Legislature(2013 - 2014)BUTROVICH 205

02/20/2013 03:30 PM RESOURCES

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03:30:28 PM Start
03:32:16 PM SB21
06:46:30 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 21 Major Producers TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Scheduled But Not Heard
-- 5:15 p.m. Public Testimony on SB 21 --
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
3:32:16 PM                                                                                                                    
CHAIR GIESSEL announced SB 21 to be up for consideration.                                                                       
DAMIAN  BILBAO, Head  of Finance,  BP  Exploration Alaska,  Inc.,                                                               
Anchorage, Alaska,  introduced himself and said  today they would                                                               
walk through a  conversation around the impact of ACES  on how BP                                                               
evaluates  business  in  a  bit   more  detailed  way  than  they                                                               
typically do.  It's also important  to understand the  context of                                                               
how   ACES  is   affecting   the  analysis   of  their   business                                                               
opportunities and Mr. Williams would walk through that.                                                                         
3:34:45 PM                                                                                                                    
THOMAS  WILLIAMS, Senior  Tax &  Royalty Counsel,  BP Exploration                                                               
Alaska,  Inc., Anchorage,  Alaska,  introduced  himself and  said                                                               
there are  three primary changes that  SB 21 would make  to ACES.                                                               
It would repeal  progressivity, change the system  of tax credits                                                               
that now exists,  which threatens to harm some  producers even if                                                               
it may help others, and it  creates a new gross revenue exclusion                                                               
for  new production  that they  feel is  innovative, but  largely                                                               
MR. WILLIAMS explained that progressivity  is a sliding scale tax                                                               
that runs  quickly up  to a  25 percent rate  and the  rises more                                                               
slowly and is in addition to  the base rate and that repealing it                                                               
is  a  good idea  for  a  number of  reasons,  but  he wanted  to                                                               
describe  two significant  unintended effects  that seem  largely                                                               
unknown and even less understood.                                                                                               
3:36:33 PM                                                                                                                    
He used  eight slides  to describe  how progressivity  works; the                                                               
following is a copy of his written comments:                                                                                    
     If you look  at this first slide, you will  see the tax                                                                    
     calculation  for a  hypothetical  producer with  10,000                                                                    
     barrels of oil who sells it  on the West Coast for $100                                                                    
     a  barrel  and receives  a  million  dollars. It  costs                                                                    
     $150,000  - or  $15 a  barrel -  to transport  that oil                                                                    
     from  the field  in  Alaska to  the  West Coast,  which                                                                    
     leaves  $850,000 as  the gross  value at  the point  of                                                                    
     production  or "GVPP."  The  producer  had $300,000  of                                                                    
     allowable  lease  expenditures,  or field  expense,  to                                                                    
     produce the oil, which leaves  a taxable production tax                                                                    
     value, or "PTV," of $550,000  or $55 a barrel. The base                                                                    
     tax is 25 percent of the PTV, or $137,500.                                                                                 
     The  progressivity   rate  equals  four  tenths   of  a                                                                    
     percentage point  times the difference between  $30 and                                                                    
     the  producer's PTV  per  barrel.  Here the  difference                                                                    
     between $30 and  $55 is $25, and $25  times four tenths                                                                    
     of a  point per dollar  equals 10 percent.  Ten percent                                                                    
     of $550,000 is $55,000  of progressivity tax. That plus                                                                    
     the  base  tax  of  $137,500  equals  a  total  tax  of                                                                    
     $192,500. So far  there is nothing here that  is new to                                                                    
     So now let me begin  to show you something you probably                                                                    
     have not seen  before. This scenario is  not about what                                                                    
     the  producer  has  actually  produced,  but  about  an                                                                    
     evaluation of  what could  happen from  the development                                                                    
     of a new reservoir or  field if the investment is made.                                                                    
     And  let's  suppose  that   this  producer  sees  three                                                                    
     different ways that she  could potentially improve this                                                                    
     investment. One  is that she  knows of a  buyer willing                                                                    
     to  pay a  premium of  a dollar  a barrel  for the  oil                                                                    
     delivered on  the West  Coast; the second  is a  way to                                                                    
     save $20,000 in transportation  costs; and the third is                                                                    
     a  way  to  cut  the  costs  for  field  operations  by                                                                    
     $30,000. If  she can do  all three, what is  the change                                                                    
     in the tax?                                                                                                                
     In  this slide  we  see the  three  changes. The  extra                                                                    
     dollar  a  barrel  in the  price  increases  the  sales                                                                    
     revenue from the oil  to $1,010,000. The transportation                                                                    
     savings reduces  that cost  from $150,000  to $130,000.                                                                    
     Between  the  increased  price and  the  transportation                                                                    
     savings,  the GVPP  of the  oil  back in  the field  is                                                                    
     $880,000  instead of  $850,000.  And  the reduction  in                                                                    
     upstream lease  expenditures raises the taxable  PTV by                                                                    
     another  $30,000,  for  a  total  increase  in  PTV  of                                                                    
     $60,000 from $550,000 to $610,000.                                                                                         
     The  25 percent  base tax  is now  $152,500 instead  of                                                                    
     $137,500.  And  with  PTV  per   barrel  now  $61,  the                                                                    
     progressivity  rate is  $61 minus  $30,  or $31,  times                                                                    
     four tenths of  a percentage point per  dollar, or 12.4                                                                    
     percent.  Twelve-point-four  percent   of  $610,000  is                                                                    
     $75,640,  and  the total  tax  is  $228,140 instead  of                                                                    
     $192,500. This is an increase of $35,640.                                                                                  
     I have  highlighted this change in  yellow and recorded                                                                    
     it in the  upper right corner of the slide  in order to                                                                    
     keep  it on  screen so  we  can remember  what it  was,                                                                    
     because in  this scenario the  producer next  asks what                                                                    
     the  tax  change  is  separately   for  each  of  these                                                                    
     improvements to  the investment. This next  slide shows                                                                    
     the change resulting only from  the extra dollar in the                                                                    
     West Coast price.                                                                                                          
3:40:16 PM                                                                                                                    
SENATOR MICCICHE asked why the field expense changed from $300                                                                  
thousand to $270 thousand.                                                                                                      
MR. WILLIAMS answered because they are assuming that there is a                                                                 
way this producer sees to improve the efficiency of the field by                                                                
     The  higher  price  increases  the  sales  proceeds  by                                                                    
     $10,000  to $1,010,000.  And  as you  go  down the  "As                                                                    
     Revised" column you see this  $10,000 flowing down into                                                                    
     the  $860,000  GVPP  and then  into  the  taxable  PTV,                                                                    
     raising  it to  $560,000. The  25 percent  base tax  on                                                                    
     $560,000  is $140,000.  The progressivity  rate is  $56                                                                    
     minus $30,  or $26, times  four tenths of  a percentage                                                                    
     point  per dollar,  which is  10.4 percent.  Ten-point-                                                                    
     four percent of  $560,000 is $58,240 and  the total tax                                                                    
     is $198,240, an increase of $5,740 from the base case.                                                                     
3:41:47 PM                                                                                                                    
     The  next  slide  shows  the change  in  tax  from  the                                                                    
     $20,000  savings in  transportation costs.  The $20,000                                                                    
     again  flows  straight  down   into  the  taxable  PTV,                                                                    
     increasing it from $550,000 to $570,000.                                                                                   
     The progressivity  rate is now  $57 dollars  minus $30,                                                                    
     or $27,  times four  tenths of  a percentage  point per                                                                    
     dollar, or 10.8 percent. That  plus the 25 percent base                                                                    
     rate  on  $570,000  of  PTV   yields  a  total  tax  of                                                                    
     $204,060, an increase of $11,560 from the base case.                                                                       
     Finally,  this next  slide shows  the effect  of saving                                                                    
     $30,000 in field expense. The  PTV increases by $30,000                                                                    
     to  $580,000   and  the  progressivity  rate   is  11.2                                                                    
     percent.  The  base tax  and  progressivity  add up  to                                                                    
     $209,960, an increase of $17,460 from the base case.                                                                       
3:42:33 PM                                                                                                                    
     And here at last, this slide  shows what it is that you                                                                    
     probably have  not seen before.  The sum for  the three                                                                    
     changes separately  is $34,760.  This is less  than the                                                                    
     $35,640 change  in tax when  all three are  factored in                                                                    
     at once. In other  words, with progressivity, the whole                                                                    
     is greater  than the sum  of its parts. And  that's not                                                                    
     all.  The amount  of tax  that is  calculated for  each                                                                    
     individual  part changes  depending on  what order  you                                                                    
     look at them. Here's a  slide that looks at the $20,000                                                                    
     savings   in  transportation   cost  and   the  $30,000                                                                    
     reduction in field expense together.                                                                                       
     The  two  cost  reductions  together  increase  PTV  by                                                                    
     $50,000,  to   $600,000.  The  base  tax   on  that  is                                                                    
     $150,000; the  progressivity for $60 of  PTV per barrel                                                                    
     is  $60 minus  $30,  or  $30, times  four  tenths of  a                                                                    
     percentage  point  per  dollar, or  12  percent,  times                                                                    
     $600,000, which  is $72,000. The total  tax change from                                                                    
     the two  is $29,500. From  the previous cases  where we                                                                    
     considered  each  cost  reduction separately,  the  tax                                                                    
     increase with  transportation only was $11,560  and for                                                                    
     field expense only was $17,460.                                                                                            
     If we  look at transportation  first, it  is equivalent                                                                    
     to looking  at it standing  alone, and we  have already                                                                    
     calculated what  that is -  $11,560. So $11,560  of the                                                                    
     combined  $29,500 tax  increase is  from the  change in                                                                    
     transportation cost,  and the rest  - $17,940 -  is for                                                                    
     the change in  field expense. But this  means the field                                                                    
     expense is  almost $500  greater than  what it  is when                                                                    
     it's standing alone.                                                                                                       
3:44:35 PM                                                                                                                    
     And if  you reverse  the order, then  the field-expense                                                                    
     tax increase is  the same as when it  stands alone, but                                                                    
     now the tax increase  for the transportation savings is                                                                    
     different,  $12,040, instead  of  the  $11,560 when  it                                                                    
     stands alone or  is taken first. Either  one cost stays                                                                    
     the same as what it  was when it is factored separately                                                                    
     and  the  other  one  changes or  it's  the  other  way                                                                    
     around. Either one is an equally valid approach.                                                                           
MR.  WILLIAMS  commented  that reversing  the  order  that  these                                                               
deductions are taken changes the field expenses figure.                                                                         
     [Continuation of  written testimony] What we  have done                                                                    
     here on  this sixth  slide is  to look  at the  pair of                                                                    
     cost   savings   for  downstream   transportation   and                                                                    
     upstream lease  expenditures, and we've looked  at that                                                                    
     pair first ahead of the  change in market price. But if                                                                    
     we go  back to the  previous slide,  we see that  if we                                                                    
     take transportation first and  subtract its $5,740 from                                                                    
     the total $35,640  tax effect for all  three, then that                                                                    
     leaves a  different number -  $29,900 for this  pair of                                                                    
     changes instead of  the $29,500 on slide  six when that                                                                    
     pair was calculated back first.                                                                                            
3:46:43 PM                                                                                                                    
SENATOR FRENCH  asked if a  clearer regulation  stipulating which                                                               
order the calculations are made would help.                                                                                     
MR.  WILLIAMS replied  that a  regulation wouldn't  help, because                                                               
they are not  talking about what is being put  on the return, but                                                               
rather how a producer would  model its potential investments. You                                                               
often  look at  particular components;  in this  case he  chose a                                                               
market  price  change,  a  transportation   cost  change  and  an                                                               
upstream field  cost change. These  numbers would be  adjusted to                                                               
see what the  sensitivity is. The point is when  you try do that,                                                               
by  the  very nature  of  the  mathematical properties  this  tax                                                               
prevents you  from coming up with  a single valid number  that is                                                               
the tax  effect for  any one  of the changes;  it depends  on the                                                               
sequence when you look at it.                                                                                                   
3:48:07 PM                                                                                                                    
     [Mr.  Williams continued  to  read prepared  comments.]                                                                    
     There is nothing special about  this particular pair of                                                                    
