Legislature(2013 - 2014)BUTROVICH 205

01/31/2013 01:00 PM SENATE SPECIAL COMM ON TAPS THROUGHPUT


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01:01:03 PM Start
01:01:30 PM SB21
07:35:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time and Location Change --
+= SB 21 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Presentation by PFC Energy
-- Public Testimony 4:30 - 7:30 p.m. --
LIO Public Testimony from Kodiak, Homer, Kenai,
Seward, Ketchikan, Sitka, Petersburg, Wrangell,
Barrow, Bethel, Cordova, Delta Junction,
Dillingham, Glennallen, Juneau, Off-nets
               SB  21-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                                
1:01:30 PM                                                                                                                    
CO-CHAIR MICCICHE stated  that the purpose of  today's meeting is                                                               
to  hear  a presentation  from  PFC  Energy  and to  hear  public                                                               
testimony on SB 21.                                                                                                             
                                                                                                                                
1:03:25 PM                                                                                                                    
SENATOR   FAIRCLOUGH  requested   information  about   where  the                                                               
presentation can be found on line.                                                                                              
                                                                                                                                
CO-CHAIR MICCICHE related that the  information is on BASIS under                                                               
the Senate Special TAPS Throughput Committee.                                                                                   
                                                                                                                                
JANAK  MAYER, Manager,  Upstream  & Gas,  PFC Energy,  introduced                                                               
himself. He described his work  with PFC Energy to provide advice                                                               
and analysis to  the legislature in the context  of future Alaska                                                               
production.                                                                                                                     
                                                                                                                                
CO-CHAIR MICCICHE  said he  requested an  independent evaluation,                                                               
with a focus on increasing oil production through TAPS.                                                                         
                                                                                                                                
MR.  MAYER introduced  his partner,  Mr. Reinsch.  He listed  the                                                               
day's agenda.                                                                                                                   
                                                                                                                                
1:06:08 PM                                                                                                                    
TONY  REINSCH,  Senior  Director,  Upstream &  Gas,  PFC  Energy,                                                               
explained that  PFC Energy is an  above ground risk group  with a                                                               
focus  on  issues  beyond  the oil  reservoir  which  impact  the                                                               
success  or failure  of hydrocarbon  exploration and  development                                                               
from  global  economics  and geopolitics  to  above  ground  risk                                                               
issues and fiscal  systems. He described his focus  within PFC is                                                               
portfolio analysis and strategy and  planning for the largest oil                                                               
and  gas companies  globally. He  said today's  presentation will                                                               
focus on BP, ExxonMobil, and Conoco Phillips.                                                                                   
                                                                                                                                
CO-CHAIR MICCICHE noted the arrival of Senator McGuire.                                                                         
                                                                                                                                
MR. REINSCH turned to the first  topic on how oil and gas company                                                               
decision  making   is  made  in  terms   of  capital  allocation,                                                               
budgeting, and  long-range planning. He  said the second  part of                                                               
the  presentation would  be  a portfolio  analysis  of the  three                                                               
major  oil  companies  and  how Alaska  fits  into  their  global                                                               
portfolios.                                                                                                                     
                                                                                                                                
He  began  with a  graph  depicting  a company's  typical  annual                                                               
planning  cycle.  Oil and  gas  companies  follow a  standardized                                                               
process aligning the  annual budget cycle to the  long range plan                                                               
and  corporate strategy.  In the  first quarter  of the  cycle, a                                                               
company  will  look  at its  annual  strategy  review,  operating                                                               
environment,  and  long  range  plan, and  prepare  for  a  board                                                               
meeting early  in the second  quarter of  the year. In  the third                                                               
quarter a company focuses on the  annual budget and in the fourth                                                               
quarter the budget is approved.                                                                                                 
                                                                                                                                
1:09:47 PM                                                                                                                    
MR.  REINSCH listed  components  of the  first quarter  analysis:                                                               
strategy, planning  and positioning.  He discussed  how companies                                                               
analyze   markets,  new   sources,  and   competition.  Companies                                                               
identify gaps  in their  planning. They  apply their  own filters                                                               
that have to  do with metrics and above ground  risk, in order to                                                               
produce strategic options.                                                                                                      
                                                                                                                                
He  described the  budget  activity in  the  third quarter.  Most                                                               
companies are  structured around  business units.  Corporate will                                                               
provide those  business units  with their  operating assumptions.                                                               
Based on  those assumptions, each unit  will come up with  a long                                                               
range plan and  a budget for next year's  capital allocation. The                                                               
budget  is  made during  the  first  year  of a  five-year  plan.                                                               
Corporate  evaluates the  budget and  sends it  back to  the unit                                                               
with added constraints. Eventually, a  budget request goes to the                                                               
board for approval.                                                                                                             
                                                                                                                                
1:14:17 PM                                                                                                                    
MR. REINSCH related  how companies attract capital  - the project                                                               
approval process. He listed stages  of an oil and gas development                                                               
or investment  project; exploration, appraisal,  development, and                                                               
production.  For each  stage, companies  have a  project approval                                                               
request form accompanied by an approval of expenditure.                                                                         
                                                                                                                                
SENATOR GARDNER asked  for examples of what  "stranded within the                                                               
strategy of the company" looks like.                                                                                            
                                                                                                                                
MR.  REINSCH gave  as  an  example ConocoPhillips'  repositioning                                                               
their  global   portfolio  to  focus   their  upstream   more  on                                                               
Organisation  for  Economic  Cooperative and  Development  (OECD)                                                               
basins in  order to  minimize above ground  risk. In  doing that,                                                               
they sold their equity share  in LUKOIL. He noted another example                                                               
when BP sold  out of entire portfolios in North  America for lack                                                               
of relevancy. Or,  a developer may not have the  focus to take on                                                               
the  enhanced recovery  requirements  of a  particular asset,  so                                                               
they will sell it to a company for whom it is relevant.                                                                         
                                                                                                                                
