuk idea  when they stumbled  into the Jurassic  Alpine sand.                                                               
"This is  an absolute adage:  if you're not pulling  the trigger,                                                               
you're  not going  to shoot  anything."  You need  to get  people                                                               
looking up  here to get  lucky. He  didn't think they  would find                                                               
another Prudhoe  Bay or Kuparuk,  but some Alpines are  out there                                                               
and  that was  pretty good;  some  low grade  reservoirs are  out                                                               
there that have been drilled through  in the past. We need to get                                                               
those  guys up  here  who  know how  to  do these  unconventional                                                               
plays, like  Armstrong, and give  it a crack, "Because,  it might                                                               
really work fantastic." He related  how he passed on Bakken fives                                                               
times and it worked; Alaska has way better resources.                                                                           
                                                                                                                                
CHAIR GIESSEL thanked him for  his thoughts and invited Mr. Foley                                                               
from Pioneer Natural Resources to testify.                                                                                      
                                                                                                                                
4:32:18 PM                                                                                                                    
PAT FOLEY,  Manager, Land and  External Affairs,  Pioneer Natural                                                               
Resources,  Alaska,  said he  felt  he  had been  following  Bill                                                               
Armstrong's footsteps since 2003. He  said in May he would become                                                               
the president  of Pioneer,  but he  would try  to not  get bogged                                                               
down in talking about Pioneer,  because this was really about tax                                                               
policy. So, he wanted to give  them a little bit of insight about                                                               
what goes  through his [Pioneer's]  mind when  allocating capital                                                               
and  what would  make  investing in  Alaska  more attractive  for                                                               
them.                                                                                                                           
                                                                                                                                
MR. FOLEY said  Pioneer is a largish independent  worth about $19                                                               
billion (stocks,  market capitalization plus debt);  it has about                                                               
3,500 employees  and a 2013  capital budget of about  $3 billion.                                                               
They will make  a little bit of money from  Alaska but their core                                                               
business is  in Texas; they  do business in Colorado  and Kansas,                                                               
too. Pioneer  is the first  independent on the North  Slope; they                                                               
have 70 employees and everyone is  an Alaskan. They have from 150                                                               
to 300 contractors  working with them depending on  what they are                                                               
doing. In a normal year it's about  150, but last year they had a                                                               
large  exploration  program  and  this  year  they  have  another                                                               
appraisal program going on, so  that number swells to almost 300.                                                               
Pioneer makes  about 6,000 barrels of  oil a day at  Oooguruk and                                                               
they hope  to see  production rates  increase there  by 40  or 50                                                               
percent over  the next year, because  of some of the  success Mr.                                                               
Armstrong mentioned.                                                                                                            
                                                                                                                                
He said  Pioneer came  up to  Alaska in  2002 when  Mr. Armstrong                                                               
encouraged them for  a Kuparuk play. In getting  to Kuparuk, they                                                               
drilled  through the  Nuiksut and  realized that  all the  really                                                               
good Nuiksut was  not on the leases they got  from Bill but right                                                               
next door on ConocoPhillips' land. So  they made a deal with them                                                               
and  now  their  Oooguruk  development   is  primarily  based  in                                                               
Nuiksut; they recently expanded into  the Torok where they have a                                                               
little bit of a Kuparuk play.  The point was that "Bill" got them                                                               
excited about  a play;  they came  up looking  for one  thing and                                                               
found something  else. "It's that  serendipity. You  drill wells;                                                               
you're exposed to upside and  sometimes that upside works out for                                                               
you."                                                                                                                           
                                                                                                                                
He  said Pioneer  owns 70  percent  of the  Oooguruk Unit;  their                                                               
partner is  Eni and together they  have spent over $1  billion in                                                               
developing  and producing  12 million-plus  barrels; Pioneer  has                                                               
enjoyed the  benefit of  receiving $270  million in  credits from                                                               
the state.  They look at  the state as their  investment partner.                                                               
Pioneer got  about 7  percent of  all the  credits the  state has                                                               
given out so far.                                                                                                               
                                                                                                                                
MR. FOLEY  said they came  here during  the ELF regime  (for them                                                               
that meant  a zero tax rate)  and honestly for the  projects they                                                               
thought they would  become involved with they  never thought they                                                               
would pay a  production tax. But the day  after sanctioning their                                                               
project, they got  a call from Governor Murkowski  who said there                                                               
was going to  be some tax changes, but they  would be better off.                                                               
They wondered  how they could  be better  off than zero,  but his                                                               
proposal  was for  a  20  percent tax  rate  and  for 20  percent                                                               
credits  and when  they  looked  at the  value  of those  credits                                                               
upfront  and paying  some tax  on the  other end,  he was  right.                                                               
Pioneer  was  actually marginally  better  off.  But then  things                                                               
started  to escalate;  ACES came  along  and then  progressivity.                                                               
Since they  made their commitment  to develop their  project, the                                                               
fiscal environment has become poorer  rather than more attractive                                                               
and SB 21 provides an opportunity to turn that around.                                                                          
                                                                                                                                
4:38:50 PM                                                                                                                    
MR. FOLEY  explained that the  Oooguruk project is an  island off                                                               
shore drill site.  He said their next project is  called Nuna, an                                                               
Inupiat word  that means  "on the land."  From this  onshore site                                                               
they will  laterally drill into  the Torok Unit  (offshore). They                                                               
drilled one exploration  well in phase 1 of Nuna  and it was very                                                               
successful;  this winter  they drilled  a second  appraisal well,                                                               
which is just  finishing up as he speaks. If  that is successful,                                                               
phase 2  will expand into  the southern  part of that  unit. They                                                               
are  pumping very  large mechanical  diversion  fracs (2  million                                                               
pounds). While  it's not  big compared  to some  of the  Lower 48                                                               
fracs, it's substantially bigger than  what people have pumped up                                                               
here before. So far everything looks really good.                                                                               
                                                                                                                                
If Nuna is  successful, it's about 50 million barrels  of oil and                                                               
will cost  another $1  billion. They  have actually  acquired all                                                               
the required  permits from the  North Slope Borough and  have the                                                               
permit they  need from the  Corps of  Engineers, but he  is still                                                               
waiting for  the state permit.  He had  been slugging away  on it                                                               
for two years  now and had been working very  diligently with the                                                               
DNR. Oooguruk  is about 14,000  barrels of  oil a day,  peak, and                                                               
first oil is in 2015.                                                                                                           
                                                                                                                                
MR.  FOLEY said  for  him to  get  the funding  he  will have  to                                                               
compete against a whole number  of opportunities that Pioneer has                                                               
in the Lower 48. When they first  came up here, Alaska had a much                                                               
greater attraction  than the Lower  48, and it hasn't  gotten any                                                               
worse, but the  Lower 48 resource potential  is enormous, because                                                               
of the explosion of shale plays.                                                                                                
                                                                                                                                
4:42:20 PM                                                                                                                    
He said the  key things that really help drive  projects and help                                                               
the  economics   is  quick  payback,  quick   cycle  times  (make                                                               
investment  today and  start making  oil  soon), and  operational                                                               
flexibility. He explained what he  meant saying their projects in                                                               
the Lower 48 have "a gas pedal  and a brake." They can react very                                                               
quickly to changes  in the economy - the oil  price, activity and                                                               
the  success of  their  neighbors. It's  a lot  harder  to do  in                                                               
Alaska  where he  has one  rig for  an offshore  drill site  that                                                               
works 365 days a  year that he can't shut down or  send home.  It                                                               
doesn't have a brake or an accelerator.                                                                                         
                                                                                                                                