     changes that creates this difference.  There would be a                                                                    
     similar    difference   if    we   pair    price   with                                                                    
     transportation or  price with lease  expenditures. With                                                                    
     either one,  we'd get one  set of tax effects  for this                                                                    
     pair if  we calculate them  first, and a  different set                                                                    
     of  tax  effects if  we  calculate  the effect  of  the                                                                    
     unpaired change first. And, as  here, within each pair,                                                                    
     there  is a  different  cost for  each  change in  that                                                                    
     pairing depending  on whether its effect  is calculated                                                                    
     first or the other's effect is calculated first.                                                                           
3:48:20 PM                                                                                                                    
     These  examples  involve  a triplet  of  categories  of                                                                    
     change that could  be made to improve  the economics of                                                                    
     the  project:  an increase  in  price,  a reduction  in                                                                    
     transportation costs to  market, and greater efficiency                                                                    
     in  field  operations.  But  I  have  simplified  these                                                                    
     examples by  using lease expenditures generically  as a                                                                    
     single  cost category.  In the  real  world a  would-be                                                                    
     investor would look  at capital expenditures separately                                                                    
     from operating  costs because the  timing for  when the                                                                    
     two  kinds of  cost  are incurred  is  different and  -                                                                    
     especially important  in the  context of  analyzing tax                                                                    
     effects -  the capex  generates a 20  percent Qualified                                                                    
     Capital Expenditure tax credit  in addition to changing                                                                    
     the  PTV  and  the  progressivity rate.  So  there  are                                                                    
     really four  categories of change  to look  at: changes                                                                    
     in  sales  price,   changes  in  transportation  costs,                                                                    
     changes in  operating expense,  and changes  in capital                                                                    
     expenditures. And  that is what  a real  producer would                                                                    
     be looking at.                                                                                                             
     But,  for  each  one  of  these  four  categories,  its                                                                    
     respective  tax  effect  can be  calculated  separately                                                                    
     from the  other three,  either ahead  of them  or after                                                                    
     them. And  each such  triplet of  changes has  the same                                                                    
     analysis  and the  same variations  in  tax effect  for                                                                    
     individual  changes that  we have  seen  in the  entire                                                                    
     analysis that  we have  just gone  through in  this and                                                                    
     the four  earlier slides -  namely, the tax  effect for                                                                    
     the entire  triplet being greater  than the sum  of the                                                                    
     effects  for  the  individual  categories  in  it;  the                                                                    
     different  amount for  the  unpaired  category in  each                                                                    
     triplet  relative  to  the pair  of  other  categories,                                                                    
     depending  on  whether  the  effect   of  the  pair  is                                                                    
     calculated first or second; and  within each such pair,                                                                    
     the  different amount  depending on  which category  in                                                                    
     that pair  is calculated first. Each  of these numerous                                                                    
     variations  and combinations  will  divide the  $35,640                                                                    
     total tax  effect up  into a  different set  of amounts                                                                    
     calculated for  the four categories. Yet  even with all                                                                    
     those sets  of calculated  amounts for  the categories,                                                                    
     none of  those sets will add  up to the tax  effect for                                                                    
     all the changes taken together as a whole.                                                                                 
3:50:31 PM                                                                                                                    
SENATOR FAIRCLOUGH asked  if BP had resolved  its outstanding tax                                                               
issues with  the department, because  the scenarios  Mr. Williams                                                               
was putting forward  seemed to be valid and could  be argued from                                                               
either way.  And she  asked as the  state audits  their financial                                                               
disclosures, if  there were problems resolving  audits because of                                                               
these particular calculations.                                                                                                  
MR.  WILLIAMS  replied that  confidentiality  on  tax matters  in                                                               
Alaska   was  not   entirely  clear   and  therefore,   he  would                                                               
"respectfully decline  to answer  that."   They being  audited on                                                               
all the taxes they pay for every tax period.                                                                                    
SENATOR FAIRCLOUGH said  she wanted to hold the  question for the                                                               
Department  of  Revenue  (DOR).   She  was  wondering  about  the                                                               
possibility of debating whether  the calculation was favorable to                                                               
two different  people, the  state being  one perspective  and the                                                               
industry being another.                                                                                                         
3:52:27 PM                                                                                                                    
MR. WILLIAMS said  that wouldn't be a  fruitful exercise, because                                                               
mathematically there is no correct  answer. That is the point. In                                                               
this  case they  are not  talking about  an assessment;  they are                                                               
talking  about looking  at an  investment  and how  to tweak  the                                                               
parameters  and look  at the  sensitivity  to see  the pluses  or                                                               
downsides  with  different  risks,  but those  effects  can't  be                                                               
quantified.  Regulations  can't  account  for  all  the  possible                                                               
scenarios you can envision to change all the possible scenarios.                                                                
3:53:28 PM                                                                                                                    
SENATOR MICCICHE  said he thought  Senator Fairclough  was saying                                                               
that the complication  of the tax code delivers  its own problems                                                               
and part of it is that the answer is not consistent.                                                                            
MR.  WILLIAMS elaborated  his point  was that  you get  a correct                                                               
amount when you look at all  of them together; it's only when you                                                               
try to  figure out how  much is  from the different  changes that                                                               
you're  testing that  you cannot  get a  correct answer  for each                                                               
individual cause.                                                                                                               
SENATOR  MICCICHE commented  that inherent  in ACES  is that  the                                                               
state is paying BP for  having less than efficient operations and                                                               
penalizing them for becoming more efficient.                                                                                    
MR.  BILBAO  remarked  that  BP  always  strives  to  make  their                                                               
operations more  efficient, regardless - as  does every business,                                                               
but there is a tax consequence of  doing that and that is part of                                                               
what Mr.  Williams was  trying to  outline. Efficiency  in Alaska                                                               
would have  a different  level of  impact than  the same  type of                                                               
efficiency identified in another jurisdiction.                                                                                  
3:56:06 PM                                                                                                                    
MR. WILLIAMS continued reading from his prepared comments:                                                                      
     These   bizarre   effects   are   not   mere   abstract                                                                    
     curiosities.  If you  are an  investor and  you have  a                                                                    
     variety of  ways to try  to improve the  performance of                                                                    
     an  investment, these  effects from  progressivity mean                                                                    
     there is no  single correct answer about  how much each                                                                    
     one changes  the tax and  improves the  investment. The                                                                    
     more ways you have to  improve the investment, the more                                                                    
     the change  in tax  for each one  depends on  where you                                                                    
     put it in  the sequence of calculating  the changes for                                                                    
     all  of   the  opportunities.  This  is   because  each                                                                    
     opportunity  in that  sequence not  only increases  the                                                                    
     PTV,  but  it  also increases  the  progressivity  rate                                                                    
     applicable to the  base case PTV plus all  the PTV that                                                                    
     has  been  added  by the  prior  opportunities  in  the                                                                    
     sequence.  So,   you  layer  on   and  take   a  higher                                                                    
     percentage  of the  pile with  that  last layer  added;                                                                    
     that is why you can't  identify a single amount and why                                                                    
     it depends on the order.                                                                                                   
     Interestingly,  the Department  of Revenue  has exactly                                                                    
     the same  problem when it  audits a taxpayer  and makes                                                                    
     multiple changes to figures reported  on the tax return                                                                    
     and  increases  the  amount of  tax.  The  auditor  can                                                                    
     quantify the  whole tax increase from  all the changes,                                                                    
     but  he  or  she  cannot make  a  definitively  correct                                                                    
     determination  of  the  amount  of  any  one  of  those                                                                    
     changes. A  taxpayer might have an  interesting time in                                                                    
     an  appeal having  an auditor  admit,  issue by  issue,                                                                    
     that there is no correct amount for each one.                                                                              
3:58:17 PM                                                                                                                    
     There   is   a    second   important   consequence   of                                                                    
     progressivity  that  was  generally  unintended  or  is                                                                    
     greater  than  intended.  I  call it  a  tax  on  price                                                                    
     volatility, because  it increases  the tax  when prices                                                                    
     change during a  tax year even though the  total PTV is                                                                    
     exactly the same  as if the prices  had stayed constant                                                                    
     at the average price for the year.                                                                                         
3:59:10 PM                                                                                                                    
     On this slide  we see such a "flat  price" scenario. To                                                                    
     fit  conveniently  within  the  space  available  in  a                                                                    
     slide, the  table omits columns for  West Coast prices,                                                                    
     transportation  costs and  field  expenses, and  starts                                                                    
     instead  with the  PTV that  is  calculated from  them.                                                                    
     Here the PTV  is $61.25 per barrel, and  with 2 million                                                                    
     barrels  of  production  a month,  the  amount  of  the                                                                    
     taxable PTV is $122.5 million a month.                                                                                     
     Progressivity starts  when the  PTV per  barrel exceeds                                                                    
     $30, and it  reaches 25 percent at a PTV  per barrel of                                                                    
     $92.50. I have  chosen $61.25 as the PTV  per barrel in                                                                    
     this base case  because it is half way  between $30 and                                                                    
     $92.50. The progressivity rate at  this price is $61.25                                                                    
     minus  $30,   or  $31.25,  times   four  tenths   of  a                                                                    
     percentage  point per  dollar,  or  12.5 percent.  This                                                                    
     also is half  way between the zero rate at  $30 and the                                                                    
     25 percent rate  at $92.50. As you can  see, each month                                                                    
     the PTV  is $122.5  million, the progressivity  rate is                                                                    
     always  12.5  percent,  and the  progressivity  tax  is                                                                    
     exactly  the same  for each  month  as $15.31  million.                                                                    
     Total progressivity for the year is $183.75 million.                                                                       
4:00:29 PM                                                                                                                    
     In this  next slide the  left half is exactly  the same                                                                    
     as the  previous one with the  flat-price scenario. The                                                                    
     right half of  the table shows what  happens when there                                                                    
     are six months  in the year when the PTV  per barrel is                                                                    
     $30 and six  when it is $92.50. In this  case the first                                                                    
     three months  and the last  three have the $30  PTV per                                                                    
     barrel,  and   the  middle   six  from   April  through                                                                    
     September   have  the   $92.50.   This  price   profile                                                                    
     resembles  what  actually   happened  with  West  Coast                                                                    
     prices  for  North Slope  oil  during  2008, when  they                                                                    
     peaked at  the all-time record  of $144.59 a  barrel on                                                                    
     July 3rd.                                                                                                                  
     For the six months when the  PTV per barrel is $30, the                                                                    
     progressivity tax rate  is zero because $30  of PTV per                                                                    
     barrel  minus the  $30 threshold  for progressivity  is                                                                    
     zero. So,  as you  can see,  there is  no progressivity                                                                    
     tax  for the  first three  months of  the year  and the                                                                    
     last three.  In the middle  six, the PTV per  barrel is                                                                    
     $92.50. That  is $62.50 higher than  the $30 threshold,                                                                    
     so  the   progressivity  rate  is  four   tenths  of  a                                                                    
     percentage point times 62.50,  or 25 percent. At $92.50                                                                    
     a barrel, the progressivity  tax on two million barrels                                                                    
     a month  is $46.25 million, so  the total progressivity                                                                    
     tax for the  six non-zero months is $277.5 million. The                                                                    
     progressivity tax under  the changing-price scenario is                                                                    
     51  percent   higher  than   the  $183.75   million  of                                                                    
     progressivity for the flat-rate scenario.                                                                                  
4:02:19 PM                                                                                                                    
     This tax  increase is entirely  the result of  the fact                                                                    
     that prices  changed during the  year instead  of being                                                                    
     flat. You  can see this  for yourselves. The  total PTV                                                                    