MR. REINSCH  continued to explain approval  requests and approval                                                               
for expenditures, both of which  compete for limited capital. The                                                               
board makes  decisions at  each stage  of project  development to                                                               
amend, suspend, or divest.                                                                                                      
                                                                                                                                
MR.  REINSCH  turned  to  a   graph  depicting  business  control                                                               
architecture  of  six  years  of  cyclical  planning.  There  are                                                               
activities that  extend well  beyond a  fiscal year.  The capital                                                               
budget  in  a  given  year   consists  of  activities  that  have                                                               
successfully competed for scarce  resources and attracted capital                                                               
to those activities.                                                                                                            
                                                                                                                                
1:19:35 PM                                                                                                                    
He addressed the  question to what basis does  a company allocate                                                               
investment capital to opportunities,  or how the projects compete                                                               
for  capital. He  pointed out  that  a project  will compete  for                                                               
capital within a basin, with  like activities within a portfolio,                                                               
and  with all  activities  within a  portfolio.  For example,  an                                                               
enhanced  recovery project  in Alaska  will  compete for  capital                                                               
against  other  capital   expenditure  opportunities  in  Alaska,                                                               
against enhanced recovery projects  elsewhere, and against simple                                                               
capital investment within those  portfolios. It is also competing                                                               
against alternative uses of capital,  such as paying down debt or                                                               
paying  shareholders. He  noted that  ExxonMobil creates  capital                                                               
scarcity  within  their  portfolio by  allocating  a  significant                                                               
share of their available funds to shareholder returns.                                                                          
                                                                                                                                
1:21:16 PM                                                                                                                    
CO-CHAIR MICCICHE  asked if  companies divide  capital investment                                                               
by business units  and have areas of no  investment because other                                                               
projects are more attractive.                                                                                                   
                                                                                                                                
MR. REINSCH explained,  if a business unit  has received approval                                                               
for  an  activity   request,  that  capital  is   secure  and  is                                                               
allocated. Competition is at the next stage.                                                                                    
                                                                                                                                
CO-CHAIR MICCICHE  understood that there could  be business units                                                               
that receive no capital.                                                                                                        
                                                                                                                                
MR. REINSCH said yes.                                                                                                           
                                                                                                                                
CO-CHAIR MICCICHE  said even  if a  unit was  a core  interest of                                                               
that company, the company can choose not to fund it.                                                                            
                                                                                                                                
MR. REINSCH said if the business  is core to the operation, there                                                               
is  a level  of production  and on-going  capital commitment  and                                                               
requirement. However,  even within core business  units, some are                                                               
not competitive.                                                                                                                
                                                                                                                                
1:23:40 PM                                                                                                                    
MR.  REINSCH  listed  the five  elements  of  upstream  financial                                                               
metrics: growth, profitability, efficiency,  cash flow, and risk.                                                               
He  described growth  as  managing the  "top  line." It  involves                                                               
compound average  growth rate (CAGR)  in production  and reserves                                                               
relative to the target, quality of growth, and plowback rates.                                                                  
                                                                                                                                
He explained profitability  as the ability to  manage the "bottom                                                               
line," the upstream cash flow, net income, and production costs.                                                                
                                                                                                                                
SENATOR GARDNER asked what CAGR is.                                                                                             
                                                                                                                                
MR. REINSCH said it is compounded average growth rate.                                                                          
                                                                                                                                
He explained efficiency as the  ability to manage capital, either                                                               
from  operations  or from  shareholders.  The  return on  capital                                                               
employed (ROCE) is one measure, as is finding costs.                                                                            
                                                                                                                                
He defined  cash flow  as the ability  to manage  investments and                                                               
reinvestments in  the portfolio. He  said risk is the  ability to                                                               
manage a diversified portfolio.                                                                                                 
                                                                                                                                
1:27:03 PM                                                                                                                    
MR.  REINSCH explained  project  selection  and decision  metrics                                                               
such as the  pay-out period and internal rate of  return (IRR), a                                                               
discount rate  that equates costs  and revenues. He  related that                                                               
net present  value (NPV)  is bringing the  present values  of the                                                               
cost stream and  the revenue stream together to occur  at a point                                                               
in time in order to measure net  gain. If the NPV is greater than                                                               
zero, it  means the project  is expected  to deliver a  return to                                                               
the  company that  is greater  than the  cost of  development. It                                                               
includes a return on the capital invested.                                                                                      
                                                                                                                                
CO-CHAIR  MICCICHE   asked  about  maximum  negative   cash  flow                                                               
exposure and capex/boe.                                                                                                         
                                                                                                                                
MR.  REINSCH  replied  that maximum  negative  cash  exposure  is                                                               
investing  capital   long  before  break  even   position.  Is  a                                                               
companion  to "pay-out  period" and  is particularly  relevant to                                                               
very  large and  long-life capex  projects, such  as major  deep-                                                               
water  development, liquefied  natural gas  developments, or  oil                                                               
sands projects. A company may be  putting capital out for four or                                                               
five years before production.                                                                                                   
                                                                                                                                
CO-CHAIR MICCICHE suggested  that might also be seen  in shale or                                                               
heavy oil production.                                                                                                           
                                                                                                                                