4:43:05 PM                                                                                                                    
SENATOR  DYSON  asked  what  the  state  could  do  to  ease  the                                                               
regulatory process.                                                                                                             
                                                                                                                                
MR.  FOLEY replied  that permitting  just  takes a  long time  in                                                               
Alaska and  he thought one  of the  problems was staffing  in the                                                               
department. The people are good,  but there just aren't enough of                                                               
them. He  said Pioneer has $3  billion to spend in  2013 and will                                                               
probably spend it all in Texas.                                                                                                 
                                                                                                                                
4:46:06 PM                                                                                                                    
SENATOR  MICCICHE asked  him to  define  "operating margins"  and                                                               
tell them why the Lower 48 is superior.                                                                                         
                                                                                                                                
MR.  FOLEY replied  that costs  for the  exact same  services are                                                               
substantially more in  Alaska than they are in  Texas or anywhere                                                               
in the Lower 48. The exploration  rigs don't get to work 365 days                                                               
a year;  they work  in the winter.  Companies have  to capitalize                                                               
the  cost  of that  rig;  it's  just  an  expensive place  to  do                                                               
business.  It's  not  a  complaint;  it's a  great  place  to  do                                                               
business, but it's hard and it's expensive.                                                                                     
                                                                                                                                
4:46:59 PM                                                                                                                    
SENATOR  MICCICHE  asked  if  production  taxes  enter  into  the                                                               
equation.                                                                                                                       
                                                                                                                                
MR. FOLEY  answered the production  tax is  just one part  of the                                                               
whole fiscal  environment. The other  side of government  take is                                                               
the  industry take;  the more  the  government gets  the less  he                                                               
gets.  In Alaska  their industry  take  is less  than many  other                                                               
places they  do business.  It's just a  reality. Pioneer  is also                                                               
burdened by net profit share leases.                                                                                            
                                                                                                                                
Pioneer will spend  a total of $3 billion next  year, he said; $2                                                               
billion  of that  will come  from  free operating  cash flow  and                                                               
about $600 million will from  joint ventures (they have two large                                                               
ones in Texas  - Sinchem, a Chinese company,  and Reliant). Their                                                               
2013 budget  is based  on $85/bbl  WTI price  (which is  equal to                                                               
$100/bbl for ANS) and $3.25 gas.                                                                                                
                                                                                                                                
4:49:11 PM                                                                                                                    
MR. FOLEY  said revising  the tax structure  is a  wonderful idea                                                               
and that  they support  the governor's  four key  principles, but                                                               
the  bill  as currently  written  doesn't  achieve all  of  those                                                               
principles.  On the  positive side,  it eliminates  progressivity                                                               
and extends the  small producer credit that  Pioneer was involved                                                               
in creating that helped little  people come up here and establish                                                               
a toe hold.                                                                                                                     
                                                                                                                                
4:50:45 PM                                                                                                                    
On the  negative side,  it disadvantages  small new  projects and                                                               
Pioneer  will be  worse off  under the  proposed tax  change than                                                               
they are  under ACES, and  the real  reason is because  they will                                                               
lose all the QCE credits. They  came to the state and invested $1                                                               
billion and over $100 million in  the appraisal of Nuna, all with                                                               
an expectation that they would  be able to enjoy capital credits.                                                               
Now they are concerned that may change.                                                                                         
                                                                                                                                
4:51:42 PM                                                                                                                    
He  presented slide  11  that  ranked the  players  in Alaska  by                                                               
enterprise value:  ExxonMobil at $400 billon;  Shell, Chevron and                                                               
BP  in  the $200  billion  range;  Eni, ConocoPhillips,  Statoil,                                                               
Anadarko, Repsol,  Apache are in  the $50 billion  range; Pioneer                                                               
comes in at  $19 billion; then there is a  bunch of other private                                                               
players that had no publicly available data.                                                                                    
                                                                                                                                
MR. FOLEY  said because the cycle  time takes 10 years  in Alaska                                                               
from first idea to the  first barrel of oil, increased production                                                               
will  come  from  one  of  the players  that  are  already  doing                                                               
business here  and they need  to incentivize every single  one of                                                               
them.                                                                                                                           
                                                                                                                                
4:53:36 PM                                                                                                                    
What is an  independent? Mr. Foley said an independent  is a non-                                                               
integrated  oil company;  it doesn't  do marketing  and refining.                                                               
They are responsible for drilling 94  percent of all the wells in                                                               
America.                                                                                                                        
                                                                                                                                
4:54:16 PM                                                                                                                    
SENATOR  MICCICHE asked  if applying  credits against  production                                                               
only was a disincentive in SB 21.                                                                                               
                                                                                                                                
MR. FOLEY said he would come to  that in a minute. The reason the                                                               
independents aren't here is because  of the cost structure, which                                                               
is  where Alaska  falls to  the bottom  of the  list in  terms of                                                               
CAPEX and OPEX. He explained  that Pioneer looks at projects with                                                               
CAPEX in  the $25-20/bbl range  $10-20/bbl for OPEX.  However, he                                                               
said they  ran Econ One's  slide of  a typical project  in Alaska                                                               
that coincidentally was very similar  to Nuna ($1 billion project                                                               
and 50 million bbl/oil) at $100  WC discounting it 12 percent and                                                               
found that a  new project would be $115 million  better off under                                                               
the  new tax  proposal  than  under ACES.  But  that  is not  how                                                               
Pioneer sees  the world at  all. Econ  One's work said  you spend                                                               
all your  capital in the  first three  years, oil peaks  and then                                                               
you have relatively  flat operating costs. But  Pioneer sees very                                                               
substantial capital  expenditures for  the first eight  years and                                                               
oil ramping  up so it peaks  at year 8, and  then operating costs                                                               
climb for a time.                                                                                                               
                                                                                                                                
MR. FOLEY related  that he provided all of  this information back                                                               
to Econ  One, but  they looked  at it  and delivered  a different                                                               
economic answer with that input.  He ran that project through the                                                               
model  for  three  different  players: a  brand  new  entrant,  a                                                               
company  like  Pioneer and  a  bigger  company, and  without  the                                                               
capital expenditure credits  the costs are 20  percent higher and                                                               
the new entrant was disadvantaged by $92 million under SB 21.                                                                   
                                                                                                                                
4:59:09 PM                                                                                                                    
SENATOR  FAIRCLOUGH asked  why their  models were  different from                                                               
Econ  One's  (that used  today's  dollar  not net  present  value                                                               
(NPV)).                                                                                                                         
                                                                                                                                
MR. FOLEY  answered that Econ  One showed both and  admitted that                                                               
although Pioneer discounts  at 10 percent like  most companies in                                                               
the industry, he  used 12 percent and if you  ran this project at                                                               
10 percent, that  $92 million would be smaller.  A small producer                                                               
like Pioneer would be $66 million worse off.                                                                                    
                                                                                                                                
Why is  this project better for  Pioneer than for a  new entrant?                                                               
It's pretty simple. The new  entrant doesn't get credits anymore;                                                               
all he can do is offset  tax through that loss carry forward. But                                                               
he's not  making any production,  so he doesn't get  that benefit                                                               
until several  years down the  road. Pioneer, because  it already                                                               
has production, gets the benefit of  the loss sooner, and that is                                                               
why it is more attractive to them.                                                                                              
                                                                                                                                