     for  the  year  in  the  right-hand  column  is  $1,470                                                                    
     millions  of dollars,  or $1.47  billion -  exactly the                                                                    
     same as in  the flat-price scenario on  the left. Total                                                                    
     production  for  the year  is  exactly  the same  -  24                                                                    
     million barrels.  Dividing $1.47  billion of PTV  by 24                                                                    
     million barrels  equals $61.25 per barrel,  exactly the                                                                    
     same,  but  progressivity on  one  side  is 51  percent                                                                    
4:03:58 PM                                                                                                                    
     And  if you  look at  the monthly  calculations in  the                                                                    
     changing-price scenario,  you can see that  the monthly                                                                    
     progressivity tax will be exactly  the same for each of                                                                    
     the  $30 months  no  matter what  order  you put  those                                                                    
     months in. The  same is true for the  $92.50 months. So                                                                    
     this  phenomenon is  different from  what I  showed you                                                                    
     earlier about the  whole being greater than  the sum of                                                                    
     its parts,  because here  there are  no changes  in the                                                                    
     actual progressivity  calculation for a $30  month or a                                                                    
     $92.50 one.                                                                                                                
     The  bottom  line here  is  this.  The year  under  the                                                                    
     changing-price scenario  is just  as profitable  as the                                                                    
     flat-price one, and for the  same amount of production.                                                                    
     The tax base to  which progressivity applies is exactly                                                                    
     the  same for  the  year.  Yet the  tax  is 51  percent                                                                    
     higher when prices change during  the year. Now, I have                                                                    
     chosen these PTV-per-barrel figures  so they would show                                                                    
     the  greatest amount  of  tax  increase resulting  from                                                                    
     prices  that are  not flat  all year  long. I  did this                                                                    
     because,  if I  showed you  an example  with a  smaller                                                                    
     effect, someone  would surely ask  me what  the maximum                                                                    
     effect could  be. My example  gives you that  answer at                                                                    
     the same time it explains the phenomenon.                                                                                  
4:04:39 PM                                                                                                                    
     Those of you  who were here in the  Legislature in 2009                                                                    
     may recall  the surprise  of the Department  of Revenue                                                                    
     when  the actual  ACES tax  collected during  its first                                                                    
     full year of operation -  the 2008 calendar year - came                                                                    
     in  about  half  a  billion  dollars  higher  than  the                                                                    
     Department  had forecasted.  This tells  you why:  2008                                                                    
     was  a  very  volatile  year  for  prices.  While  that                                                                    
     volatility  did not  generate  the  maximum 51  percent                                                                    
     increase that my example illustrates,  it did produce a                                                                    
     very  substantial increase  in progressivity  tax -  on                                                                    
     the order  of half  a billion dollars  - from  the mere                                                                    
     fact  that prices  fluctuated during  2008, instead  of                                                                    
     being  flat at  the volume-weighted  average price  for                                                                    
     the year.                                                                                                                  
     So,   to  summarize:   Progressivity   has  two   major                                                                    
     unintended consequences. First,  when you are analyzing                                                                    
     combinations of steps to take  to improve an investment                                                                    
     opportunity, the whole  is greater than the  sum of its                                                                    
     parts. Second, if you, as  a potential inventor, do not                                                                    
     take  into account  the  effect  from price  volatility                                                                    
     during  each   year  in   an  investment's   life,  the                                                                    
     progressivity could  turn out  to be 50  percent higher                                                                    
     than  what you  have estimated.  Both of  these effects                                                                    
     promise   to  increase   the  risks   and  reduce   the                                                                    
     competitiveness of an Alaskan  investment relative to a                                                                    
     comparable one elsewhere.                                                                                                  
     These negatives  of progressivity complement  what AOGA                                                                    
     told  you during  its  testimony  last Monday.  Without                                                                    
     repeating that testimony here, I  will only list AOGA's                                                                    
     main  points.  One,  progressivity sacrifices  the  one                                                                    
     advantage  Alaska has  from its  economic remoteness  -                                                                    
     namely,   the   greater    improvement   in   financial                                                                    
     performance  for investments  here if  prices turn  out                                                                    
     better  than projected.  This sacrifice  occurs because                                                                    
     progressivity  taxes   away  more  and  more   of  that                                                                    
     improvement the  better it  turns out  to be.  And two,                                                                    
     progressivity  makes  the tax  extraordinarily  complex                                                                    
     and inconsistent to compute,  and to analyze. For these                                                                    
     reasons  BP  fully  endorses  the  proposed  repeal  of                                                                    
     progressivity that Senate Bill 21 proposes.                                                                                
4:06:44 PM                                                                                                                    
     [Mr. Williams continued] Let me  now turn to the second                                                                    
     main feature in this bill  - the changes it proposes to                                                                    
     the present  system of tax  credits, and  in particular                                                                    
     to  the sunset  of  the credit  for "qualified  capital                                                                    
     expenditures"  or "QCE"  at the  end  of this  calendar                                                                    
     year.   The   first,   and  probably   most   important                                                                    
     observation I  can offer about  tax credits  in general                                                                    
     is they would  not be so significant  for the economics                                                                    
     of oil  and gas production  here if the  production tax                                                                    
     were not so high.                                                                                                          
     Second, the QCE  tax credit depends solely  on how much                                                                    
     a  company   invests  for  oil  and   gas  exploration,                                                                    
     development and  production in  Alaska. Period.  If you                                                                    
     want to  address the North  Slope decline  curve, there                                                                    
     have to be investments  here leading to more production                                                                    
     - not  just by  finding and  developing new  fields and                                                                    
     new reservoirs,  but also by getting  more recovery out                                                                    
     of fields already in production.  The QCE tax credit is                                                                    
     a direct  incentive for  making these  investments. And                                                                    
     it   costs  the   State   nothing   unless  there   are                                                                    
     investments: if investment is zero,  then 20 percent of                                                                    
     zero is  zero. The QCE  tax credit arises only  when it                                                                    
     succeeds, and costs nothing if it doesn't.                                                                                 
     The QCE tax  credit is not affected by  oil prices, the                                                                    
     costs of  transporting oil and  gas to market,  nor the                                                                    
     operating costs  of the field. Consequently,  its value                                                                    
     to a business like BP's is  the same for a given amount                                                                    
     of  QCE expenditure,  regardless of  the price  and the                                                                    
     transportation and field  operating cost scenarios that                                                                    
     the  business estimates  in  its investment  decisions.                                                                    
     And it is  the same regardless of how  prices and those                                                                    
     other costs  actually turn  out. Progressivity,  on the                                                                    
     other  hand, is  dependent  on prices  and  costs in  a                                                                    
     twofold way: one in determining  the amount of PTV that                                                                    
     is subject  to tax,  and again  in calculating  the tax                                                                    
     rate that progressivity will apply to that PTV.                                                                            
4:08:26 PM                                                                                                                    
     [Mr.  Williams continued]  Thus,  the  point where  the                                                                    
     cost of  losing the QCE  credit begins to  outweigh the                                                                    
     benefit  from repealing  progressivity depends  both on                                                                    
     the price of oil and,  for each individual producer, on                                                                    
     that  producer's  own  unique   portion  of  the  lease                                                                    
     expenditures  for   the  North  Slope.  For   BP's  own                                                                    
     business and  expenditures, this  crossover comes  at a                                                                    
     higher price  level - in  the mid  to upper 90s  - than                                                                    
     that  which  Econ One  and  others  are presenting  for                                                                    
     North Slope producers as a whole.                                                                                          
     So, the  improvement to  our investment  economics from                                                                    
     the repeal of progressivity  stands to be substantially                                                                    
     undone by the sunset of the  QCE tax credit. Since I am                                                                    
     a tax  man who  is here  to testify  about this  tax, I                                                                    
     would ask,  please, for  your patience  for just  a few                                                                    
     minutes if you have  questions regarding this point, so                                                                    
     I can quickly finish up and Mr. Bilbao can testify.                                                                        
     The  third  major feature  in  SB  21 is  its  proposed                                                                    
     "gross revenue exclusion" or  "GRE," which is something                                                                    
     new. It would exclude  from the taxable PTV (production                                                                    
     tax  value) a  percentage  of the  gross  value at  the                                                                    
     point of  production for additional  or new  volumes of                                                                    
     oil  or gas  being  produced. This  concept could  have                                                                    
     significant  potential, and  indeed it  may prove  very                                                                    
     valuable  for explorers  and others  who can  bring new                                                                    
     fields and reservoirs into production.                                                                                     
     Unfortunately,  the proposed  GRE  aims  away from  the                                                                    
     significant  opportunities for  new production  that BP                                                                    
     has identified  for its business.  SB 21 would  allow a                                                                    
     GRE only for production "from  a lease or property that                                                                    
     does  not  contain  land  that was  within  a  unit  on                                                                    
     January 1,  2003[,]" or if  it does have land  that was                                                                    
     in  such  a  unit  before  2003, "the  oil  or  gas  is                                                                    
     produced  from a  participating area  established after                                                                    
     ... 2011 [that]  does not contain a  reservoir that had                                                                    
     previously  been in  a  participating area  established                                                                    
     before ...  2012." This  means that  new units  and new                                                                    
     participating areas are eligible and old units and old                                                                     
     participating areas are not.                                                                                               
4:10:41 PM                                                                                                                    
SENATOR DYSON  asked if "new  participating area" is  a different                                                               
stratum that was  not produced before, so it ends  up being a new                                                               
field within  the unit,  because this GRE  gives an  incentive to                                                               
those  new areas  and the  state  wants new  production. But,  he                                                               
inferred  from what  Mr. Williams  said,  it doesn't  incentivize                                                               
going  back and  producing more  from the  existing wells  in the                                                               
existing strata.                                                                                                                
MR. WILLIAMS responded that he was correct.                                                                                     
SENATOR DYSON said  industry should be doing  work-overs on their                                                               
own wells without getting more incentives.                                                                                      
4:12:31 PM                                                                                                                    
MR. WILLIAMS  remarked that  he would address  a number  of those                                                               
points in the next two paragraphs.                                                                                              
CHAIR GIESSEL  asked if it  would be helpful to  BP if SB  21 was                                                               
altered to allow an extension of an existing PA.                                                                                
MR. BILBAO replied that BP will  look at the bill in its entirety                                                               
and consider it in the  context of its business opportunities. As                                                               
in ACES,  if you  try to  pick one piece  to evaluate,  the other                                                               
pieces don't  hold together:  if you take  away the  credits, you                                                               
would recognize very quickly that  the very high tax rate creates                                                               
a  concern.  Mr. Williams  just  articulated  that because  their                                                               
reservoir is already covered by PAs, it is not applicable.                                                                      
CHAIR GIESSEL asked if they had modeled SB 21 as proposed.                                                                      
MR. BILBAO said yes.                                                                                                            
CHAIR GIESSEL asked if they find it better than ACES.                                                                           
MR.  BILBAO replied  yes; eliminating  progressivity  is a  great                                                               
step forward for  many reasons. SB 21 makes a  good first step at                                                               
making  Alaska more  attractive, but  at certain  oil prices,  it                                                               
would not make Alaska more competitive.                                                                                         
4:15:48 PM                                                                                                                    
SENATOR  MCGUIRE  asked  if  using  the  structure  of  SB  21  -                                                               
eliminating progressivity  - but  now including GREs,  which many                                                               
like because  it delivers some  results that Alaskans  have asked                                                               
for,  as opposed  to the  credits  which some  are concerned  are                                                               
being misapplied  - protects the  state from  exposure (estimated                                                               
to be as high  as $1 billion). If the GRE was  be increased or if                                                               
the definition of  these PAs was expanded, is there  room for the                                                               
bill to have some merit for BP?                                                                                                 