MR.  REINSCH  pointed  out  that   shale  projects  return  their                                                               
investment  very  quickly.  They  are  low  cost  wells  and  are                                                               
characterized  by  very  high  initial  flow  rates,  very  steep                                                               
declines,  and  very long  plateau  periods.  They attract  small                                                               
investors who can test their  theories and technological advances                                                               
and get  funds back quickly.  He noted that  Alaska has a  mix of                                                               
small investor projects and very large capex projects.                                                                          
                                                                                                                                
He said capex/boe, or cost  per barrel of production capacity, is                                                               
a measure  of a project  by accounting  for the capital  that was                                                               
spent or burdened  with shared facilities that  it is benefitting                                                               
from. It  tends to favor  developments that are less  complex and                                                               
less capital intensive.                                                                                                         
                                                                                                                                
1:33:31 PM                                                                                                                    
MR.  REINSCH spoke  of the  advantages of  NPV. One  advantage is                                                               
that  time  value  can  be incorporated.  It  can  be  calculated                                                               
exactly.  It can  accommodate risk  through discounting  of costs                                                               
and/or  revenue  flows.  It can  encompass  opportunity  cost  of                                                               
investment capital. The sole disadvantage  with NPV is that it is                                                               
difficult to  rank projects. Significantly different  capital and                                                               
expenditure profiles can  deliver the same NPV due  to the effect                                                               
of discounting.                                                                                                                 
                                                                                                                                
MR.  REINSCH defined  internal rate  of return  (IRR). It  is the                                                               
discount rate  that equates all  future cash inflows  to outflows                                                               
at a point, usually  the present. The value of an  IRR is that it                                                               
can be  compared to a required  minimum or hurdle rate.  It helps                                                               
companies  allocate  capital  within  a  portfolio  of  competing                                                               
opportunities.                                                                                                                  
                                                                                                                                
MR. REINSCH showed charts that  depict capital allocation and the                                                               
IRR  hurdle rate.  The projects  are ranked  from highest  IRR to                                                               
lowest IRR. Eligibility for consideration  for capital means that                                                               
all projects  are showing positive attributes.  For example, they                                                               
will  all  have  a  positive   NPV,  a  positive  return  to  the                                                               
investment dollar,  and acceptable payback terms.  Corporate will                                                               
establish a hurdle rate for IRR.  Projects with IRR's equal to or                                                               
greater than the hurdle rate will be undertaken.                                                                                
                                                                                                                                
1:37:33 PM                                                                                                                    
MR. REINSCH spoke of issues with  IRR hurdle rate. If there is an                                                               
increase  in  cash flow  from  high  oil  prices, there  is  more                                                               
available capex  to spend  on projects.  In that  case, companies                                                               
may  lower the  hurdle rate  and extend  their risk  horizon. The                                                               
problem is  that if the hurdle  rate is lowered, the  company may                                                               
be  taking  on   projects  that  are  less   lucrative  and  less                                                               
competitive.  This is  reflected  sometimes in  "cycles of  value                                                               
destruction" and  gaming the system.  He explained  problems with                                                               
projects that are exposed and generate low rates of return.                                                                     
                                                                                                                                
CO-CHAIR  MICCICHE asked  if larger  integrated companies  have a                                                               
higher IRR hurdle than smaller independents.                                                                                    
                                                                                                                                
MR. REINSCH suggested it was  the inverse; smaller companies tend                                                               
to be  risk companies. At  the other  end is ExxonMobil  that has                                                               
little  interest  in  risk.  Most  companies  fall  somewhere  in                                                               
between.                                                                                                                        
                                                                                                                                
MR.  REINSCH  related  what  "gaming  the  system"  means.  In  a                                                               
business  that  involves  attracting  capital, there  is  a  real                                                               
incentive  for project  managers  to overstate  the  size of  the                                                               
prize or  to understate  the cost. There  are standards  in place                                                               
that help to eliminate that behavior.                                                                                           
                                                                                                                                
1:41:20 PM                                                                                                                    
MR. REINSCH discussed return on  capital employed (ROCE). He said                                                               
it is the net profit before  interest and taxes, divided by gross                                                               
capital  employed,  times  100.  He  talked  about  upstream  and                                                               
corporate, and compared independents.                                                                                           
                                                                                                                                
He explained  return on capital  employed (ROCE) and  issues with                                                               
ROCE. He said  ROCE is a measure of how  successful and efficient                                                               
a company  is at investing the  money that has been  given to it.                                                               
ROCE tends to  increase with production and prices  and it favors                                                               
a mature portfolio.  He featured charts that  depict upstream and                                                               
corporate ROCE  amongst global players and  amongst independents.                                                               
The global  players compete  on efficiency  so ROCE  is extremely                                                               
important. The independents  compete on growth. There  is a great                                                               
difference between  ROCE for larger  global players, who  in 2011                                                               
averaged 20 percent, and independents who averaged 11 percent.                                                                  
                                                                                                                                
MR. REINSCH  spoke of issues  with ROCE. Major  capital projects,                                                               
which increase the  denominator in the equation,  will weaken the                                                               
ROCE performance. He said that ROCE favors mature assets.                                                                       
                                                                                                                                
SENATOR GARDNER asked  why ROCE favors mature assets  and at what                                                               
point  would  a  company  consider   stripping  off  assets.  She                                                               
wondered if Alaska is at that point.                                                                                            
                                                                                                                                
MR.  REINSCH  said   Alaska  is  an  interesting   mix  of  basin                                                               
opportunities due to the variety  of fields and situations. Field                                                               
life is  an economic concept.  He related that Alaska  has mature                                                               
fields,  enhanced recovery  opportunities,  new fields,  offshore                                                               
exploration, and stranded gas. There  are also unique contractual                                                               
structures.  The big  three  play  a part.  All  those are  facts                                                               
unique to Alaska.                                                                                                               
                                                                                                                                