5:00:58 PM                                                                                                                    
They modeled a  company with production of  10,000 bbl/day (twice                                                               
as much as  Pioneer) and escalated operating costs  by 10 percent                                                               
(not a legacy producer) to show  a company that is already paying                                                               
taxes and getting  to enjoy the benefit of  the loss immediately;                                                               
they  are only  $13 million  worse off  than under  SB 21.  He 12                                                               
percent NPV, but if you ran it  at 10 percent, it would almost be                                                               
a  wash, which  he thought  was the  administration's goal.  They                                                               
wanted to  reduce the  credits upfront  in exchange  for lowering                                                               
the tax rate on the other end.                                                                                                  
                                                                                                                                
He summarized  that everyone says a  lot of money had  been spent                                                               
on credits  and where did  it all go?  About 42 percent  of those                                                               
credits  had  been spent  on  drilling  new  wells and  he  could                                                               
guarantee that every one of them delivered new oil.                                                                             
                                                                                                                                
SENATOR FRENCH remarked that this  was the strongest presentation                                                               
made today  so far,  particularly the  close examination  of Econ                                                               
One's numbers versus someone who  has a little more experience in                                                               
the  field in  making projects  come together.  It's stunning  to                                                               
find out  if they  had not  done their  homework they  would have                                                               
passed a bill last year that  would have impacted a small project                                                               
like  the one  being  discussed here  by $92  million  for a  new                                                               
entrant or by $66 million for a small producer.                                                                                 
                                                                                                                                
5:03:49 PM                                                                                                                    
MR. FOLEY  said people will  ask what could  be done to  make the                                                               
bill more helpful and it's really  simple: lower the tax rate and                                                               
keep  the credits  alive. The  credits matter  to a  company like                                                               
his,  because  they  reduce  the upfront  capital  needed  for  a                                                               
project. He  believed the administration  tried to design  a bill                                                               
that would  compensate by taking  the credits away and  allow the                                                               
losses to escalate at 15 percent.  But if you think in simple and                                                               
discount it 10 or 12 percent, why  is that not a wash? The answer                                                               
is there are  so many rules about how that  escalation works: the                                                               
first two  years don't count, the  year you use it  doesn't count                                                               
and  if you  didn't pay  a tax  because you're  a small  producer                                                               
those dollars  don't get to  escalate. His  point was that  for a                                                               
company  like Pioneer  and  this  project the  value  of that  15                                                               
percent  escalation  on  the  loss  carry  forward  just  doesn't                                                               
compensate for the loss of the credits.                                                                                         
                                                                                                                                
SENATOR BISHOP complimented him on his Alaska hire record.                                                                      
                                                                                                                                
5:05:19 PM                                                                                                                    
BART   ARMFIELD,  CEO,   Brooks   Range  Petroleum   Corporation,                                                               
Anchorage, Alaska, supported  SB 21. He said  they would probably                                                               
echo a  lot of the same  positions as the previous  speakers, but                                                               
he wanted to show it to them in a different manner.                                                                             
                                                                                                                                
The key elements  in SB 21 for Brooks Petroleum  were the capital                                                               
credits under .023(a) and the  ability to cash in certificates in                                                               
a  single year  versus  50  percent one  year  and  the other  50                                                               
percent  in the  second. The  problem is  that they  only get  to                                                               
experience that  for a single  year, because they  are eliminated                                                               
December  31,  2013.  To  offset  that,  he  suggested  extending                                                               
.023(a)  or applying  the credit  policy in  .023(l), Cook  Inlet                                                               
policy, to  the North Slope.  A .023(l) credit allows  40 percent                                                               
for all  intangible well work in  the Cook Inlet. A  third option                                                               
would be to redefine the .025 exploration incentive credit.                                                                     
                                                                                                                                
MR.   ARMFIELD   said    Brooks   Range   supported   eliminating                                                               
progressivity and maintaining the 25 percent base tax.                                                                          
                                                                                                                                
He  said not  being  able to  apply for  the  loss carry  forward                                                               
credits  on a  cash  basis after  December 31,  2013  was also  a                                                               
problem  for  a small  independent,  but  the  15 percent  was  a                                                               
benefit.  He supported  extending  the small  producer credit  in                                                               
.024(c) from 2016 to 2022.                                                                                                      
                                                                                                                                
He said while  they support the GRE concept,  the actual language                                                               
says that  it doesn't not  contain lands that  were in a  unit on                                                               
January 1,  2003 and the problem  with that is that  two of their                                                               
near  term   development  projects,  Mustang  and   Tofkat,  were                                                               
actually in a unit in 2003 and wouldn't qualify.                                                                                
                                                                                                                                
He said  the reasons they came  to Alaska from the  Lower 48 were                                                               
the big reserves that are  available. An acceptable cost of doing                                                               
business in early 2000 was $6  to $8 million per well; today they                                                               
cost $20 to $25 million per well.  In 2000 the tax policy was not                                                               
an impact consideration (under ELF);  it was a tax structure used                                                               
in other  lower 48 properties, but  it has changed twice  and now                                                               
they are considering another one.                                                                                               
                                                                                                                                
5:12:49 PM                                                                                                                    
MR.  ARMFIELD said  they  also envisioned  a  cyclical change  in                                                               
focus  from the  majors  lessening their  activity  on the  North                                                               
Slope - much  as occurred in the  mid-continent, Rocky Mountains,                                                               
Gulf  of  Mexico -  and  that  they  would  move on  and  smaller                                                               
independents would come in and pick  up the slack as they existed                                                               
the area.                                                                                                                       
                                                                                                                                
When they  came to Alaska  the biggest  draw was its  world class                                                               
reserve base. But those are being  challenged by the high cost of                                                               
oil, the new technology and  unconventional plays taking place in                                                               
the Lower 48.  The perception of high taxes and  changing the tax                                                               
regime so  frequently both make  Alaska an unattractive  place to                                                               
invest in; you can't adhere to a 5-10 year business plan.                                                                       
                                                                                                                                
5:15:55 PM                                                                                                                    
Key elements people look at in coming to Alaska are:                                                                            
-they must have the desire to really be in Alaska                                                                               
-they need to  understand the business from  a geological setting                                                               
to permitting,  to lease administration,  to Native  relations to                                                               
politics                                                                                                                        
-the must have the financial capacity to fully execute a program                                                                
                                                                                                                                
5:16:53 PM                                                                                                                    
Brooks Petroleum currently  uses the QCE (.023(a)  credit, but it                                                               
would like to  get out of the loss carry  forward credit, because                                                               
that  means they  are still  losing  money in  Alaska. They  like                                                               
small producer credit and would like it extended to 2022.                                                                       
                                                                                                                                
5:19:05 PM                                                                                                                    
MR. ARMFIELD  said in  the groups he  speaks with  everyone feels                                                               
Brooks Petroleum receives the .025  exploration credits, but they                                                               
never have. Even though they  are an exploration company, none of                                                               
their leases  come even close  to being able to  qualify, because                                                               
of having to be three-miles  outside around any existing well and                                                               
25-miles from producing units in order to qualify for it.                                                                       
                                                                                                                                