MR.  BILBAO  answered  that  the   impact  has  to  affect  their                                                               
investment decisions at  a range of prices not  just one, because                                                               
that is the  way they look at their business.  They will consider                                                               
various evolutions of  the bill and speak to it  in its entirety.                                                               
They  believe fundamentally  that the  governor's principles  are                                                               
met  most  effectively  when  the  policy is  in  place  for  all                                                               
different good projects  for all the different  producers to move                                                               
CHAIR GIESSEL  said that  was a  wonderful closing  statement and                                                               
thanked him for  presenting today. She welcomed  Scott Jepsen and                                                               
Bob Heinrich from ConocoPhillips Alaska to the table.                                                                           
4:18:33 PM                                                                                                                    
SCOTT  JEPSEN, Vice  President, External  Affairs, ConocoPhillips                                                               
Alaska, said this is the same  presentation they gave to the TAPS                                                               
Throughput  Committee  and  it summarizes  some  of  the  salient                                                               
elements with regard to Alaska, ACES and SB 21.                                                                                 
SENATOR   FAIRCLOUGH   said   she   appreciated   BP's   detailed                                                               
explanation on  evaluating opportunities under  different pricing                                                               
scenarios and different reductions.                                                                                             
MR.  JEPSEN said  the first  topic  he would  cover was  Alaska's                                                               
production challenge.  Turning to  slide 3  he explained  that it                                                               
showed production going  up significantly in the  Lower 48, which                                                               
has been driven  predominantly by production coming  out of Texas                                                               
and North Dakota (also shown).  However, it also showed the North                                                               
Slope's  constant  decline  for  the  last  decade.  The  natural                                                               
question would be: what is  driving those production increases in                                                               
the Lower 48 and does it  apply to potentially turning around the                                                               
production decline in Alaska?                                                                                                   
Clearly,  he said  there is  resource  availability: everyone  is                                                               
familiar with  what is happening  with the shale plays;  there is                                                               
also  additional investment  in some  of the  conventional plays,                                                               
and technology  is playing a  role. Some of the  shale production                                                               
would not  have been possible  without the evolution  in fracking                                                               
technology  and  some of  that  technology  is being  applied  to                                                               
conventional  sand stones,  as well.  So, huge  reinvestments are                                                               
being seen in older basins.                                                                                                     
MR.  JEPSEN said  another thing  that  has happened  is that  the                                                               
price  has gone  up  significantly -  a  fourfold increase  since                                                               
2002. And  lastly they have  a good tax environment.  An investor                                                               
in the Lower 48 will enjoy the upside as prices go up.                                                                          
4:22:24 PM                                                                                                                    
Alaska compared to  the Lower 48 has the  resource and technology                                                               
has  contributed  significantly to  developing  it  on the  North                                                               
Slope, and it will continue  to play a significant role. However,                                                               
the  costs  are  high:  Alaska   is  remote;  it  has  a  hostile                                                               
environment in  the wintertime and  is a very difficult  place to                                                               
operate in the summertime, because  essentially you are operating                                                               
in a  wetland. And last,  Alaska has a  high tax that  takes away                                                               
the upside;  the progressivity  in ACES is  very punitive  and as                                                               
prices go up and costs  decrease industry doesn't see much return                                                               
on  overall revenue.  ACES  really takes  away  the incentive  to                                                               
invest much more than what they are currently investing.                                                                        
MR.  JEPSEN said  slide 4  summarized  how ConocoPhillips  thinks                                                               
about making  investments in  basins as  a whole.  Its investment                                                               
criteria are as follows:                                                                                                        
-Exploration prospectivity:  don't see it here  compared to other                                                               
places in the world. Alaska doesn't rank where it used to.                                                                      
-Costs:   Alaska   is   high  cost:   far   from   market,   high                                                               
transportation costs; winter is  a hostile environment; logistics                                                               
are  expensive   and  difficult;   summer  is  wet   and  special                                                               
techniques are necessary. Drilling  and production is much easier                                                               
in Texas  and Oklahoma  where you  simply open  a gate,  push the                                                               
bulldozer through, plow  a road, clear out some dirt  and drill a                                                               
-Cycle time: If you find a place  where you want to drill a well,                                                               
for  instance  an  extension  in Kuparuk  called  "2S'"  IT  will                                                               
require  a new  gravel pad,  pipelines and  extending a  road out                                                               
there; it will  take a minimum of three years  before it comes on                                                               
stream. An  extreme example like  CD5 took seven years  to permit                                                               
and 3-4 more  years to get it on stream.  That takes deep pockets                                                               
and a lot of staying power to invest in Alaska.                                                                                 
-Taxes:  Alaska's   tax  environment  doesn't   incentivize  more                                                               
investment above what is happening today.                                                                                       
-Legacy oil fields are a big positive:  If you want to make a big                                                               
change in Alaska's  production decline that is the  place where a                                                               
focus needs to be.                                                                                                              
4:27:27 PM                                                                                                                    
ConocoPhillips  is drilling  new  wells on  the  North Slope  but                                                               
maybe not at the pace lawmakers would like to see.                                                                              
SENATOR DYSON asked if he is limited by availability of rigs.                                                                   
MR. JEPSEN said with a better  tax environment they could get the                                                               
rigs up here.                                                                                                                   
SENATOR DYSON  said his experience is  that Lower 48 rigs  need a                                                               
lot of refitting before coming up here.                                                                                         
MR. JEPSEN  said that  was correct;  they need  modifications for                                                               
Alaska's environment.                                                                                                           
SENATOR DYSON  said he  would like  to know what  can be  done to                                                               
bring more rigs up.                                                                                                             
MR.  JEPSEN  answered that  eliminating  progressivity  in SB  21                                                               
would be a good step.                                                                                                           
SENATOR DYSON said it was  represented to them today that credits                                                               
taken to  date are  somewhere around $3  billion from  the Legacy                                                               
fields on North Slope and asked if that was far off.                                                                            
MR. JEPSEN  said that didn't  jibe with his recollection  of what                                                               
ConocoPhillips had experienced. He deferred to Mr. Heinrich.                                                                    
4:30:45 PM                                                                                                                    
BOB  HEINRICH,   Vice  President,  Finance   and  Administration,                                                               
ConocoPhillips  Alaska, remarked  that a  number as  large as  $3                                                               
billion sounded  more like  the total tax  credits from  the ACES                                                               
structure, which  would be  for all  the participants;  less than                                                               
half of that had been taken by participants on the North Slope.                                                                 
SENATOR DYSON said he understood  the total was about $6 billion,                                                               
$3 billion within the unit and  $3 billion outside, but he wanted                                                               
to know for sure.                                                                                                               
4:31:17 PM                                                                                                                    
SENATOR MCGUIRE said she was shocked  at the lack of rig count in                                                               
Alaska compared to  its neighbors in Texas and  Alberta and asked                                                               
what credit  would create  a stampede  like SB  309 did  for Cook                                                               
Inlet. What  types of  things would be  effective in  bringing up                                                               
more rigs?                                                                                                                      
MR. JEPSEN  said for  starters tax  credits should  apply towards                                                               
drilling  and work  over  well  expenditures and  infrastructure.                                                               
Make sure the incentives apply to legacy fields.                                                                                
SENATOR  MCGUIRE said  the gross  revenue  exclusion is  probably                                                               
what will  be passed  and she  didn't want  to pass  another bill                                                               
that doesn't deliver  the kind of results they want,  which is to                                                               
have more  production in  TAPS, which will  come from  the Legacy                                                               
fields in Prudhoe Bay for the next 3-5 years.                                                                                   
MR. JEPSEN  appreciated her comments  and said he wanted  to give                                                               
it more thought rather than a quick off-the-cuff response.                                                                      
4:36:25 PM                                                                                                                    
SENATOR DYSON said they struggle  to get good information. One of                                                               
the  participants in  the unit  said last  year that  credits are                                                               
fine, but they make  their plans for 10 or 20  years out based on                                                               
the tax  rate; the  rest is just  frosting.    But now  that same                                                               
person was  saying you've got to  go back to the  credits that we                                                               
had before. "So, you can see why we struggle."                                                                                  
MR. JEPSEN  said eliminating progressivity was  very significant;                                                               
they  have stated  before and  again that  the tax  credits don't                                                               
offset progressivity. Under ACES the  tax credits did not improve                                                               
the  investment climate  overall, although  they were  useful for                                                               
some parties, in particular.                                                                                                    
4:38:30 PM                                                                                                                    
SB  21 takes  care  of  the most  deleterious  parts  of ACES  by                                                               
elimination  progressivity,  but   that  alone  doesn't  entirely                                                               
separate  it from  making  investments in  other  locals, and  it                                                               
doesn't address  the fact that Alaska  is still a very  high cost                                                               
place to do business.                                                                                                           
MR. HEINRICH added that from  ConocoPhillips' experience, the tax                                                               
credits represent  a very  small reduction  of their  overall tax                                                               
liability, which has been in the high rates lately.                                                                             
SENATOR  FRENCH   went  back  to   slide  5  and  asked   what  a                                                               
realistically achievable decline curve is for the legacy fields.                                                                
MR. JEPSEN  said he could  give a better  answer if he  knew what                                                               
the tax would be.                                                                                                               
SENATOR FRENCH said back in 2006  they got a slide from BP saying                                                               
basically that you  can have three different  decline curves: one                                                               
that is horrible if you don't  invest much, one that is better if                                                               
you invest  a medium amount  and one  that is stronger  with more                                                               
investment, and asked  what would it take to  flatten the decline                                                               
curve or make it slightly sloping downward.                                                                                     
MR. HEINRICH said he  would have to get back to  him on that, but                                                               
slide 10  is the result  of their modeling  work on SB  21 (green                                                               
line)  compared to  ACES (red  line)  on a  producer share  basis                                                               
(percentage of  the available cash  after costs and  taxes). It's                                                               
pretty  much  the  inverse  of  what they  might  hear  from  the                                                               
consultants about  the state's share.  Care is needed  in looking                                                               
at  these types  of calculations  to understand  how the  data is                                                               
presented.  The  actual  calculation  will depend  on  your  cost                                                               
assumptions, your  capital assumption which will  vary from field                                                               
to field, and from producer to producer.                                                                                        
ConocoPhillips used 2012  Senate Resources data to  model all the                                                               
producers'  tax  liability  in aggregate.  The  graph  represents                                                               
FY2014 only  as though SB  21 was in  effect for the  full fiscal                                                               
year. It's not  a five year average  nor is it a  full field life                                                               
average.  They chose  the first  year,  because it  is easier  to                                                               
explain, but also  because from their perspective  the first year                                                               
of any forecast  is much more reliable in terms  of what they can                                                               
expect  to see.  It shows  a  cross over  (where producer  starts                                                               
retaining more cash)  between ACES and SB 21 at  around $93. This                                                               
means  as  you  head  prices  higher than  $93  there  is  a  tax                                                               
reduction from the  share of cash retained by  the producer under                                                               
SB  21.  But it  also  means  that below  $93,  SB  21 by  itself                                                               
represents a tax  increase for producers. So  they are evaluating                                                               
the "tradeoff."                                                                                                                 
4:43:58 PM                                                                                                                    
SENATOR MICCICHE asked if they used the GRE in their analysis.                                                                  
MR. JEPSEN answered  that none of their  production would qualify                                                               
for a GRE in 2014.                                                                                                              
SENATOR MICCICHE asked if he  thought that was the primary reason                                                               
for the  difference in  Econ One  and ConocoPhillips  analysis on                                                               
the crossover.                                                                                                                  
MR. HEINRICH replied  that it's more around  cost assumptions and                                                               
presentation; one is done on a  5-year average v. a single fiscal                                                               
year; and  also the  costs assumed for  the assumptions  could be                                                               
different. ConocoPhillips  used data from DOR,  because they have                                                               
access to it.                                                                                                                   
MR. JEPSEN said  that raised a good point, that  this analysis is                                                               
very  sensitive to  an individual  producers' cost  structure and                                                               