1:48:00 PM                                                                                                                    
SENATOR GARDNER  asked if Mr.  Reinsch would talk more  about the                                                               
unique contractual structures.                                                                                                  
                                                                                                                                
MR. RAINSCH said that Mr. Mayer would address that issue.                                                                       
                                                                                                                                
CO-CHAIR MICCICHE  questioned the idea that  depreciation creates                                                               
bias  in favor  of a  mature  portfolio. He  asked if  investment                                                               
interest in a field were to  be regenerated, if the bias would be                                                               
eliminated.                                                                                                                     
                                                                                                                                
MR. REINSCH said  an enhanced recovery program of  a mature field                                                               
stands alone and does not receive  the benefit of the maturity of                                                               
the asset to  which that capital is being  deployed. The enhanced                                                               
recovery activity is a brand new  project. The company may or may                                                               
not burden  it with shared  facility costs. It is  an independent                                                               
decision.                                                                                                                       
                                                                                                                                
He used  BP's 40's field that  was sold to Apache  as an example.                                                               
That field  today has  produced out  all of  the reserves  it was                                                               
believed to have at purchase, and  it still has more reserves. It                                                               
was a tremendous  success for Apache and BP would  not have taken                                                               
it on.                                                                                                                          
                                                                                                                                
CO-CHAIR  MICCICHE commented  that with  the right  incentives, a                                                               
field could still draw investment.                                                                                              
                                                                                                                                
MR. REINSCH said the point is  that the investment has to compete                                                               
on its own.                                                                                                                     
                                                                                                                                
1:52:58 PM                                                                                                                    
CO-CHAIR  DUNLEAVY asked  if BP  left  the field  unaware of  the                                                               
reserves.                                                                                                                       
                                                                                                                                
MR.   REINSCH   explained   that  BP   recognized   the   field's                                                               
possibilities,  but  it   no  longer  had  an   interest  due  to                                                               
opportunities or  higher returns elsewhere. Apache,  on the other                                                               
hand, was in a capital spending phase.                                                                                          
                                                                                                                                
CO-CHAIR MICCICHE  asked if  there were  factors that  could have                                                               
been created to make the field competitive to BP.                                                                               
                                                                                                                                
MR.  REINSCH  replied that  neither  BP  nor Apache  foresaw  the                                                               
dramatic  increase in  crude oil  prices  over the  life of  that                                                               
asset. High oil prices have  saved a number of otherwise marginal                                                               
investment decisions.  Gas prices in North  America currently are                                                               
bringing  into  question  what otherwise  would  have  been  good                                                               
investments  in  on shore  development.  He  could not  say  that                                                               
Apache saw  something BP did not.  Apache had a different  set of                                                               
global  opportunities  they  had  captured and  were  looking  to                                                               
allocate capital towards.                                                                                                       
                                                                                                                                
CO-CHAIR DUNLEAVY  asked if sometimes smaller  companies are less                                                               
risk adverse.                                                                                                                   
                                                                                                                                
MR. REINSCH  agreed, but for  this example  it was more  a matter                                                               
that the  40's field was an  asset to Apache and  the acquisition                                                               
became the  focus of their company.  It was less of  a risk issue                                                               
and more of a capital focus issue.                                                                                              
                                                                                                                                
SENATOR  GARDNER  asked   if  this  is  an   example  of  natural                                                               
progression in field development.                                                                                               
                                                                                                                                
MR. REINSCH said  yes, especially in North  America. The industry                                                               
has  developed in  this manner.  He described  a variety  of ways                                                               
consolidation takes place.                                                                                                      
                                                                                                                                
SENATOR GARDNER asked  if there is a period of  time between when                                                               
assets mature and companies are ready to divest and move on.                                                                    
                                                                                                                                
MR. REINSCH  called it "harvesting"  when a field  generates free                                                               
cash flow that is being invested  elsewhere. He used the UK North                                                               
Sea as an  example of a harvest portfolio  within global players;                                                               
however, for  other companies the  UK is considered a  focus area                                                               
for growth and development as they acquire UK North Sea assets.                                                                 
                                                                                                                                
1:59:32 PM                                                                                                                    
SENATOR GARDNER  requested information about when  the UK changed                                                               
its  tax regime  and investment  increased. She  wondered if  the                                                               
investment  increased  for  harvest  producers  or  in  the  next                                                               
generation of producers.                                                                                                        
                                                                                                                                
MR.  REINSCH explained  that the  UK government  uses its  fiscal                                                               
system for  behavior modification to incentivize  exploration and                                                               
development. He termed that method  "a risky game" because fiscal                                                               
system changes have unforeseen consequences.                                                                                    
                                                                                                                                
CO-CHAIR MICCICHE  said a  recent uptick  in the  UK was  that it                                                               
incentivized  current players  in order  to increase  production,                                                               
similar to  what Alaska is  proposing to  do. He said  he thought                                                               
that was what Senator Gardner was referring to.                                                                                 
                                                                                                                                
MR. REINSCH  said that was  true. All production profiles  of the                                                               
major  company portfolios  in the  North Sea  have been  trending                                                               
downwards for a  decade regardless of incentives.   All companies                                                               
have  been generating  cash flow  to  invest elsewhere.  Offering                                                               
incentives for small companies looking  to grow portfolios in the                                                               
UK has had a positive impact.                                                                                                   
                                                                                                                                
SENATOR GARDNER asked if SB 21  would cause that same effect - of                                                               
the majors investing elsewhere.                                                                                                 
                                                                                                                                