5:19:49 PM                                                                                                                    
He  said Brooks'  was the  only exploration  company drilling  in                                                               
Alaska in  2011 and of  the $1 billion  in credits the  state had                                                               
paid out they  had received$69 million, $7 million  of which came                                                               
to them  in 2011. He  compared the impacts of  ACES and SB  21 to                                                               
their Mustang  development. Brooks Petroleum would  have received                                                               
$205 million under ACES for  the Mustang development and the full                                                               
field  development  associated  with  that  would  generate  $1.2                                                               
billion in royalty, tax burden and progressivity to the state.                                                                  
Conversely, under SB  21 using the same numbers  and applying the                                                               
same  strategy, but  receiving no  credit support  in 2014/15/16,                                                               
that $205 million  credit investment by the state  was reduced to                                                               
$81.5  million. That  would require  this project  to support  an                                                               
additional $124  million worth of  capital infusion that  was not                                                               
planned for under the ACES program.                                                                                             
                                                                                                                                
5:23:35 PM                                                                                                                    
The peak  throughput of  their five  near term  projects, Mustang                                                               
through  the  Badami Expansion,  was  55,000  bbl/day. That  $561                                                               
million  in  credit  support  would throw  off  $4.4  billion  in                                                               
revenues to  the state at  an average  $300 million per  year. He                                                               
asked  them to  imagine replicating  what Brooks  Range is  doing                                                               
with 10 other companies.                                                                                                        
                                                                                                                                
5:25:28 PM                                                                                                                    
SENATOR  FRENCH asked  if the  loss of  the credits  threaten his                                                               
five listed projects.                                                                                                           
                                                                                                                                
MR. ARMFIELD answered yes, not so  much in terms of never getting                                                               
done; someone would do them, but the pace would be much slower.                                                                 
                                                                                                                                
CHAIR  GIESSEL asked  how  his loan  with  the Alaska  Industrial                                                               
Development and Export Authority (AIDEA) was affecting him.                                                                     
                                                                                                                                
MR. ARMFIELD replied that the  AIDEA loan is strictly a financial                                                               
arrangement  consisting  of  principle, interest  and  a  defined                                                               
term. That was in the Brooks  Range portion and didn't get credit                                                               
support.                                                                                                                        
                                                                                                                                
CHAIR GIESSEL asked if that was moving his project forward.                                                                     
                                                                                                                                
MR.  ARMFIELD answered  yes; ADIEA  provided  the best  financial                                                               
option at the time for the Mustang development.                                                                                 
                                                                                                                                
SENATOR MICCICHE asked the expected  dates of first oil for those                                                               
five projects.                                                                                                                  
                                                                                                                                
MR.  ARMFIELD replied  Mustang was  planned to  come on  Q3 2014,                                                               
Appaloosa was  planned for 2016/17,  Tofkat was planned  for mid-                                                               
2016, Beechey Point  was planned for mid/late 2015,  and Badami -                                                               
since it  was close to underutilized  facility infrastructure and                                                               
pipeline and they have the  ability to drill from existing gravel                                                               
and infrastructure - was soonest at Q3/4, 2014.                                                                                 
                                                                                                                                
5:31:44 PM                                                                                                                    
MR. ARMFIELD said all of their leases are burdened with a one-                                                                  
sixth  royalty position,  which would  generate $2.1  billion for                                                               
the state. Other leases are  a one-eighth royalty position, which                                                               
generates $1.6 billion.  That means they are  already paying $542                                                               
million  more  than  other  companies  and  compounded  with  the                                                               
anticipated elimination  of $561 million in  capital credits that                                                               
means this  project is impacted to  the tune of $1.1  billion. He                                                               
urged a minor  change in SB 21 that could  have a dramatic effect                                                               
on  their business:  retain the  capital and  loss carry  forward                                                               
credits that could generate a return  of $3 billion a year to the                                                               
state.                                                                                                                          
                                                                                                                                
5:33:27 PM                                                                                                                    
KEN  THOMPSON, Co-Owner,  Alaska  Venture  Capital Group  (AVCG),                                                               
parent company for  Brooks Range Petroleum, said  he supported SB
21 with  some changes. He was  a former president of  Arco Alaska                                                               
and  had served  on the  Board  of Directors  of Pioneer  Natural                                                               
Resources. He  said AVCG  invests only on  the North  Slope; they                                                               
don't  have  any  oil  production currently,  but  they  do  have                                                               
105,000  acres in  three  core  areas and  a  joint venture  (JV)                                                               
partnership   with   Ramshorn   Exploration,  an   affiliate   of                                                               
Neighbor's  Industries. To  date  they have  invested just  under                                                               
$200 million.                                                                                                                   
                                                                                                                                
In  2004,  AVCG  formed  an operating  subsidiary,  Brooks  Range                                                               
Petroleum  Corporation, and  since that  time they  have had  six                                                               
discoveries and  acquired three discoveries that  were drilled by                                                               
other  companies in  the  70s and  80s that  they  think are  now                                                               
commercial. They have four development  oil projects on the North                                                               
Slope  in   permitting  and  conceptual  engineering,   the  most                                                               
important being  the 44 million/bbl  Mustang Field,  their anchor                                                               
development. A lot  of their leases are in  unitized blocks; they                                                               
have  570 sq.  mi.  of  modern 3D  seismic,  one  of the  largest                                                               
holdings of modern 3D seismic on the North Slope.                                                                               
                                                                                                                                
He  said that  AVCG  and Ramshorn  had  drilled more  exploration                                                               
wells on the  North Slope than any other company  in the last six                                                               
years.  Literally   almost  one-third  of  all   the  exploration                                                               
activity on  the North Slope state  lands has been done  by their                                                               
company. In  the last two  years Repsol has exceed  their number.                                                               
Their first production  cash flow will be in Q3  2014. Their four                                                               
development units  will be coming  on from 2014 through  2016 and                                                               
have 770 barrels of recoverable oil.                                                                                            
                                                                                                                                
SENATOR GIESSEL asked if he liked SB 21 or continuing ACES.                                                                     
                                                                                                                                
MR.  THOMPSON  said  he'd  choose   SB  21.  He  added  that  the                                                               
production  profile of  over 50,000  barrels/day  could stop  the                                                               
decline on the  North Slope if one or two  more independents like                                                               
his could continue to explore.                                                                                                  
                                                                                                                                
5:38:18 PM                                                                                                                    
SENATOR  GIESSEL  thanked  Mr.  Armfield  and  Mr.  Thompson  for                                                               
providing their testimony and recognized Mr. Brad Keithley.                                                                     
                                                                                                                                
5:38:30 PM                                                                                                                    
BRAD  KEITHLEY,  Partner  and  Co-Head,  Oil  and  Gas  Practice,                                                               
Perkins  Coie, LLP,  said  the  five key  things  to  look at  in                                                               
redoing the  oil tax  structure to  increase oil  production over                                                               
the remaining  life of Alaska's resources  are competitive rates,                                                               
durability, neutrality, simplicity/predictability and alignment.                                                                
                                                                                                                                
The goal is  to grow the pie. The objective  any oil reform needs                                                               
to  have is  to increase  production over  the remaining  life of                                                               
Alaska's resources.  Alaska needs  an additional recovery  of 7.5                                                               
billion barrels or  4 billion barrels beyond just  staying on the                                                               
status quo.  To put that in  context, Prudhoe Bay has  25 billion                                                               
barrels of oil in place.                                                                                                        
                                                                                                                                
5:43:31 PM                                                                                                                    
MR. KEITHLY said  the level of investment needed  to maintain the                                                               
status quo  in 2006 dollars  was roughly  $1 to $1.5  billion and                                                               
double that is  needed to get to the 3  percent decline range, so                                                               
they should look at what  would get that additional investment up                                                               
here.                                                                                                                           
                                                                                                                                