it's  hard to  generalize it  to all  producers across  the North                                                               
4:45:21 PM                                                                                                                    
MR. HEINRICH said  slide 11 was a recap and  that the tax credits                                                               
structure helps  with the  overall effective  tax rate,  but it's                                                               
not enough  to offset the  negative effects of  the progressivity                                                               
surcharge.  SB  21 is  a  good  step  in  setting the  stage  for                                                               
improving  the  investment   climate;  eliminating  progressivity                                                               
solves the  problem of the  high marginal taxes and  makes Alaska                                                               
more  competitive at  higher prices  (where we  are at  today and                                                               
above), but  it disadvantages Alaska  at the lower  prices (below                                                               
$93). Elimination of the investment  incentives doesn't result in                                                               
a  differential  tax structure.  You  can  overlay the  same  tax                                                               
structures you see  in Texas and North Dakota here,  but with the                                                               
Alaska's high cost environment, it is still at a disadvantage.                                                                  
The GRE is not broad enough; if  it applied to more things in the                                                               
legacy fields,  it would  help bring  more production  from there                                                               
and they really need to be part of the equation short term.                                                                     
4:47:23 PM                                                                                                                    
CHAIR GIESSEL  asked if they were  able to identify areas  in the                                                               
same well bore in the legacy  fields that they had passed through                                                               
to get to a more hefty  pay level that would become economic with                                                               
a GRE applying to "new oil."                                                                                                    
MR. JEPSEN replied that they  had identified the resource base in                                                               
fields like  the Kuparuk  and Prudhoe Bay  unit pretty  well, but                                                               
didn't know  if the presented  incentives would be  sufficient to                                                               
spur investment in  things like the more difficult  parts of West                                                               
Sak. But  if ConocoPhillips significantly expands  its investment                                                               
in  West Sak,  it won't  be as  significant as  making that  same                                                               
investment in  the legacy  fields. They try  not to  pick winners                                                               
and losers; rather make them general.  They want to find the most                                                               
prolific  highest productivity  profitable fields  to invest  in,                                                               
and they will  do that; but it doesn't mean  they will not invest                                                               
in fields  like West  Sak where  they have  15,000 barrels  a day                                                               
now. It is not a high rate producing operation.                                                                                 
4:49:26 PM                                                                                                                    
SENATOR DYSON observed  that Mr. Jepsen missed the  intent of the                                                               
chair's question;  Senator Giessel  was talking about  within the                                                               
unit and the other producing  zones that have not been developed.                                                               
DNR  is saying  you  can  have a  participating  unit within  the                                                               
existing field  that taps another  stratigraphic trap  there. The                                                               
understanding is  that the state  will give  a company a  GRE for                                                               
the new strata and the question is why that is not enough.                                                                      
MR.  JEPSEN  explained  that most  of  the  identified  satellite                                                               
fields inside  the Kuparuk  River Unit  have been  identified and                                                               
many are  on production; Tarn,  Meltwater, West Sak,  and Kuparuk                                                               
all have  their own PAs.  Opportunities inside the  Kuparuk field                                                               
to create a new PA are  slim, although BP would know better about                                                               
Prudhoe Bay.                                                                                                                    
He  didn't think  the future  lies in  trying to  incentivize the                                                               
small potentially newer PAs inside  of existing fields. It's back                                                               
to trying  to incentivize additional investment  beyond what they                                                               
are doing today in the legacy fields.                                                                                           
SENATOR DYSON asked if they are  already in the unit, why do they                                                               
need  more to  produce from  their existing  wells in  the legacy                                                               
fields where billions [of barrels] are still left.                                                                              
MR. JEPSEN  replied that it's not  just a function of  whether or                                                               
not they  are doing it today;  it's a function of  getting two or                                                               
three  more  rigs up  there.  There  is competition  for  capital                                                               
around the  world. If a company  can get twice the  return and be                                                               
exposed  to higher  profit margins  in a  different locale,  what                                                               
would  you do?  So  they  are talking  about  whether Alaska  can                                                               
attract that discretionary investment.                                                                                          
SENATOR DYSON  said but  the infrastructure  is there;  the wells                                                               
are  on the  pad. He  thought they  were talking  about producing                                                               
more from the  existing unit at Prudhoe Bay. Can  you invest in a                                                               
green field  somewhere else and  get more return  than harvesting                                                               
the 3-5 billion they are told is available?                                                                                     
4:52:40 PM                                                                                                                    
MR. JEPSEN responded that Eagleford,  for example, could serve as                                                               
an illustration  of a Lower 48  green field. Pads are  not needed                                                               
there; they don't  need roads and if they need  one they can just                                                               
bulldoze it  in. They don't  have to drill from  centralized well                                                               
pads. The  cycle time to  drill that is  probably the same  as or                                                               
less than it is to drill a well in Prudhoe Bay.                                                                                 
SENATOR DYSON asked if his answer was yes.                                                                                      
MR. JEPSEN replied yes.                                                                                                         
SENATOR FRENCH said  he wanted to talk about gas  handling in the                                                               
legacy  fields.  To  what  degree   the  legacy  fields  are  gas                                                               
constrained and what would it take to overcome that?                                                                            
MR. JEPSEN replied that in  optimizing production in a field they                                                               
look at  the "incremental  gas/oil (GOR) ratio."  A low  GOR gets                                                               
shut in or throttled back. When  the drill new wells they are not                                                               
unable to  produce that oil,  but most  of those wells  have much                                                               
lower GORs and the  amount of oil that is shut  in is very small.                                                               
But trying to  build facilities or facility  expansions to handle                                                               
that volume of gas for that very  small volume of oil is just not                                                               
economic.  They   look  at   this  constantly.   Many  facilities                                                               
expansions have happened at Kuparuk, Prudhoe Bay and Alpine.                                                                    
SENATOR MICCICHE said he was  frustrated last year when the state                                                               
spent a lot of  money on a man named Gerking who  said there is a                                                               
relationship between tax policy  and investment, which he thought                                                               
was counter  to what all they  know about tax policy.  Is there a                                                               
list of  projects they have  in mind that  at a certain  level of                                                               
profit the  tax revisions would  allow to be  developed? Alaskans                                                               
want to  know that a  reduction in  tax policy will  increase rig                                                               
count or development resulting in more oil.                                                                                     
MR. JEPSEN  said that was a  good question and asked  to get back                                                               
to him on that.                                                                                                                 
4:56:26 PM                                                                                                                    
CHAIR  GIESSEL  thanked  them  for  speaking  today  and  invited                                                               
ExxonMobil to come forward.                                                                                                     
4:56:37 PM                                                                                                                    
DAN  SECKERS, Government  Relations  Manager, ExxonMobil  Alaska,                                                               
said  he was  ExxonMobil's tax  counsel based  in Alaska,  had no                                                               
power  point and  would  cut  to the  chase  by taking  questions                                                               
immediately.  He  said  previous testimony  from  BP  underscored                                                               
ExxonMobil's concerns with  progressivity. Alaska's fiscal regime                                                               
is uncompetitive and  needs to be addressed, and  he welcomed the                                                               
opportunity to be here.                                                                                                         
He  said  that  SB  21  makes  significant  progress  in  drawing                                                               
investment  back  to  Alaska. Eliminating  progressivity,  alone,                                                               
will dramatically  improve Alaska's investment  climate. However,                                                               
the  gross revenue  exclusions (GRE)  should be  expanded to  all                                                               
fields including  the legacy  fields, because  a majority  of the                                                               
work in  the near term will  be in areas that  will not generally                                                               
yield  a new  PA.  He said  you want  to  incent all  production,                                                               
because a  small recovery of  additional reserves in  Prudhoe Bay                                                               
will dwarf any other discovery that  is on the horizon in Alaska.                                                               
This is critical.                                                                                                               
SENATOR DYSON asked if he had  to trade GREs in the legacy fields                                                               
for the investment credits which he would choose.                                                                               
MR. SECKERS answered  that tax calculations are just  math to get                                                               
to a bottom line calculation and  that a GRE can function in many                                                               
respects as a tax credit.  The tax credits are more incentivizing                                                               
on a present value basis,  because the result is immediate versus                                                               
a delay in getting the production  to apply them to. But both are                                                               
critical  and  both can  work;  the  key is  to  come  up with  a                                                               
SENATOR DYSON  asked which  of the two  mechanisms would  be more                                                               
likely to get at production sooner,  which is more in the state's                                                               
interest than ExxonMobil's.                                                                                                     
5:01:47 PM                                                                                                                    
MR.  SECKERS replied  that tax  credits would  provide a  present                                                               
value impact  of a greater amount  than a GRE. He  said, however,                                                               
the elimination of  credits is concerning, because  they are very                                                               
important in helping  with present values. The base  rate is also                                                               
still too  high. Why? Benchmarking government  take against other                                                               
regimes like North  Dakota and Texas is useful, but  it's not the                                                               
whole picture. Alaska  is burdened by a lot of  issues that other                                                               
states don't have like high  costs and Arctic conditions. But, as                                                               
policy makers, legislators  should ask what they can  do to bring                                                               
all investors  to Alaska and if  the current path they  are on is                                                               
the right  course for a long  term solution or is  change needed.                                                               
He would pick the later.                                                                                                        
SENATOR  FRENCH asked  what  a  realistically achievable  decline                                                               
curve would be for the legacy fields.                                                                                           
MR.  SECKERS  answered  that  ExxonMobil  isn't  an  operator  at                                                               
Prudhoe Bay; BP speaks for  Prudhoe Bay and ConocoPhillips speaks                                                               
for Kuparuk. ExxonMobil  is the operator at Pt.  Thomson and they                                                               
are doing everything they can do there.                                                                                         
SENATOR MCGUIRE  said that growing up  in Alaska she had  a sense                                                               
of partnership with industry and  with TAPS; perhaps it's because                                                               
they sort of built the state  together by making Alaska the major                                                               
domestic supplier of  crude oil to the country;  roads were paved                                                               
and  great  schools   were  built,  and  she  felt   a  sense  of                                                               
accomplishment. But  in the last  decade, she had  seen animosity                                                               
and division  between the state  and industry and she  hoped that                                                               
in their partnering now they  could continue to mature going into                                                               
the  next  chapter  of  their development.  She  hoped  all  were                                                               
aligned  on increasing  production and  all can  agree that  ACES                                                               
didn't increase  production. Those  who supported it  thought the                                                               
qualified  investment  credit  would  increase it,  but  it  just                                                               
increased investment not production.                                                                                            
SENATOR  MCGUIRE said  with  the  next tax  system  they want  to                                                               
incentivize production.  They don't  want to deplete  Prudhoe Bay                                                               
by  creating  a stampede,  but  to  get  back  to some  level  of                                                               
sustainability so the state can  manage its budget. What can they                                                               
5:09:06 PM                                                                                                                    
MR. SECKERS said ExxonMobil shares  the same concerns and he also                                                               
thought a change  in policy would increase production.  He said a                                                               
good  policy shouldn't  pick winners  or losers  and promised  to                                                               
talk within  AOGA and get  a unified voice  and get back  to them                                                               
with ideas.                                                                                                                     
CHAIR GIESSEL  said she  appreciated Senator  McGuire's question,                                                               
because  they are  wrestling with  the fact  that they  have been                                                               
offering these  very magnanimous credits  - no one  had addressed                                                               
the GRE yet - and yet  the production curve continues to go down.                                                               
They are trying  to align with industry and that  is why this was                                                               
crafted. She asked  how it doesn't align, because  she was having                                                               
trouble  believing that  ExxonMobil  doesn't  have the  financial                                                               
fortitude  to  be able  to  forward  fund a  development  without                                                               
credits from the State of Alaska.                                                                                               
MR. SECKERS  said he didn't  address the tax loss  carry forward,                                                               
because he  hoped ExxonMobil would never  be there, but it  is an                                                               
interesting  proposal.   He  shared  AOGA's  comments   that  the                                                               
restrictions on transferability diminish some of that.                                                                          
Why  isn't  eliminating progressivity  enough?  From  a pure  tax                                                               
perspective,  he said  Exxon looks  at the  bottom line:  you can                                                               