MR. REINSCH  stressed that the  capital allocation decision  is a                                                               
relative  decision.   He  said,   "If  you  are   augmenting  the                                                               
investment  activity in  a particular  field or  basin, all  else                                                               
being  equal, you  will improve  the chances  of that  investment                                                               
activity attracting capital within  a global portfolio." He added                                                               
that  a good  way  to  attract capital  is  by enhancing  project                                                               
economics; improving IRR and NPV.                                                                                               
                                                                                                                                
2:04:46 PM                                                                                                                    
CO-CHAIR  DUNLEAVY referred  to a  model where  levers are  used,                                                               
such  as in  the UK  and Alberta.  He asked  if Alaska  is viewed                                                               
similarly.                                                                                                                      
                                                                                                                                
MR. MAYER  responded that the  UK is characterized as  being very                                                               
high in terms of sovereign  risk due to constantly changing terms                                                               
and  in terms  of  regimes  where governments  pull  levers at  a                                                               
micro-level, rather  than simply setting broad  and stable terms.                                                               
He  said   Alaska  is   also  characterized   that  way;   it  is                                                               
characterized  as  a  regime  that is  not  competitive  and  not                                                               
attractive. He gave  an example of the use of  a "lever" when the                                                               
state proposed a tax credit for the  best jack up rig in the Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
CO-CHAIR DUNLEAVY  asked if the view  of Alaska is that  it likes                                                               
to tinker.                                                                                                                      
                                                                                                                                
MR. MAYER agreed.                                                                                                               
                                                                                                                                
CO-CHAIR DUNLEAVY asked if that enhances investment or not.                                                                     
                                                                                                                                
MR.  MAYER  explained when  a  company  is making  large  capital                                                               
investments that  repay over decades,  what is most  important is                                                               
stability  in fiscal  terms. He  gave an  example of  Pioneer and                                                               
Oooguruk with  good economics under  ELF, and then less  so under                                                               
PPT, followed by challenging economics under ACES.                                                                              
                                                                                                                                
CO-CHAIR  DUNLEAVY stated  that Alaska  has plays  such as  those                                                               
that  are  found elsewhere  in  the  world.  He inquired  if  the                                                               
industry views Alaska as having a lot of potential.                                                                             
                                                                                                                                
MR.  REINSCH   said  yes.   For  example,   Alaska  is   core  to                                                               
ConocoPhillips. He  added that Alaska  has a lot  of opportunity,                                                               
but  also  has  a  challenging operating  environment.  Entry  to                                                               
Alaska is difficult  because there is not a lot  of asset sharing                                                               
or opportunities  for new players  to position in  mature assets.                                                               
High   potential   growth   opportunities,  such   as   deepwater                                                               
exploration, are very challenging, as is the Arctic paradigm.                                                                   
                                                                                                                                
He noted  the technology of  gas commercialization is  giving new                                                               
life to Alaska.  He said there are many  opportunities in Alaska.                                                               
He agreed with Mr. Mayer that stability is key.                                                                                 
                                                                                                                                
CO-CHAIR DUNLEAVY asked  for an example of a place  that does not                                                               
tinker.                                                                                                                         
                                                                                                                                
MR.  MAYER said  there were  many examples.  He used  Australia's                                                               
federalized  system  and U.S.  federal  offshore  as examples  of                                                               
straightforward  systems  with  well-designed tax  systems.  They                                                               
shed risk from  the government and put it on  the private sector.                                                               
He  described the  economics of  a system  that rewards  for that                                                               
risk with no micromanaging and has long-term stability.                                                                         
                                                                                                                                
2:16:35 PM                                                                                                                    
CO-CHAIR MICCICHE  asked why Texas's conventional  oil production                                                               
has  increased, while  Alaska's has  declined. Both  states enjoy                                                               
the  increase  in  the  price  of  oil.  He  questioned  why  the                                                               
economics in Texas are more attractive than Alaska's.                                                                           
                                                                                                                                
MR.  MAYER  explained that  two  things  make the  production  of                                                               
conventional  and unconventional  oil more  attractive in  Texas:                                                               
lower cost of drilling and lower government take.                                                                               
                                                                                                                                
MR. REINSCH  began part  2 of  the presentation,  which addresses                                                               
the  global  strategy  and portfolio  overview  of  major  Alaska                                                               
producers: BP,  ConocoPhillips, and ExxonMobil. He  said he would                                                               
discuss portfolio  composition and the growth/capex  focus of the                                                               
major  companies. He  said  he would  answer  the question  about                                                               
where these  companies are  looking to grow  and which  plays and                                                               
basins  are  attracting investment  capital.  He  noted that  the                                                               
majors   in   Alaska  are   amongst   the   ten  largest   global                                                               
international oil  and gas companies.  ExxonMobil is  the largest                                                               
of all companies  and the largest privately traded  entity in the                                                               
world. Each  of the  major companies  in the  last three  to four                                                               
years, has hit a major strategic wall.                                                                                          
                                                                                                                                
MR. REINSCH  began with  BP and  its challenges.  He said  BP has                                                               
taken the  disaster in the Gulf  of Mexico and turned  it into an                                                               
opportunity by  repositioning its portfolio globally.  They sold,                                                               
and bought back, roughly $30  billion in assets and changed their                                                               
growth  strategy: deepwater  basins,  global gas,  and giant  oil                                                               
fields. On  a performance basis, BP  exposed a lot of  capital to                                                               
grow. It  agreed to sell  its Russian production and  reinvest in                                                               
Rosneft, focusing on the Arctic play.                                                                                           
                                                                                                                                
He  turned to  a chart  that shows  BP's focus  areas and  a very                                                               
large exit portfolio.                                                                                                           
                                                                                                                                