The first key  thing to look at is having  competitive rates over                                                               
a full  spectrum of prices and  for a long period  of time (10-20                                                               
years)  so  companies  can test  economics  against  prices  they                                                               
anticipate occurring during that entire period.                                                                                 
                                                                                                                                
Since PFC  said in  the medium  to long term  the floor  price is                                                               
roughly $70  a barrel,  SB 21  needs to  be evaluated  using that                                                               
price  perspective.  However, he  pointed  out  that taxes  ACES,                                                               
according to  Econ One,  are actually  lower than  SB 21  at that                                                               
price  level and  that it's  important  to make  sure they  don't                                                               
replicate  the current  problem going  forward. The  problem with                                                               
ACES right now is that it  is uncompetitive at high prices and we                                                               
don't want  to enact a  statute that would make  us uncompetitive                                                               
at low prices.                                                                                                                  
                                                                                                                                
5:46:31 PM                                                                                                                    
The second key  factor was durability. Investors  are looking out                                                               
10-25 years  and whether  the tax  structure will  remain durable                                                               
over the entire term of the investment.                                                                                         
                                                                                                                                
SENATOR DYSON asked what his  statement "no durability mechanisms                                                               
included not  established by  contract or  economic stabilization                                                               
clause" meant.                                                                                                                  
                                                                                                                                
MR.  KEITHLEY  explained  in many  jurisdictions  throughout  the                                                               
world, when the fiscal regime is  settled with the investor it is                                                               
settled  by contract.  In third  world companies  a lot  of times                                                               
that  is  backed   up  by  World  Bank   agreements  that  enable                                                               
arbitration  and   other  protections  if  the   fiscal  contract                                                               
changes. That gives the investor  fiscal certainty over the term.                                                               
Another  way to  do that  is through  an "economic  stabilization                                                               
clause" which  essentially says  if the taxes  are raised  in one                                                               
area  we'll lower  government take  in another  area so  that the                                                               
level of take across the years is  held the same. That is done in                                                               
countries that have other industries  and may raise the corporate                                                               
income tax or do other things.                                                                                                  
                                                                                                                                
5:48:23 PM                                                                                                                    
SENATOR DYSON said  that would be very difficult to  do in Alaska                                                               
given  its  constitution  that  says  you  can't  bind  a  future                                                               
legislature. He asked if he had any ideas for a solution.                                                                       
                                                                                                                                
MR. KEITHLEY said  yes, and they would take more  time to explain                                                               
than the committee had now, but  he did think that Alaska had the                                                               
capability of  entering into some sort  of economic stabilization                                                               
clause with  producers or entering into  contracts with producers                                                               
through the use  of the royalty provisions. SB 21  doesn't do it,                                                               
but that's  okay if  they expect  the tax  structure to  stay the                                                               
same through the life of the investment.                                                                                        
                                                                                                                                
MR. KEITHLEY said  according to a news article that  the BC prime                                                               
minister  was  trying  to  solve the  same  problem  basically  -                                                               
raising  taxes on  LNG -  by  negotiating with  the industry  and                                                               
arriving  at a  common agreement  about what  the levels  of take                                                               
would be.                                                                                                                       
                                                                                                                                
He said  another way  of achieving durability  is to  just assume                                                               
the fiscal structure  will remain durable throughout  the life of                                                               
a  project. To  some degree  that is  what Alaska  relied on  and                                                               
people had  been testifying that  they had invested based  on the                                                               
tax  structure remaining  in  place. But  since  the early  2000s                                                               
Alaska has  changed its tax  structure periodically  (for various                                                               
reasons) in a  way that has fostered the perception  that it will                                                               
not remain durable.                                                                                                             
                                                                                                                                
MR. KEITHLEY said the Institute  for Social and Economic Research                                                               
(ISER) indicated  that Alaska's  fiscal policy had  a gap  in it,                                                               
right  in the  middle of  the time  when investors  are going  to                                                               
expect  to be  getting the  revenues that  they predicated  their                                                               
investments on. And  whether it's correct or not,  they will have                                                               
the  perception that  when that  fiscal gap  shows up,  the state                                                               
will change its tax policy again  and the economics that they had                                                               
predicated their  investments on are  going to be  undermined. So                                                               
Alaska has  to set up a  situation that has no  durability and SB
21  doesn't   have  it   either.  In   addition,  there   are  no                                                               
negotiations  going   on  with  producers  that   would  lead  to                                                               
durability. The consequence  of that is that  investors will look                                                               
at the  short term for investments  and SB 21 may  lead to those,                                                               
but it  will not lead to  the type of long  term investments that                                                               
are needed in order to level the decline curve.                                                                                 
                                                                                                                                
Durability  is perhaps  the  most significant  issue  that SB  21                                                               
faces Mr. Keithley  stated, and it's unlikely  that a legislature                                                               
would  feel comfortable  including durability  provisions in  the                                                               
statute. He emphasized:                                                                                                         
                                                                                                                                
     A necessary  part of  this process is  not only  to fix                                                                    
     the oil tax,  but we have to fix our  fiscal policy. If                                                                    
     we don't fix our  fiscal policy we're leaving investors                                                                    
     with the  impression that  okay we've  got it  done for                                                                    
     the  short  term,  so  you can  make  your  short  term                                                                    
     investments now. Those will pay  out. But we don't have                                                                    
     a  long term  solution  in  place and  you  need to  be                                                                    
     concerned about what's going to happen about half-way                                                                      
     through your investment cycle.                                                                                             
                                                                                                                                
5:54:22 PM                                                                                                                    
MR.  KEITHLEY  said the  third  criterion  was neutrality,  which                                                               
means the extent to which government  is out of the way in trying                                                               
to direct investments. ACES provided  incentives to certain types                                                               
of  investments and  "penalized"  other types  of investments  by                                                               
charging them a higher rate in  order to provide the subsidies to                                                               
the  favored investments,  which dis-incentivized  investments in                                                               
the existing  fields and  maybe over-incentivized  investments in                                                               
exploration areas.  A good  tax structure  is neutral  across all                                                               
investment  opportunities and  doesn't  try to  second guess  the                                                               
market.                                                                                                                         
                                                                                                                                
He said  SB 21 does a  good job of increasing  neutrality, but it                                                               
doesn't  go all  the  way there.  Testimony  about legacy  fields                                                               
revealed  that  Alaska has  had  a  history  of finding  ways  to                                                               
increase  ultimate  recovery  inside  of  existing  fields.  When                                                               
production first started at Prudhoe  Bay the recovery rate of the                                                               
25 billion  barrels was expected  to reach 40 percent,  and today                                                               
using  new  technologies  that  has increased  to  more  than  60                                                               
percent.  It's   important  to  remember  that   each  1  percent                                                               
improvement in  Prudhoe's recovery rate equals  an additional 250                                                               
million  barrels   of  ultimate   recovery,  the   equivalent  of                                                               
discovering another 250 million-barrel field.                                                                                   
                                                                                                                                
For  context he  showed an  Econ One  slide showing  the expected                                                               
field  size on  the North  Slope was  32-54 million  barrels. So,                                                               
improving the recovery  rate in Prudhoe Bay by 1  percent you get                                                               
250 million  barrels. It's important to  recognize that improving                                                               
the  recovery   rate  plays  an   important  role   in  improving                                                               
production, but  SB 21 doesn't deal  with that. It gives  GREs to                                                               
new fields outside existing units  and to new PAs inside existing                                                               
units, but  continues to  in some  sense penalize  the production                                                               
for existing fields. So, it's important  to find a way to provide                                                               
neutrality.                                                                                                                     
                                                                                                                                