give  us all  the  deductions  in the  world,  but  if our  taxes                                                               
triple, it hasn't really helped  that much. Yes, ACES did provide                                                               
these   credits,  but   their  taxes   also  were   raised  quite                                                               
substantially -  and that had  quite a bit  to do with  it. Their                                                               
hope is to work with the  legislature as policy makers to craft a                                                               
policy   that  would   lead  to   this  new   production  through                                                               
5:14:12 PM                                                                                                                    
SENATOR FRENCH asked  if it takes all three partners  to agree to                                                               
a major investment at Prudhoe Bay.                                                                                              
MR. SECKERS replied  that as tax counsel, it was  hard for him to                                                               
say for  certain, but  it takes  a certain level  of vote  and it                                                               
generally requires all three companies  to do that. When projects                                                               
pencil out,  they generally go  forward, and ExxonMobil  has been                                                               
supportive of all of them.                                                                                                      
SENATOR  FRENCH said  as  an example,  last year  as  HB 110  was                                                               
working  its way  through the  system, representations  were made                                                               
about investments BP and ConocoPhillips  would make if it passed;                                                               
ExxonMobil did not join in those representations.                                                                               
MR. SECKERS said  their response now, as then, is  that Alaska is                                                               
"a very important  part of our portfolio." Their goal  is to make                                                               
every  investment they  can  that pencils  out  and believe  that                                                               
improving  Alaska's  fiscal  climate would  increase  investments                                                               
from all companies.                                                                                                             
CHAIR GIESSEL  asked what  an equitable tax  structure is  in his                                                               
MR. SECKERS  said he didn't have  an answer; the company  has not                                                               
looked at it  from that point of view. In  general they think the                                                               
legislative consultants  were doing  a great  job and  have given                                                               
them some indication of where  Alaska ranks among competitors. As                                                               
policy  makers, the  legislature needs  to design  a policy  with                                                               
that information. ExxonMobil will  invest everything it can under                                                               
the policy they create.                                                                                                         
CHAIR GIESSEL thanked him for joining the committee.                                                                            
5:18:09 PM                                                                                                                    
At ease from 5:18 to 5:22 p.m.                                                                                                  
5:22:24 PM                                                                                                                    
CHAIR GIESSEL opened public comment.                                                                                            
CHARLIE  POWERS,  Resource   Development  Council  (RDC)  member,                                                               
Kodiak, Alaska,  supported SB 21  saying that  incentives attract                                                               
investment like  that used  for Cook  Inlet gas  development, the                                                               
Alaska film industry,  the Home Energy Rebate  Program, and North                                                               
Dakota's exploration. He had noticed  that disincentives like the                                                               
Alaska cruise ship  tax and ACES discourage  investment, and that                                                               
many of his neighbors seem to  harbor a mentality of "sticking it                                                               
to the  oil companies"  that likely comes  from the  Exxon Valdez                                                               
and high fuel  prices. People in Kodiak seemed to  think that the                                                               
oil industry  didn't affect Kodiak's  economy directly,  but this                                                               
year  he  hears more  folks  joining  other business  leaders  in                                                               
asking  what  is going  to  happen  to fishing  communities  when                                                               
throughput continues  to drop. People  are realizing that  in the                                                               
absence of one  industry's ability to foot the  bill the industry                                                               
they are in will have to pick up the slack.                                                                                     
5:25:33 PM                                                                                                                    
SKIP REIERSON,  representing himself,  Seward, Alaska, said  as a                                                               
38-year resident  of Alaska  he supported SB  21 to  help reverse                                                               
the  decline of  North  Slope oil  production  and the  potential                                                               
adverse impacts it has. He  wonders how about fishing, timber and                                                               
mining would  cope with the same  tax structure that is  in place                                                               
for oil.                                                                                                                        
5:27:22 PM                                                                                                                    
MIKE LEONARD,  representing himself,  Fairbanks, Alaska,  said he                                                               
is  a retired  member of  Teamsters Local  959 and  he represents                                                               
working and retired  Alaskans who are concerned  about the future                                                               
of the  state and the decline  in North Slope oil  production. He                                                               
urged them  to consider  Governor Parnell's  plan in  SB 21  as a                                                               
good start. He also urged them  to consider that any plan for oil                                                               
tax reform  must be fair to  all Alaskans; it must  encourage new                                                               
production; it must be simple  and restore balance to the system;                                                               
it  must be  durable and  long term  to ensure  opportunities for                                                               
future generations, and it must  promote and include a commitment                                                               
to Alaskan hire for all Alaskans.                                                                                               
5:28:48 PM                                                                                                                    
DANIEL FINNEY, Teamsters  Local 959-Fairbanks, Fairbanks, Alaska,                                                               
supported SB 21. They want to  ensure a good solid future for all                                                               
Alaskans and make sure the Alaska  hire provision is in place. He                                                               
said Alaska  has a great  product that  is in demand,  but others                                                               
have  the  same  product  to   offer.  They  want  Alaska  to  be                                                               
competitive again.                                                                                                              
5:30:41 PM                                                                                                                    
CARL COLBY, representing himself,  Fairbanks, Alaska, said he was                                                               
a member of Teamsters Local  959-Fairbanks and represents working                                                               
Alaskans who are concerned about the  future of the state and the                                                               
decline in  North Slope  oil production. He  supported SB  21. He                                                               
said  that Alaska's  high oil  taxes are  pricing us  out of  the                                                               
market  and  Alaska must  make  an  effort  to make  itself  more                                                               
JIM PLAQUET,  Events and  Membership Coordinator,  Alaska Support                                                               
Industry Alliance,  Fairbanks, Alaska,  supported SB 21.  He said                                                               
he  is also  a 40-year  member of  the Operating  Engineers Local                                                               
302. He agreed  with Governor Parnell that  the state legislature                                                               
must act this  year to address production taxes in  order to spur                                                               
oil  industry investment.  The government  take remains  too high                                                               
under  ACES and  encourages a  harvest mode  that realizes  short                                                               
term gain  for the state  at the  expense of increased  long term                                                               
production and revenue.                                                                                                         
He  said that  billions of  barrels of  oil remain  in the  North                                                               
Slope fields that  will be challenging and  expensive to develop.                                                               
Today's  high  oil prices  should  be  spurring that  investments                                                               
just  has  they  have  led  to  a  new  boom  in  oil  production                                                               
elsewhere: for  example Texas that  has 830 active  drilling rigs                                                               
when Alaska has  6; North Dakota that has 174;  Oklahoma has 183;                                                               
and Pennsylvania has 80 drilling  rigs. The single biggest reason                                                               
is that ACES that passed in 2007 has stifled investments.                                                                       
ROGER  BURGRAFF, Alaska  Miners  Association, Fairbanks,  Alaska,                                                               
supported  SB  21  as  written.   He  said  its  incentives  will                                                               
encourage investment  in the Alaska petroleum  industry that will                                                               
produce more oil and keep the pipeline full.                                                                                    
5:37:27 PM                                                                                                                    
ROBERT TOTH, representing himself,  Fairbanks, Alaska, said he is                                                               
a member of Carpenters Local 1243  and has also been a commercial                                                               
fisherman; he didn't  support SB 21 as  written. Progressivity is                                                               
a bit  of a problem  he said; it was  done before the  oil prices                                                               
spiked  in  2006,  so the  top  end  is  too  high. But  the  tax                                                               
structure can  be changed  without scraping  the whole  thing. He                                                               
pointed out that  the pipeline shouldn't have been  built over 36                                                               
inches in diameter,  in which case we would still  be producing 1                                                               
million  barrels a  day.  But  the oil  companies  invest on  net                                                               
present value,  but sometimes they  make false  assumptions about                                                               
the future;  the state, on  the other hand,  knows it has  oil to                                                               
sell in the long term, so our stuff has to be long term.                                                                        
MR. TOTH said Alaska will  not out-compete North Dakota and Texas                                                               
for  oil   rigs  where  they   wouldn't  be  drilling   at  under                                                               
$85/barrel.  At  $60/barrel  most investment  won't  happen.  The                                                               
Bakken just doesn't  pay and is driven by  prices. The production                                                               
in Alaska will increase as the  price for oil brings us back into                                                               
the market; heavy oil isn't going to be there for a while.                                                                      
MR. TOTH said our tax  structure is somewhat discouraging, but it                                                               
could  be  changed   without  a  massive  overhaul.   It  is  not                                                               
discouraging  companies. BP  is in  harvest  mode but  it is  all                                                               
about going after the next big play.                                                                                            
CYNTHIA   HENRY,   representing   herself,   Fairbanks,   Alaska,                                                               
supported SB 21  saying she had owned a retail  business for more                                                               
than 30 years and even though  they have no connection to the oil                                                               
industry,  her family  depends on  a healthy  Alaskan economy.  A                                                               
decline in pipeline throughput indicates  that something is wrong                                                               
with the state's current tax policies.                                                                                          
5:41:09 PM                                                                                                                    
LISA HERBERT, Executive Director,  Fairbanks Chamber of Commerce,                                                               
Fairbanks,  Alaska,  supported  SB  21. She  said  increased  oil                                                               
production is  one of  the chamber's  top critical  priorities to                                                               
encourage through taxation and regulatory policy changes.                                                                       
She said  the Chamber  supports the  governor's four  key guiding                                                               
principles,  continued  vetting  of  SB 21,  and  exercising  due                                                               
diligence to reform oil taxes in a fair and meaningful way.                                                                     
RICK POLLOCK, representing  himself, Anchorage, Alaska, supported                                                               
SB  21.  He is  vice  president  of  global projects  for  Lynden                                                               
International and a lifelong Alaskan  who cares very much for the                                                               
economic vitality of the state. He  as on the ground and sees oil                                                               
patch activity  throughout the world,  and without  hesitation he                                                               
could  say that  the only  location  that is  struggling to  find                                                               
investment dollars geared  towards increasing production activity                                                               
is Alaska.  He believed  this struggle is  directly tied  to ACES                                                               
and that it is essential to reform it.                                                                                          
RICK  CANOY,   business  representative,  Teamsters   Local  959,                                                               
Fairbanks, Alaska,  said he represents several  hundred employees                                                               
who  work  for companies  that  support  oil production  efforts.                                                               
Their  jobs  are  affected  by   the  continued  decline  in  oil                                                               
production and he encouraged them  therefore to consider SB 21 as                                                               
a good  start. He  said this  is an opportunity  to reform  a tax                                                               
structure that  is not viable  and is  pricing Alaska out  of the                                                               
5:46:39 PM                                                                                                                    
JOHN DICKENS, representing himself,  Bethel, Alaska, supported SB
21. He thought Alaska was on  the verge of a financial apocalypse                                                               
that no  one can comprehend.  Corporations are not  some faceless                                                               
entity;   they  are   organizations   of   human  beings   called                                                               
shareholders. A lot has changed  since the pipeline was built and                                                               
a lot of markets were not  open back then. Capital is invested to                                                               
get return.  Why would anyone want  to invest Alaska even  if the                                                               
tax rates  were the same?  Our weather and  logistical challenges                                                               
are  so much  more  difficult that  it would  be  a violation  of                                                               
fiduciary responsibility  to invest  money in  Alaska, especially                                                               
with the current tax structure, which is just insane.                                                                           
5:49:22 PM                                                                                                                    
ERIC FOX,  Vice President of  Operations for Camp  Services, Nana                                                               
Management Services, Subsidiary  of Nana Development Corporation,                                                               
a business  arm of Nana Regional  Corporation, Anchorage, Alaska,                                                               
supported SB  21. He supported  changes in the oil  tax structure                                                               
to bring more business to the  Nana subsidiaries that work in the                                                               
oil industry  that in turn  bring economic opportunities  to Nana                                                               
shareholders. Unemployment  is a real  problem in most of  the 11                                                               
villages in the Nana region as it  is in most of rural Alaska and                                                               
the current tax  structure is having a negative impact  on all of                                                               
them. Alaska's  investment climate  is driving away  business; we                                                               
don't have a lack of oil.                                                                                                       
5:51:40 PM                                                                                                                    
PRISCILLA  SIMMONS,  representing   herself,  Anchorage,  Alaska,                                                               
supported SB 21.  She said she grew up in  Alaska and received an                                                               
outstanding public  education here.  She now works  in mechanical                                                               
and process engineering in support  of Alaska's oil industry. Her                                                               
generation  is very  concerned about  the  tremendous decline  in                                                               