2:23:36 PM                                                                                                                    
CO-CHAIR MICCICHE asked why UK  is considered only a harvest area                                                               
in BP's portfolio.                                                                                                              
                                                                                                                                
MR. REINSCH showed a chart  of regional trajectories, which shows                                                               
a  European decline  in production  for  BP. The  reality of  the                                                               
North Sea decline  is because BP takes free cash  flow from there                                                               
and reinvests it in other areas,  such as Africa or in the Middle                                                               
East.  He pointed  out that  BP's  future growth  will come  from                                                               
elsewhere.                                                                                                                      
                                                                                                                                
SENATOR GARDNER  asked, if  Alaska is pulled  out from  the North                                                               
American data, whether the profile  would look the same as Europe                                                               
or different.                                                                                                                   
                                                                                                                                
MR. REINSCH replied  that it would look a lot  like Europe with a                                                               
large decline.                                                                                                                  
                                                                                                                                
SENATOR GARDNER  pointed out that  in Norway the  government take                                                               
is higher or comparable to Alaska's.  In spite of the UK's recent                                                               
reduction  in government  take, the  profile shows  a decline  in                                                               
production out to 2020.                                                                                                         
                                                                                                                                
MR. REINSCH  agreed. He said  this data consists of  PFC Energy's                                                               
modeling  of  each  company's  portfolio  and  does  not  include                                                               
forward exploration success.                                                                                                    
                                                                                                                                
CO-CHAIR  MICCICHE asked  what  is different  about  Alaska -  so                                                               
Alaska  could  expect  greater  fiscal  certainty  in  a  reduced                                                               
government take. He inquired about  the probability of Alaska not                                                               
ending up looking like the UK.                                                                                                  
                                                                                                                                
MR.  MAYER  explained  that  the   major  differentiator  is  the                                                               
enormous  potential in  Alaska, even  with challenging  access to                                                               
the  resources. He  noted that  there are  many future  unknowns,                                                               
such as future of the shale resource.                                                                                           
                                                                                                                                
CO-CHAIR MICCICHE asked  if the investment world  accepts that UK                                                               
does not have the same potential.                                                                                               
                                                                                                                                
MR.  MAYER replied  that the  UK is  not deemed  to have  similar                                                               
resources.                                                                                                                      
                                                                                                                                
2:30:07 PM                                                                                                                    
MR.  REINSCH added  that the  UK/North  Sea has  reached a  stage                                                               
where   the  remaining   resource  basin   and  the   field  size                                                               
distribution  is material  for  smaller companies.  Alaska has  a                                                               
very different reality.                                                                                                         
                                                                                                                                
2:31:22 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
2:50:17 PM                                                                                                                    
MR. REINSCH turned to global  areas of upstream operations by BP.                                                               
He  reviewed  the  types of  operations  depicted:  core,  focus,                                                               
harvest, or new venture.                                                                                                        
                                                                                                                                
He  explained a  graph  that  shows BP's  production  and how  it                                                               
compares  to the  competition. He  pointed out  that BP  has been                                                               
through a  tremendous change. He  said the impact of  its Russian                                                               
portfolio sale, TNK-BP, would yield  a production floor of 2.3 to                                                               
2.4  million barrels  a day  (mmboe), a  tremendous decrease.  If                                                               
they  are  successful in  positioning  within  Rosneft, BP  would                                                               
receive  that millions  of  barrels  a day  back  by securing  20                                                               
percent equity stake in Rosneft.                                                                                                
                                                                                                                                
He showed a chart called  regional trajectories of BP's. It shows                                                               
growing  trends;   where  the  company  has   been  focused.  The                                                               
assumption is  that BP  would reposition  in Rosneft.  He related                                                               
growth in various areas and said that  BP is looking for a lot of                                                               
capital  investment, both  in unconventional  resources plays  in                                                               
the  Lower 48  and  in  the oil  sands  development potential  in                                                               
Canada.                                                                                                                         
                                                                                                                                
He highlighted BP's portfolio in Alaska.                                                                                        
                                                                                                                                
He turned to  BP Alaska activity and PFC  Energy's assessment. He                                                               
explained that Alaska is considered  a harvest area. He suggested                                                               
focusing on  PFC Energy's assessment  of BP,  "Current production                                                               
volumes are  modest and declining. Significant  potential lies in                                                               
the long-term commercialization of  Prudhoe and Point Thomson gas                                                               
resources.  Cancellation  of  the Denali  gas  pipeline  proposal                                                               
leaves BP as a potential  supplier to an alternative pipeline/LNG                                                               
export option, should one be approved and developed."                                                                           
                                                                                                                                
2:55:47 PM                                                                                                                    
He focused on BP's six challenges,  as identified by PFC: bring a                                                               
close  to the  portfolio rationalization  process, reposition  in                                                               
Russia,   develop  a   deepwater  partnership   in  Brazil   with                                                               
Petrobras,  develop the  U.S.  unconventional  gas resource,  and                                                               
accelerate  the  development  of  oil  sands  leases  in  Western                                                               
Canada.                                                                                                                         
                                                                                                                                
MR. REINSCH moved  on to discuss ConocoPhillips.  He related that                                                               
in 2010 ConocoPhillips  committed to execute on  a full portfolio                                                               
repositioning   plan  that   has   resulted   in  a   significant                                                               
divestiture  of  assets.  It included  a  departure  from  equity                                                               
interest in  LUKOIL, the entire  proceeds which were  put towards                                                               
debt  reduction and  shareholder returns.  This approach  is very                                                               
different from BP's approach.                                                                                                   
                                                                                                                                