SENATOR  MICCICHE said  the state  has 3  billion barrels  of oil                                                               
economically  recoverable on  the North  Slope at  $90/bbl (under                                                               
ACES) and  asked if the curve  changes under SB 21  especially at                                                               
$110/barrel.                                                                                                                    
                                                                                                                                
MR. KEITHLEY  said that was  a question  for Econ One  to answer,                                                               
and  he was  using their  slide to  demonstrate the  size of  the                                                               
fields people  expect going  forward and  comparing those  to the                                                               
improving recovery rates.                                                                                                       
                                                                                                                                
SENATOR MICCICHE  added that the  1 percent  should incrementally                                                               
improve  as  the  cost  to  produce  comes  down  or  the  profit                                                               
increases.                                                                                                                      
                                                                                                                                
MR. KEITHLEY  said the 1  percent in  Prudhoe Bay will  always be                                                               
250  million barrels,  because the  oil  in place  is 25  billion                                                               
barrels  - the  math is  always the  same -  so the  economics of                                                               
making the  investment necessary  to achieve  the 1  percent will                                                               
improve or  be penalized if the  GRE isn't extended there.  SB 21                                                               
does not  provide a  level playing  field for  those investments,                                                               
because they are inside existing fields.                                                                                        
                                                                                                                                
5:59:42 PM                                                                                                                    
SB  21 does  a good  job in  the area  of another  key criterion,                                                               
simplicity/predictability.  It doesn't  have a  lot  of room  for                                                               
interpretation or have  a lot of recalculations and  or require a                                                               
lot of regulations.                                                                                                             
                                                                                                                                
His  final category  was  aligning the  state  with producers  in                                                               
growing  the   pie.  A  lot   of  conversations  right   now  are                                                               
interpreted by investors as arguing  about who gets what share of                                                               
the  existing pie,  not about  growing it.  SB 21  doesn't change                                                               
that.  Before SB  21,  Alaska relied  on  indirect policy  tools,                                                               
trying the carrot approach of  creating fiscal incentives and the                                                               
stick approach of creating regulatory  action at Pt. Thomson, but                                                               
the state  hasn't aligned  with investors in  trying to  grow the                                                               
pie.  It has  essentially tried  to drive  the industry  from the                                                               
backseat. He  sincerely believed  the state  needed to  adopt the                                                               
mindset  of an  investor in  putting  its money  and effort  into                                                               
things that  produce the greatest  returns. When you  look around                                                               
the  world, the  most  successful  model is  in  Norway that  has                                                               
created a  co-investment vehicle  that partners with  industry in                                                               
identifying new opportunities.                                                                                                  
                                                                                                                                
6:02:25 PM                                                                                                                    
In summary  he said that SB  21 is better than  ACES but material                                                               
concerns remain.  SB 21  is not  competitive at  a full  range of                                                               
anticipated  prices   for  long   term  investments   and  unlike                                                               
horseshoes being  close isn't good  enough. Durability is  a huge                                                               
significant issue - he went so far  as to say that to some degree                                                               
messing with the  oil tax structure is sort of  like playing with                                                               
deck chairs  on the Titanic.  Investors won't make  the long-term                                                               
investment   Alaska   needs   without  a   fiscal   policy   that                                                               
demonstrates  to them  that  it's  not likely  to  change in  the                                                               
middle  of their  investment cycle.  Neutrality is  significantly                                                               
better with expanding  the GREs to new participating  areas in SB
21, but bias remains  against important investment opportunities.                                                               
Increasing  the ultimate  recovery  rate in  existing fields  has                                                               
always  been  a  way  that  Alaska  has  benefited  in  terms  of                                                               
increased production  and recovery  and this  needs to  remain on                                                               
the playing field if we are  going to fix the decline problem. SB
21 doesn't gain any on the  alignment issue - we're sort of stuck                                                               
in the same rut we have been in.                                                                                                
                                                                                                                                
6:04:27 PM                                                                                                                    
MR.  KEITHLEY  had  three  recommendations:   adopt  SB  21  with                                                               
amendments,  make  the  tax   structure  competitive  across  all                                                               
anticipated  prices  not  just  the  high end  and  avoid  a  tax                                                               
increase at the lower end,  provide GRE or similar incentives for                                                               
investments designed  to increase  ultimate recovery  in existing                                                               
fields  (don't'  penalize  them).  And while  it  is  beyond  the                                                               
purview of  this committee, the  Finance committee  must identify                                                               
and deal  with the fiscal  policy concerns  the state faces  - if                                                               
we're going to have long term investment.                                                                                       
                                                                                                                                
There are  long term fixes on  the table: the ISER  study does an                                                               
excellent job  of talking about  developing a  sustainable budget                                                               
and  the Finance  Committee should  take it  up as  part of  this                                                               
issue. Finally,  he recommended holding hearings  on Norway's co-                                                               
investment  model, because  the  state needs  a  game changer  in                                                               
terms  of  aligning  the state's  interests  with  industry.  DNR                                                               
Commissioner Sullivan said Alaska needs  $4 billion more per year                                                               
in order to achieve an oil  economy it wants to have. He reminded                                                               
them that Norway's permanent fund  concept came from them looking                                                               
at  Alaska, so  we  can  learn things  from  other countries  and                                                               
regimes, too. The  second largest oil discovery in  the world was                                                               
led by science in the North  Sea last year when Petoro identified                                                               
opportunities  that other  companies  had  overlooked. There  are                                                               
benefits  from the  state contributing  to the  effort to  try to                                                               
develop  its resources  and it's  important to  hold hearings  on                                                               
those and take advantage of those opportunities.                                                                                
                                                                                                                                
6:07:58 PM                                                                                                                    
SENATOR GIESSEL thanked Mr. Keithley.                                                                                           
                                                                                                                                
6:08:46 PM                                                                                                                    
At ease from 6:08 to 6:10 p.m.                                                                                                  
                                                                                                                                
6:10:11 PM                                                                                                                    
SENATOR GIESSEL reconvened  the hearing at 6:10  p.m. and invited                                                               
Mr. Corbus to testify.                                                                                                          
                                                                                                                                
BILL  CORBUS, member,  Make Alaska  Competitive (MAC)  Coalition,                                                               
Juneau,  Alaska, said  he was  a former  commissioner of  Revenue                                                               
during 2003 to  2006 and supported SB 21. He  participated in the                                                               
ELF aggregation  formulation of the  PPT and watched  with dismay                                                               
as ACES was passed. He  supported particularly the removal of the                                                               
extreme progressivity tax increase at  high oil prices, the gross                                                               
revenue exclusion and  modifying the tax credit  system that will                                                               
result in credits  being granted when production  begins. He said                                                               
something is urgently needed to  increase investment on the North                                                               
Slope and  to turn around  the declining oil production.  If they                                                               
modify SB  21 he urged  adopting a  severance tax system  that is                                                               
competitive at a range of  oil prices with similar provinces such                                                               
as the Gulf of Mexico, Texas, North Dakota or Alberta.                                                                          
                                                                                                                                
SENATOR GIESSEL thanked him for his  service to the state and his                                                               
testimony.                                                                                                                      
                                                                                                                                