North Slope  production and the  decrease in  overall development                                                               
and exploratory wells  over the last few years.  The entire state                                                               
needs   a  vibrant   oil  industry   to   provide  revenue,   job                                                               
opportunities and growth for our educated work force.                                                                           
KENNETH   CARON,   representing   himself,   Anchorage,   Alaska,                                                               
supported SB 21.  He came to Alaska in 1975  and worked two years                                                               
on TAPS, 33  years on the Alaska radar system  and spent 20 years                                                               
on the  Yukon River. He supported  SB 21 because the  state needs                                                               
jobs.  During the  building TAPS  there  were so  many jobs  that                                                               
everyone could find good work.  He suggested asking how much more                                                               
oil would have to go through  the pipeline to equal the amount of                                                               
revenue that we get today and  then judge for ourselves if we can                                                               
trust the  oil companies  to make the  investment and  develop to                                                               
reach that threshold.                                                                                                           
5:55:57 PM                                                                                                                    
RACHAEL  PETRO,  President  and  CEO,  Alaska  State  Chamber  of                                                               
Commerce, Anchorage,  Alaska, supported SB 21.  This year chamber                                                               
members  chose   reforming  oil  tax  policy   to  encourage  new                                                               
production  as its  top  legislative  priority. Additionally,  13                                                               
local  Chambers of  Commerce -  Anchorage, Bethel,  Chugach/Eagle                                                               
River,  Haines,  Fairbanks,  Juneau,  Kenai,  Ketchikan,  Kodiak,                                                               
Palmer,  Seward,   and  Sitka   -  have   resolutions  supporting                                                               
meaningful   oil  tax   reform.  They   represent  thousands   of                                                               
additional  businesses  and  Alaskan  citizens  who  are  gravely                                                               
concerned about Alaska's economic future.                                                                                       
5:57:48 PM                                                                                                                    
GRAHAM GREEN, representing  himself, Anchorage, Alaska, supported                                                               
SB 21. He and his wife  are lifelong Alaskans and their four kids                                                               
go to  Anchorage public  schools; he  works for  the oil  and gas                                                               
industry  as his  family  did.  But his  brother  moved to  North                                                               
Dakota two  years after working  in the  Alaska oil patch  for 30                                                               
years and now  runs a successful welding business.   The state is                                                               
uncompetitive and that has to  change. He urged learning from the                                                               
lessons of the past and change the things they can control.                                                                     
6:00:24 PM                                                                                                                    
JIM  AYERS, representing  himself,  said he  served  as chief  of                                                               
staff for Governor  Tony Knowles and had  various other positions                                                               
in government.  He supported the  direction SB 21 was  going, but                                                               
he hoped  they would  bring some industry  leadership in  to talk                                                               
about what  they are going to  do for Alaska. Don't  let them sit                                                               
in their offices in other  states or other countries since you're                                                               
going to do all this for them.                                                                                                  
MR. AYERS explained that during his  time with the state he dealt                                                               
former President Bob Malone with  BP in negotiations over several                                                               
issues  including  orphan  sites  and  Chairman  Lee  Raymond  of                                                               
ExxonMobil over  a variety of  things from the  Valdez settlement                                                               
to  adopting  escort  tugs,  providing  university  scholarships,                                                               
establishing  moratoriums in  a  variety of  important areas,  as                                                               
well  as  constructing  modules (controversial  in  Canada).  And                                                               
there   was   no   better   gentleman   than   Jim   Mulva   with                                                               
ConocoPhillips. Those  guys taught him  this: taxes is  matter of                                                               
discussion  and has  been since  the first  oil came  out of  the                                                               
ground and it will  continue to be so. It's a  matter of big time                                                               
negotiation.  Tax  breaks  may  or may  not  result  in  expanded                                                               
exploration or oil development enhancement or jobs.                                                                             
He  advised if  you're going  to consider  give-backs, breaks  or                                                               
incentives,  bring industry  leaders in  and have  them be  clear                                                               
about what  the performance will  be for the incentives  they are                                                               
6:03:09 PM                                                                                                                    
GARY  DIXON,  Vice  President, Teamsters  Local  959,  Anchorage,                                                               
Alaska, supported SB  21. He said he represents  workers from all                                                               
over Alaska who  are concerned about the future of  the state and                                                               
the decline  on the  TAPS throughput. He  urged them  to, "Please                                                               
make us competitive again."                                                                                                     
CARL PORTMAN, representing  himself, Anchorage, Alaska, supported                                                               
meaningful  oil  production  tax  reform this  session.  He  said                                                               
Alaska needs to  position itself as "a most  compelling place for                                                               
investment."  He said  the private  sector is  the foundation  of                                                               
Alaska's  economy and  the oil  industry is  the state's  biggest                                                               
economic engine.  "ACES is broken  and it is  redirecting capital                                                               
to more  attractive oil and  gas jurisdictions elsewhere."  SB 21                                                               
is a big step in the right direction.                                                                                           
6:06:41 PM                                                                                                                    
PAUL FRIESE,  representing himself  and family,  Wasilla, Alaska,                                                               
supported  SB 21.  He  said he  is vice  president  of sales  for                                                               
Lynden  in Alaska.  He  moved here  in  1984 to  work  and go  to                                                               
school. In  the late 80s he  watched as the state  struggled with                                                               
oil at $10 a barrel. It's hard for  him to imagine that at $100 a                                                               
barrel we are facing a  similar situation unless some reforms are                                                               
made  immediately  to the  oil  tax.  He  said  the oil  and  gas                                                               
industry  supports   everybody  from   the  restaurants   to  the                                                               
retailers. Currently  three of his  kids are in college  and they                                                               
all want to make Alaska their home.                                                                                             
BRIAN  HOVE, representing  himself, Anchorage,  Alaska, supported                                                               
SB  21. The  oil industry  has provided  him with  a standard  of                                                               
living that has  been greater than it otherwise  would have been;                                                               
he hasn't paid any income tax or  state sales tax for the last 33                                                               
years. When he  moved to Alaska in  1980 he was 18  years old and                                                               
even then he could see the  opportunity here. Now he looks around                                                               
at the 18 year olds and asks himself  if they feel the way he did                                                               
in 1980.  He just doesn't  know, but he  believes that we  have a                                                               
responsibility  to  make sure  there  is  opportunity for  future                                                               
generations of Alaskans.                                                                                                        
6:10:17 PM                                                                                                                    
PAUL  GLAVINOVICH,   representing  himself,   Anchorage,  Alaska,                                                               
supported SB  21. He said it  is common knowledge that  Alaska is                                                               
dependent upon the  petroleum industry for upwards  of 90 percent                                                               
of  its tax  revenue and  the  current decline  in production  is                                                               
cause for  acute concern. It is  only the recent high  price that                                                               
has kept Alaskans from raiding its various savings accounts.                                                                    
He said  he is  more than familiar  with the  investment criteria                                                               
that drives  the successful production  of the  earth's resources                                                               
and any  investment in the  extraction industry, be it  mining or                                                               
oil  and  gas,  and  it  all  involves  a  degree  of  risk.  The                                                               
investment community  deploys its  assets in  those areas  of the                                                               
greatest potential  for acceptable returns.  And Alaska is  or is                                                               
rapidly becoming a non-competitor in that criterion.                                                                            
6:12:13 PM                                                                                                                    
KATY CAPOZZI, representing  herself, Anchorage, Alaska, supported                                                               
SB 21.  She was  concerned about the  decline in  TAPS throughput                                                               
while we  know for  certain that  there is still  a lot  more oil                                                               
available to  be produced on the  North Slope. At the  same time,                                                               
places  like California  and North  Dakota  have enjoyed  massive                                                               
investment and production in their  oil fields. She said there is                                                               
no reason  why during  historically high  oil prices  that Alaska                                                               
shouldn't   also  be   enjoying  the   increased  investment   in                                                               
RADA   KHADJINOVA,  representing   herself,  Anchorage,   Alaska,                                                               
supported SB 21.  She came to Alaska in 1993  from Russia and now                                                               
has three degrees  from UAA including a graduate  level degree in                                                               
environmental regulation  and permitting.  She wants  to continue                                                               
using her  skills and expertise  to live  and work in  Alaska and                                                               
wants the  same for her friends  and family. No matter  what kind                                                               
of rhetoric  is being used, she  said the facts remain  the facts                                                               
and  those are  that what  we  have been  doing thus  far is  not                                                               
working, because  production continues to decline.  Alaska is not                                                               
competitive  with  other  oil  producing  nations  or  other  oil                                                               
producing  states. Legislators  should go  over the  bill with  a                                                               
fine toothed comb.                                                                                                              
JIM SYKES,  representing himself,  Palmer, Alaska, opposed  SB 21                                                               
in its  current form. He wasn't  in favor of the  net profits tax                                                               
when  it was  enacted,  but  on the  other  hand  it hasn't  been                                                               
audited  and we  don't know  exactly where  we are.  And it  does                                                               
appear to  be working. What troubles  him about SB 21  is that it                                                               
gets rid  of progressivity, which  is one of the  most successful                                                               
parts of the tax. It might need  adjusting or to be capped at the                                                               
high  end, but  we have  a constitutional  obligation to  get the                                                               
maximum  value from  our resources.  He agreed  with the  speaker                                                               
that said we need to get  away from politics and into the problem                                                               
solving  mode. He  has heard  some  assumptions that  need to  be                                                               
checked against the facts. Both  OPEX and CAPEX have increased in                                                               
the past  several years  and employment  has increased  to record                                                               
He said  that most of  the rest  of the oil  that is going  to be                                                               
produced from  state lands is  in the  legacy fields and  many of                                                               
those have  the highest profits  for any oil company  anywhere in                                                               
the world.  They need to demand  the evidence of what  the actual                                                               
economic rent  is that  we get from  those fields.  Throughput in                                                               
1988 was  over 2 million  barrels per day; we're  actually making                                                               
about twice  the money off of  about one-quarter of the  oil. So,                                                               
it's  really  more  about  price  than  throughput.  We  need  to                                                               
maximize the value of our one-time resources.                                                                                   
6:19:56 PM                                                                                                                    
RON  JOHNSON,  representing  himself  and  his  wife,  Fairbanks,                                                               
Alaska,  said he  is a  retired Fairbanks  professor and  that he                                                               
opposed SB 21. He favors increased  throughput in TAPS, but SB 21                                                               
doesn't ask  for any specific  throughput increase  or investment                                                               
to qualify  for the  tax breaks.  What evidence  do we  have that                                                               
lowering tax  rates will increase  TAPS throughput?  For example,                                                               
from  1996-2006,  Kuparuk's  throughput  went  down  by  about  7                                                               
percent a year -  as the tax rate went down from  12 percent to 1                                                               
percent. If  we use  that logic,  maybe we  should raise  the tax                                                               
rates to increase the throughput.                                                                                               
He asked where  the analysis was to back the  governor's bet that                                                               
lowering  the tax  rate by  more  than 20  percent will  increase                                                               
throughput  by more  than that  to make  up for  the loss  in tax                                                               
revenue due to  the tax rate going down. He  urged them to assess                                                               
how much  extra drilling success  is needed to recoup  the losses                                                               
from  reduced tax  rates and  the likelihood  that industry  will                                                               
make the necessary investments.                                                                                                 
MR. JOHNSON  said there is  also the time  value of money.  If we                                                               
change from ACES to SB 21,  maybe the state will lose $10 billion                                                               
in tax revenue  over the next half dozen years.  So, are we going                                                               
to get  back more than  $15 billion in  revenue over the  next 10                                                               
years to make  up for it? He wanted them  to assess these details                                                               
in  determining whether  SB  21 will  increase  revenues, but  he                                                               
didn't think it would.                                                                                                          
DAVE HARBOUR,  representing himself,  Anchorage, Alaska,  said he                                                               
serves  as publisher  of Northern  Gas Pipelines,  a 10-year  old                                                               
energy web  page in  Alaska, and chairs  oil and  gas conferences                                                               
throughout  the U.S.  and Canada.  He has  served with  state and                                                               
municipal  governments,   the  Alaska  University  and   the  oil                                                               
industry. He wanted to provide  some historical comments. Back in                                                               
1969,  at the  time of  the Prudhoe  Bay lease  sale, Alaska  was                                                               
about 10  years old.  It hadn't fully  developed or  defined what                                                               
Alaska's  constitutional   requirement  for   developing  maximum                                                               
benefit for  the people  for its  natural resource  really meant.                                                               
The  decade of  the  70s  was a  period  of  dissension as  taxes                                                               
increased  almost every  year (as  the  legislature struggled  to                                                               