He  continued  to  say  that   in  2011  and  executed  in  2012,                                                               
ConocoPhillips separated the company  into two separate corporate                                                               
entities.  The  net impact  has  been  a significant  decline  in                                                               
production. The company  is looking to grow  from global gas/LNG,                                                               
oil sands, and unconventional resource development.                                                                             
                                                                                                                                
MR. REINSCH looked at ConocoPhillips'  global portfolio, or areas                                                               
of upstream operations.  He said the company  sees that deepening                                                               
their  position  in  relatively stable,  above  ground  operating                                                               
environments, separates them from  their competitors. Their asset                                                               
divestitures have  been largely  focused on  moving out  of areas                                                               
that did not fit that goal.                                                                                                     
                                                                                                                                
He looked at the total  portfolio evolution for ConocoPhillips as                                                               
a pure play independent versus  their competition. He described a                                                               
chart  that  shows  rapid  growth  from 2001  until  2011  and  a                                                               
forecast of staying at 2011 production levels in 2016.                                                                          
                                                                                                                                
He   presented   a   chart   with   regional   trajectories   for                                                               
ConocoPhillips.  He  detailed  seven focus  areas:  Asia-Pacific,                                                               
Europe,  Latin America,  Middle  East &  North  Africa, Russia  &                                                               
Central  Asia,   and  Sub-Saharan  Africa.  He   emphasized  that                                                               
activity  in Alaska  is core  to  ConocoPhillip's portfolio.  The                                                               
future  of  natural  gas   commercialization  has  a  significant                                                               
bearing to the success of their company.                                                                                        
                                                                                                                                
3:00:59 PM                                                                                                                    
CO-CHAIR MICCICHE  asked why  BP and  ConocoPhillips are  in exit                                                               
mode from Russia, whereas ExxonMobil is not.                                                                                    
                                                                                                                                
MR. REINSCH  replied that BP  exited the TNK-BP joint  venture in                                                               
Russia, which was  a monetization play, as much  as anything. The                                                               
TNK-BP portfolio was a very  mature, onshore portfolio and made a                                                               
lot of  money. He explained  that BP  is not leaving  Russia, but                                                               
taking proceeds to buy a 20 percent equity interest in Rosneft.                                                                 
                                                                                                                                
He  said  that ConocoPhillips,  however,  is  truly leaving.  Its                                                               
equity  investment with  LUKOIL did  not bring  expected returns.                                                               
ExxonMobil is a single asset player  in Russia. All of the majors                                                               
are looking at the Arctic.                                                                                                      
                                                                                                                                
3:03:31 PM                                                                                                                    
MR. REINSCH looked at challenges  ConocoPhillips is dealing with:                                                               
competing  as   a  "pure  play"   E  &  P   company,  effectively                                                               
positioning in high value  areas, defining operational strengths,                                                               
effectively   managing  base   production,  and,   their  biggest                                                               
challenge, delivering production growth.                                                                                        
                                                                                                                                
CO-CHAIR MICCICHE welcomed Senator French.                                                                                      
                                                                                                                                
MR.  REINSCH provided  an overview  of  ExxonMobil. He  described                                                               
difficult situations  in global unconventional areas  like Qatar,                                                               
Brazil, and  Venezuela. He  related that  ExxonMobil made  a very                                                               
aggressive move  of a $40  billion acquisition of XTO  Energy. He                                                               
concluded that ExxonMobil  is a company that has  had to redefine                                                               
itself.                                                                                                                         
                                                                                                                                
3:07:28 PM                                                                                                                    
He  looked  at  ExxonMobil's portfolio,  listing  core,  harvest,                                                               
focus, and new  ventures. The company is  constantly churning its                                                               
portfolio to move non-core, non-material assets out.                                                                            
                                                                                                                                
He said ExxonMobil  is by far the largest  producer. He described                                                               
their  total  portfolio  evolutions  and  compared  them  to  the                                                               
competition.  He  noted  less  emphasis  on  "return  on  capital                                                               
employed - a little more emphasis on growth."                                                                                   
                                                                                                                                
He  looked  at  regional  trajectories for  ExxonMobil  in  seven                                                               
regions of  the world.  He pointed  out that  ExxonMobil's Europe                                                               
profile looks similar to BP  and ConocoPhillips. Volume growth is                                                               
focused on North America. There is  growth in Asia Pacific due to                                                               
LNG development ventures.                                                                                                       
                                                                                                                                
3:10:36 PM                                                                                                                    
He  looked  at  ExxonMobil's  Alaska activity  and  PFC  Energy's                                                               
assessment of  that activity. Alaska  is designated as  a harvest                                                               
designation. PFC's  assessment reads,  "As the largest  holder of                                                               
discovered gas resources on the  North Slope and a co-operator of                                                               
the Prudhoe  Bay Western Region  development, ExxonMobil  holds a                                                               
leading  position in  Alaska.  Maintaining  and growing  upstream                                                               
investment increasingly hinges  on a gas commercialization/export                                                               
scheme."                                                                                                                        
                                                                                                                                
He  showed a  chart that  summarized the  three majors'  share of                                                               
U.S., Alaska, and global production.                                                                                            
                                                                                                                                
3:11:50 PM                                                                                                                    
MR. MAYER began a presentation  about Alaska's fiscal regime in a                                                               
global competitive  context and how ACES  and SB 21 fit  into the                                                               
picture.                                                                                                                        
                                                                                                                                
He showed  a graph that  depicts how  fixed-royalty jurisdictions                                                               
in  the  Lower  48  area  are a  key  competitor  to  Alaska  for                                                               
investment dollars.  It is now  an exception not to  be targeting                                                               
unconventionals in North  America as a major  growth platform. He                                                               
called them  fixed royalty  regimes and  all have  low government                                                               
take that decreases as prices rise.                                                                                             
                                                                                                                                