6:13:02 PM                                                                                                                    
DAVID TRANTHAM,  representing himself, Bethel,  Alaska, testified                                                               
in opposition to SB 21 in  its current form. He said the governor                                                               
supports a tax that  is fair, but this bill would  not be fair to                                                               
small   operators   and   independents  on   the   North   Slope,                                                               
particularly  regarding  eliminating  a contribution  to  revenue                                                               
sharing on page 2, line  2. Small operators and independents will                                                               
help  the state  get  back to  1  million barrels  a  day in  the                                                               
pipeline much faster than the large operators.                                                                                  
                                                                                                                                
SENATOR FAIRCLOUGH responded that  the governor was not proposing                                                               
to eliminate  the contribution to revenue  sharing (which remains                                                               
whole),  but proposing  to fund  it using  corporate income  tax,                                                               
because he is eliminating progressivity.                                                                                        
                                                                                                                                
6:17:29 PM                                                                                                                    
NOEL  WOODS,  representing  himself,   Palmer,  Alaska,  said  he                                                               
appreciated  previous testimony  on SB  21. He  said there  is so                                                               
much  opposition  to developing  the  state's  resources and  the                                                               
permitting  process takes  so long.  When you're  trying to  do a                                                               
project, time really is money.                                                                                                  
                                                                                                                                
6:19:18 PM                                                                                                                    
LANCE   ROBERTS,   representing   himself,   Fairbanks,   Alaska,                                                               
supported  them  doing  some  measure   of  oil  tax  reform  and                                                               
supported  the  governor's third  point  of  simplifying the  tax                                                               
structure  and eliminating  progressivity or  going to  a smaller                                                               
number of brackets. He supported moving SB 21 forward.                                                                          
                                                                                                                                
KEN  HALL,  representing  himself,  Fairbanks,  Alaska,  said  he                                                               
supported  the   "sentimental  concepts  of  fair   to  Alaskans"                                                               
embodied in SB 21. And it must be  fair not only to those who are                                                               
still coming  into the workforce,  but those in the  future, too.                                                               
New  production   is  needed  here;  other   regions  had  either                                                               
increased production or stymied the  decline. He said SB 21 needs                                                               
to have  incentives for companies  to develop the  legacy fields,                                                               
because realistically that  is where the oil is.  The state needs                                                               
to be  competitive and have  a durable  tax policy. Writing  a C-                                                               
grade paper in  this circumstance will not  provide the necessary                                                               
incentives to increase production and just tweaking it won't do.                                                                
                                                                                                                                
6:24:32 PM                                                                                                                    
MAYNARD TAPP, representing  himself, Anchorage, Alaska, testified                                                               
in  support of  the  concept  of SB  21.  He  encouraged them  to                                                               
simplify the  tax, get competitive,  stop the decline  curve, and                                                               
make a plan that is longer than for two years.                                                                                  
                                                                                                                                
6:26:27 PM                                                                                                                    
STEVE  PRATT,   Executive  Director,  Consumer   Energy  Alliance                                                               
Alaska,  Anchorage, Alaska,  said  there are  several reasons  to                                                               
change  the  tax  regime  in  Alaska.  Consumers  have  a  direct                                                               
interest  in consuming  competitively priced  energy supply  from                                                               
domestic  sources  and also  have  a  direct interest  in  robust                                                               
overall economic  activity to maintain livelihoods.  According to                                                               
ISER, at  least 30 percent of  Alaskans are dependent on  oil and                                                               
gas exploration  and development  for employment.  Development of                                                               
Alaska's abundant  resources is vital  to the energy  security of                                                               
the entire nation  as well as the state. Alaska  needs to be able                                                               
to   compete  for   global   investment   dollars.  The   current                                                               
progressivity  is a  disincentive,  because at  the current  high                                                               
prices other states' production is going up, but not in Alaska.                                                                 
                                                                                                                                
6:29:54 PM                                                                                                                    
RICK  ROGERS, Executive  Director,  Resource Development  Council                                                               
(RDC), Anchorage, Alaska, said they  could support the governor's                                                               
four guiding principles  but the real giveaway is  the oil that's                                                               
locked in the  ground, because we're looking  at maximizing short                                                               
term tax  revenue at  the expense  of encouraging  investment and                                                               
production for  the long  term. If a  less aggressive  tax regime                                                               
could cut the  decline rate by half, over $8  billion new dollars                                                               
would be  circulating in Alaska's  economy. He said  the business                                                               
community is  fearful of what  continued TAPS  throughput decline                                                               
will  do to  the state's  economy as  a whole.  He quoted  Lynden                                                               
Johnson who  said, "The most  dangerous thing  you can do  to any                                                               
businessman  in  America  is  keep  him in  doubt  and  keep  him                                                               
guessing  on what  our tax  policy is;"  and Calvin  Coolidge who                                                               
said,  "The  method  of  raising revenue  ought  not  impede  the                                                               
transaction of business; it ought to encourage it."                                                                             
                                                                                                                                
6:32:44 PM                                                                                                                    
LAURIE FAGNANI, MSI  Communications, Anchorage, Alaska, testified                                                               
that  SB 21  is  a step  in  the right  direction.  More than  50                                                               
percent of their revenues come from  oil and gas industry and the                                                               
decisions made today  impact her company and the  people who work                                                               
there.  Every day  she  worries about  being  competitive in  her                                                               
industry; if  the answer  is no, then  she changes  her strategy.                                                               
She maneuvers  to a better position,  because if they can  get it                                                               
cheaper someplace  else, they will.  That's how the  market place                                                               
works.                                                                                                                          
                                                                                                                                
ALLISON GRIFFITH,  representing herself, Anchorage,  Alaska, said                                                               
she was advocating for oil tax  reform in whatever form it takes.                                                               
She had  lived here all her  life and worked for  an Alaska owned                                                               
company since 1978,  virtually her whole career. She  spoke for a                                                               
lot of people who had also invested their lives here.                                                                           
                                                                                                                                
6:36:37 PM                                                                                                                    
SCOTT  HAWKINS, Advanced  Chain Supply  International, Anchorage,                                                               
Alaska, supported the  governor's four principles and  SB 21. His                                                               
was an oil and gas  services company employing about 230 Alaskans                                                               
in direct support  of the industry in Alaska. He  said Alaska had                                                               
been missing out on a worldwide  boom for all the reasons pointed                                                               
out  by  previous  speakers. He  concurred  with  Mr.  Keithley's                                                               
comments about achieving alignment  with the producers and having                                                               
a stable durable tax policy.                                                                                                    
                                                                                                                                
6:39:23 PM                                                                                                                    
MICHAEL JESPERSON, representing  himself, Anchorage, Alaska, said                                                               
SB  21 is  better than  the  alternatives, although  it could  be                                                               
improved in  terms of durability. But  it needs to get  passed so                                                               
we can start getting some investments.                                                                                          
                                                                                                                                
6:40:43 PM                                                                                                                    
ANDY ROGERS  representing himself,  Palmer, Alaska,  testified in                                                               
support of oil tax reform and SB 21 in particular.                                                                              
                                                                                                                                
6:41:40 PM                                                                                                                    
JOHN  STURGEON,  Concord   Forest  Products,  Anchorage,  Alaska,                                                               
supported  SB 21.  He manages  one of  the few  timber operations                                                               
left in  Alaska. If he  operated under the same  progressivity as                                                               
the oil companies  he would have been out of  business many years                                                               
ago. If they  want Alaska's economy to thrive,  they must provide                                                               
the incentives  to encourage people  in Alaska to invest  and the                                                               
current oil tax structure is a disincentive.                                                                                    
                                                                                                                                