define maximum benefit), followed by  a period of tranquility. In                                                               
1981, Governor  Hammond and  the legislature  had unique  a press                                                               
conference  in  that it  was  non-partisan  and was  attended  by                                                               
virtually  all  the  leaders  of  the  legislature.  In  it  they                                                               
announced  that in  a unified  way they  had established  a "fair                                                               
share" of  oil and gas  revenue that was roughly  about one-third                                                               
of total  revenues among  the state,  the federal  government and                                                               
the  oil industry.  Once that  was done  - and  the tradeoff  for                                                               
doing that was repeal of  the separate accounting methodology for                                                               
corporate income tax  as well as the oil  industry's agreement to                                                               
change  the  severance tax  from  12.25  to  15 percent  -  there                                                               
followed  a  20 year  period  of  relative tranquility  and  high                                                               
investment, the  best evidence of  which is that Prudhoe  Bay and                                                               
TAPS  were financed  on  the basis  of   9.6  billion barrels  of                                                               
proved  reserves  (and as  we  know  about  twice that  has  been                                                               
He summarized that  the legislature would be well  advised not to                                                               
pick a percentage,  but rather analyze where we stand  and put us                                                               
in  the median  of competing  oil and  gas jurisdictions  with an                                                               
offset for the  high cost of doing business here,  the need for a                                                               
800-mile  pipeline to  move the  oil down  to tidewater,  and the                                                               
fact that  many of  our competitors located  at tidewater  are in                                                               
the temperate zone.                                                                                                             
6:26:11 PM                                                                                                                    
JIM  PALMER, representing  himself and  his family,  Eagle River,                                                               
Alaska, supported  SB 21. He  remembered the beginnings  of North                                                               
Slope production  and the onslaught  of royalties and  taxes into                                                               
the  state  treasury. He  also  remembered  the many  legislative                                                               
battles over taxes, fair share,  all of which he thought weakened                                                               
Alaska's competitive  place in  the world's  oil markets.  We are                                                               
now at a critical point in  the state's history when the governor                                                               
and  the  legislature have  an  opportunity  to finally  fix  the                                                               
detrimental ACES  provisions and put  Alaska in a place  where it                                                               
effectively and  over longer term  seizes investment  capital for                                                               
both production and exploration.                                                                                                
He said  we can no  longer depend on  high oil prices  to sustain                                                               
state spending; production  is the key. He urged them  to fix the                                                               
progressivity  provisions  of  ACES   and  fashion  a  bill  that                                                               
effectively makes  Alaska competitive.  Marginal changes  are not                                                               
6:28:26 PM                                                                                                                    
SENATOR FAIRCLOUGH  thanked Mary and  Jim for taking the  time to                                                               
call in.                                                                                                                        
MARY BRAHM, representing herself,  Eagle River, Alaska, supported                                                               
SB 21. She is on professional  staff with the Chugiak Eagle River                                                               
Chamber,  but   testified  for  herself.  She   agreed  with  the                                                               
Chamber's position  on Resolution 2010-1 that  passed in February                                                               
2010. It supported  the re-evaluation of ACES  and encouraged the                                                               
Alaska  state   legislature  to   create  the   most  competitive                                                               
environment   with  fiscal   certainty   in   order  to   attract                                                               
sustainable reinvestment  in North  Slope oil  production. Again,                                                               
in 2013, they  established the revision of ACES  as their highest                                                               
priority in  order to reverse  declining production  and increase                                                               
investment on  the North Slope. She  said the state needs  a $106                                                               
price in  order to cover  its operating budget. Her  children and                                                               
grandchildren  want  to  make  Alaska  their  home  and  that  is                                                               
dependent upon the state's ability to prosper and grow.                                                                         
6:30:42 PM                                                                                                                    
JOE  HEGNA,  past  president,   Chugach/Eagle  River  Chamber  of                                                               
Commerce, Eagle River,  Alaska, supported SB 21.  The Chamber has                                                               
identified  the oil  and gas  production  tax as  its number  one                                                               
priority,  because  it  is clearly  the  state's  most  important                                                               
issue. They  support the  governor's four  key principles  on oil                                                               
and  gas  production  and  SB  21  addresses  them.  The  Chamber                                                               
believes the current production  tax rate discouraged development                                                               
investment   and  the   progressivity  component   is  the   most                                                               
problematic component.  It has also concluded  that a significant                                                               
change in  the production tax  is needed now. He,  personally, is                                                               
concerned about  the current  short term  tax and  spend approach                                                               
that  Alaska has;  it  will  eventually kill  the  future of  his                                                               
grandchildren and maybe even his children.                                                                                      
6:32:18 PM                                                                                                                    
JOHN  SIMS,  Vice  President,   Chugach/Eagle  River  Chamber  of                                                               
Commerce, Eagle River,  Alaska, supported SB 21. He  was born and                                                               
raised in  Alaska and  is a  father of  three. He  is continually                                                               
concerned  about the  declining production  of oil  on the  North                                                               
Slope. Even a basic understanding  of the decision making process                                                               
in the corporate environment shows  clearly that Alaska holds the                                                               
key to  its own  success. Alaska has  the highest  industry costs                                                               
and  tax  rate  in  the  nation, and  only  the  most  profitable                                                               
projects in a company's portfolio  get funded. The state can keep                                                               
its  current  policy  that  limits  investment  or  it  can  show                                                               
businesses and residents  that their main focus is  on securing a                                                               
long term  solution, he supported the  governor's four principles                                                               
for guiding this legislation.                                                                                                   
6:33:07 PM                                                                                                                    
STUART COHEN,  representing himself, Juneau, Alaska,  said he had                                                               
lived  in  Juneau  for  30   years  and  has  a  business  called                                                               
"Invisible World" that  does business in South  America and Asia.                                                               
Before that he was in the  oil business in eastern Kentucky where                                                               
a good well might  be two or three barrels a  day. He agreed with                                                               
a lot  of the general things  he had heard: oil  is important and                                                               
we all want the state to thrive  and for the treasury to be full.                                                               
The question  they are  addressing is  if this  bill specifically                                                               
moves us  towards increasing production  and throughput.  But the                                                               
answer  is no;  it gives  a  tax break  for the  existing oil  in                                                               
Prudhoe Bay, but experts have said  that even when oil taxes were                                                               
much lower  oil companies  had decided not  to reinvest  here and                                                               
harvested the profits from Prudhoe Bay oil.                                                                                     
And from listening  to testimony you would think  that these guys                                                               
were  losing money  hand over  fist,  but in  actuality [the  oil                                                               
business] is  still extremely  profitable and  the infrastructure                                                               
is  in  place.  He  supported  some sort  of  tax  break  on  new                                                               
production and on  new investment, which are  already giving, but                                                               
he didn't see  the point of giving  a tax break for  a field that                                                               
the oil companies  have already decided to  milk, especially with                                                               
no  guarantees  to  us  about  what they  would  do  to  increase                                                               
The  other problem  with  SB 21  is that  it  creates an  instant                                                               
budget crisis. His kids are in  the public schools here just like                                                               
very one else's  who testified and the question is  how much will                                                               
oil  production  have to  increase  to  make  up for  the  budget                                                               
shortfall that  it will instantly  create and how long  that will                                                               
take to happen.                                                                                                                 
PETE  STOKES,  representing  himself   and  his  three  children,                                                               
Anchorage, Alaska,  supported SB 21.  He is a  petroleum engineer                                                               
for  Petrotechnical Resources  of  Alaska, on  the  board of  the                                                               
Alliance, and a  chairman of the University  of Alaska Fairbank's                                                               
College  of  Engineering  and   Mines  Advisory  and  development                                                               
Council. SB 21 is a good  start in attracting more investment and                                                               
making   Alaska   more    competitive,   especially   eliminating                                                               
progressivity. Other  modifications could include no  increase of                                                               
tax in  the $50-90  range, incentives  for new  production within                                                               
the  existing PAs,  allowing new  explorers to  continue to  sell                                                               
loss  carry  forward  credits  (taking  this  away  limits  their                                                               
ability to raise and explore for new production).                                                                               
6:39:09 PM                                                                                                                    
PHILLIS  SPENCER-BELZ, representing  herself, Anchorage,  Alaska,                                                               
said she has  a small business and a daughter  in private school.                                                               
She is  an Arctic Slope Regional  Corporation Inupiat shareholder                                                               
and said  these tax breaks don't  seem fair to her.  If the state                                                               
is  handing  them  out,  why  not   give  them  out  to  all  the                                                               
shareholders  all   the  Alaska  Native  Claims   Settlement  Act                                                               
corporations, and all  Alaskans - along with a job  since lack of                                                               
Native hire is also an issue.                                                                                                   
ROCK HENGEN,  President and General Manager,  NANA Worley Parson,                                                               
LLC, Anchorage, Alaska,  supported SB 21. He had  three points to                                                               
make:  in  2008,  they  achieved   their  peak  growth  with  650                                                               
employees.  The work  was based  upon  projects they  had won  in                                                               
2007. Today  they have approximately  400 employees. The  lack of                                                               
opportunities  within  the  oil  and   gas  industry  has  had  a                                                               
significant impact on their ability to get back on their feet.                                                                  
In  addition, the  supply and  demand environment  that currently                                                               
exists in Alaska's oil and gas  industry has made it difficult to                                                               
retain employees.  Changes are needed that  will encourage growth                                                               
in the industry. He has lost  many valued employees to the heated                                                               
oil and gas  market in the Lower 48, because  they cannot compete                                                               
with the compensation that market offered.                                                                                      
Finally,  the picture  of an  insecure future  that is  currently                                                               
presented in Alaska has created  a challenge for their company to                                                               
attract employees. Without it, talented  people look elsewhere to                                                               
establish  their lives.  Real  change needs  to  occur that  will                                                               
create  the  environment for  real  growth  in  the oil  and  gas                                                               
6:42:36 PM                                                                                                                    
JASON BRUNE,  representing himself, Anchorage,  Alaska, supported                                                               
SB  21, but  said it  doesn't  go far  enough. He  serves as  the                                                               
chairman  of  the  Consumer  Energy   Alliance  Alaska  Board  of                                                               
Directors, Vice Chair  of the Alaska branch of  the Alaska Miners                                                               
Association, said  he is  on the  board of  the State  Chamber of                                                               
Commerce and on several other  non-profits that depend on the oil                                                               
industry contribution for much of their on-going support.                                                                       
He  said that  the  state's royalty  is our  fair  share of  each                                                               
barrel of  oil. Taxes are  a choice of the  legislature. Previous                                                               
legislatures  have  chosen  to  be punitive  and  he  hopes  this                                                               
legislature is  different. Alaska's  cost of  business is  one of                                                               
the highest on earth. To  lure more investment dollars, our taxes                                                               
should be some of the  lowest on earth. Investment dollars follow                                                               
the best rates of return.                                                                                                       
A couple  of years ago  he served  as co-chair of  the governor's                                                               
resources  energy and  environment  transition  team. After  many                                                               
meetings and  lengthy discussions  there was  unanimous agreement                                                               
that increasing throughput in TAPS  should be the number one goal                                                               
of Alaskans. A conclusion in  the report said, "Specific emphasis                                                               
must  be placed  on  addressing the  negative investment  climate                                                               
caused by progressivity."                                                                                                       
6:44:49 PM                                                                                                                    
PAULA EASLEY, representing  herself, Anchorage, Alaska, supported                                                               
SB  21. She  asked  if anyone  remembered how  it  was living  in                                                               
Alaska  in the  1980s; when  stores were  boarded up  and schools                                                               
were closed. She dreads the  thought of that happening again. She                                                               
hoped this legislature would solve the issue once and for all.                                                                  
CHAIR GIESSEL thanked everyone for  their comments and held SB 21                                                               
in committee.                                                                                                                   

Document Name Date/Time Subjects
SB 21 ConocoPhillips Heinrich Jepsen SRES 2013.02.20.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Testimony BP Bilbao Williams SRES 2013.02.20.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Written Testimony BP Williams SRES 201.02.20.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Supp Letter LindaLeary 2013.02.18.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Written Testimony CEA StevePratt 2013.02.18.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Written Testimony GailPhillips 2013.02.18.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21Written Testimony RDC RickRogers SRES 2013.02.18.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Written Testimony DaveHarbour SRES 2013.02.20.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Supp Letter FAI Chamber LisaHerbert 2013.02.20.pdf SRES 2/20/2013 3:30:00 PM
SB 21
SB 21 Supp Testimony CynthiaHenry 2013.02.20.pdf SRES 2/20/2013 3:30:00 PM
SB 21