6:42:35 PM                                                                                                                    
GAIL PHILLIPS, representing herself,  Anchorage, Alaska, said she                                                               
supported the  work the committee  had done to find  a reasonable                                                               
and long term solution to the  oil tax conflict. She was a former                                                               
member of the  legislature and congratulated them  on their great                                                               
stamina  and said  it's up  to  them to  make Alaska  competitive                                                               
again with a durable and simple tax policy.                                                                                     
                                                                                                                                
6:45:31 PM                                                                                                                    
RENEE   SCHOFIELD,  representing   herself,  Ketchikan,   Alaska,                                                               
testified in  support of SB 21.  She urged the committee  to pass                                                               
tax reform that  was fair and durable and to  do it this session.                                                               
She said  they really want  family to be  able to stay,  live and                                                               
work in  Alaska. Her  business is  not in  the oil  industry, but                                                               
everything is impacted by their decisions.                                                                                      
                                                                                                                                
6:47:32 PM                                                                                                                    
TOM LAKOSH,  representing himself,  Anchorage, Alaska,  asked the                                                               
committee to honor  its oath of office to evaluate  the long term                                                               
benefits to Alaskans  from development of its  resources. He said                                                               
the benefit of the different  tax regimes to Alaskans hadn't been                                                               
sufficiently or competently  analyzed. He said there  may be some                                                               
merit in looking  at the Norway model. The  committee should also                                                               
commission  further  analysis  that   is  consistent  with  their                                                               
mandate to get  the maximum benefit of the resource  here for the                                                               
long term.                                                                                                                      
                                                                                                                                
6:51:05 PM                                                                                                                    
MERRICK  PEIRCE,   representing  himself,  North   Pole,  Alaska,                                                               
opposed  SB  21  asking  how  often  legislators  questioned  the                                                               
reckless  policy of  having only  one source  of revenue.  He had                                                               
worked  with Governor  Palin and  DOR Commissioner  Bryan Butcher                                                               
doing  transition work  in 2006  with a  significant emphasis  on                                                               
getting  a  fair  return  for  our oil.  SB  21  is  supposed  to                                                               
accomplish  more TAPS  throughput, but  that hypothesis  has been                                                               
thoroughly  refuted by  Bill Wielechowski.  Even if  we had  more                                                               
throughput there is  no guarantee that the price of  oil will not                                                               
be $40 next year and then Alaska will have massive deficits.                                                                    
                                                                                                                                
He said to  ask themselves what they  could do with the  $1 to $2                                                               
billion per year  that SB 21 would  cost us if the  money is used                                                               
to  find  new alternative  revenue  sources.  SB 21  offers  zero                                                               
guarantee  of  any  return  on  investment  and  there  is  clear                                                               
evidence that  ramping up production  and over-supply of  the ANS                                                               
market drives down profits. Smart  producers will take that money                                                               
and  invest  it outside  of  Alaska.  The  Asian market  is  very                                                               
interested in Alaska LNG and we  have trillions of dollars of gas                                                               
under the  North Slope  that is not  being monetized,  because we                                                               
refuse to invest billions of  dollars to build the infrastructure                                                               
to get  the gas to  market. Alaska  has keen competition  from 19                                                               
LNG projects in North America alone.                                                                                            
                                                                                                                                
6:54:40 PM                                                                                                                    
KIMBERLY   METCALFE,   representing  herself,   Juneau,   Alaska,                                                               
testified  in opposition  to  SB 21.  She said  ACES  was a  very                                                               
reasoned approach and she was  against giving back to an industry                                                               
that makes millions  in profits from Alaska's oil and  we need it                                                               
so much. In 2007 the legislature  made a conscious choice to save                                                               
for the  future that  produced budget  surpluses and  allowed the                                                               
state to save billions of  dollars in the budget reserve. Through                                                               
strategic  tax incentives  it also  attracted  new oil  explorers                                                               
here. Today we  have more jobs in the oil  industry, more capital                                                               
investment in  the oil and  more new exploratory wells  than when                                                               
ACES passed. This  is major progress. The decline  in oil flowing                                                               
through  the pipeline  has  continued due  to  maturation of  the                                                               
Kuparuk and Prudhoe Bay fields.                                                                                                 
                                                                                                                                
She said the governor's tax  giveaway would create ongoing budget                                                               
deficits and  cripple the state's competitiveness;  this year the                                                               
Anchorage  and  Juneau  school districts  announced  hundreds  of                                                               
layoffs and  are looking at the  loss of more. Alaska  cannot cut                                                               
oil taxes and still have a viable education system.                                                                             
                                                                                                                                
KELLY   WALTERS,   representing   himself,   Anchorage,   Alaska,                                                               
testified in opposition to SB 21.  He said the evidence is pretty                                                               
clear that taxes  are not related to throughput  in the pipeline.                                                               
We  have 30  years of  low tax  policies and  yet the  pipeline's                                                               
throughput has  declined. There are  a lot of other  problems and                                                               
issues around throughput,  but taxes isn't one of  them. Prior to                                                               
2006, 15 of 19 fields on the  North Slope had zero taxes, and the                                                               
state's own data shows that investment still declined.                                                                          
                                                                                                                                
7:01:44 PM                                                                                                                    
JERRY   AHWINONA,   representing  himself,   Anchorage,   Alaska,                                                               
testified in opposition to SB 21.  He had lived in Alaska all his                                                               
life.  He thought  the current  law was  working. Alaska  has the                                                               
biggest bank account  of any state in the nation  and due to ACES                                                               
a lot  of people are coming  up who want our  natural gas. Russia                                                               
just took a  stake in our Pt. Thomson development.  So, we have a                                                               
lot potential to keep a lot of our future intact.                                                                               
                                                                                                                                
7:03:18 PM                                                                                                                    
KATE VAY,  representing herself,  Soldotna, Alaska,  testified in                                                               
opposition to SB 21. Keep ACES  intact she said, because it works                                                               
great! Don't give the state's  resources away. How will the money                                                               
be  replaced? She  pointed out  that Alaska  is a  safe place  to                                                               
extract  oil;  we  don't  have terrorism,  wars  or  an  unstable                                                               
political regime.                                                                                                               
                                                                                                                                
CHAIR GIESSEL  thanked everyone for  their testimony and  held SB
21 in committee.                                                                                                                

Document Name Date/Time Subjects
SB 21 SRES B.Keithley Five things (pub.11 23 2012) 2013 02 18.pdf SRES 2/18/2013 3:30:00 PM
SB 21
SB 21 Bradford Keithley Comments 2013 02 18.pdf SRES 2/18/2013 3:30:00 PM
SB 21
SB 21 Brooks Range Petroleum Armfield SRES 2013.02.18.pdf SRES 2/18/2013 3:30:00 PM
SB 21
SB 21 Alaska Venture Capital Group Thompson SRES 2013.02.18.pdf SRES 2/18/2013 3:30:00 PM
SB 21
SB 21 AOGA Moriarty SRES 2013.02.18.pdf SRES 2/18/2013 3:30:00 PM
SB 21
SB 21 Pioneer Testimony Foley 2013.02.18.pdf SRES 2/18/2013 3:30:00 PM
SB 21