He showed  how Alaska's days of  "easy oil" are gone.  High costs                                                               
and   high  government   take  present   challenges.  Costs   are                                                               
significantly  higher in  Alaska  than  in the  Lower  48 -  even                                                               
compared to unconventionals.  Meanwhile, Alaska's government take                                                               
has  risen  significantly  over  recent  years.  He  suggested  a                                                               
further look be taken at global  economics in order to meet those                                                               
challenges.                                                                                                                     
                                                                                                                                
MR. MAYER defined  divisible income as gross  revenues less cost,                                                               
including capex and transportation.  Government take includes all                                                               
payments the government  mandates in its function  as a sovereign                                                               
including   royalties,   land   rental  fees,   property   taxes,                                                               
production taxes,  and income taxes. Relative  government take is                                                               
government take divided by divisible income.                                                                                    
                                                                                                                                
MR.  MAYER  showed a  graph  that  depicts fixed  royalty  versus                                                               
profit  based  fiscal systems.  He  concluded  that a  high  cost                                                               
project in a given oil environment,  or one single project as the                                                               
oil price  moves, is  going to face  a very  different government                                                               
take in  those different circumstances.  He pointed out  that the                                                               
chart  on the  left shows  the incidence  of a  30 percent  fixed                                                               
royalty for a single project,  under five price environments. The                                                               
chart on  the right shows the  incidence of a 50  percent profit-                                                               
based tax on five different price environments.                                                                                 
                                                                                                                                
3:20:59 PM                                                                                                                    
He noted that the fixed  royalty system is inherently regressive.                                                               
There are  many benefits to  the private  investor on a  low cost                                                               
project or  a high price environment.  In a high cost  project or                                                               
low  price  environment  the private  investor  does  poorly.  By                                                               
contrast, the basic  nature of the profit-based  system in Alaska                                                               
is one  that tries to more  evenly have a more  stable government                                                               
take.                                                                                                                           
                                                                                                                                
He showed  a chart that  compares Alaska's government  take under                                                               
ACES with  the take of  global fiscal regimes at  $60/bbl. Alaska                                                               
is shown  in red.  At $60/bbl under  ACES, government  take looks                                                               
moderate due to a fixed royalty  at high costs. At $100/bbl, both                                                               
for a new  producer and for an existing producer,  Alaska has the                                                               
highest government take of any OECD country other than Norway.                                                                  
                                                                                                                                
SENATOR GARDNER asked if the data includes lease costs.                                                                         
                                                                                                                                
MR.  MAYER  said   lease  costs  are  included   in  the  overall                                                               
economics, but are not done on an "unrisked basis."                                                                             
                                                                                                                                
SENATOR GARDNER said it was slightly distorted.                                                                                 
                                                                                                                                
MR. MAYER agreed, as it applies to the Gulf of Mexico.                                                                          
                                                                                                                                
SENATOR GARDNER  asked if it  includes that Alaska is  sharing in                                                               
the risk under ACES through the credit system.                                                                                  
                                                                                                                                
MR.  MAYER  replied  that  those  credits  are  included  in  the                                                               
analysis. He added that costs  against existing production reduce                                                               
government take. That benefit does not  apply to a new entrant to                                                               
Alaska. He  noted that "these  are stand-alone economics"  for an                                                               
existing  producer based  on their  base  portfolio or  of a  new                                                               
producer.  There  is  no incremental  analysis  for  an  existing                                                               
producer.                                                                                                                       
                                                                                                                                
3:27:42 PM                                                                                                                    
CO-CHAIR MICCICHE  commented that a new  entrant is disadvantaged                                                               
under ACES until about $140/bbl regarding government take.                                                                      
                                                                                                                                
MR. MAYER responded it relates  to the economics of having higher                                                               
costs.                                                                                                                          
                                                                                                                                
He  said  at  $120/bbl,  for  new  development  under  ACES,  the                                                               
government take is the highest of any area.                                                                                     
                                                                                                                                
CO-CHAIR MICCICHE said at $120  it is highest for new development                                                               
and just below Norway for existing producers.                                                                                   
                                                                                                                                
MR. MAYER agreed.  He said at $160/bbl,  Alaska's government take                                                               
is greater than Venezuela's.                                                                                                    
                                                                                                                                
MR.  MAYER  looked  at  the components  of  government  take  for                                                               
existing production  under ACES.  The tables  show the  impact of                                                               
credits.  Credits are  a way  in which  the state  shares in  the                                                               
downside risk of  all price environments, but takes  a very large                                                               
share of the benefit at high oil prices.                                                                                        
                                                                                                                                
CO-CHAIR MICCICHE asked  if at a low price  environment - $60/bbl                                                               
to $70/bbl  - the  state take  is about  half of  that in  a high                                                               
price  environment -  $110/bbl to  $120/bbl. He  stated that  the                                                               
production   tax  dramatically   declines   in   a  lower   price                                                               
environment.                                                                                                                    
                                                                                                                                
MR. MAYER  drew attention to the  wedge shape of the  yellow bars                                                               
on  the graph  that  shows how  progressivity affects  government                                                               
take.  He compared  how  government  take would  look  for a  new                                                               
investor under ACES.                                                                                                            
                                                                                                                                
He showed  a cash flow analysis  for new development at  $100 ANS                                                               
West Coast under  ACES. He said he is working  with the same data                                                               
Econ One used so that the models would align.                                                                                   
                                                                                                                                
SENATOR  GARDNER asked  to see  the chart  as it  would apply  to                                                               
legacy fields.                                                                                                                  
                                                                                                                                
3:36:58 PM                                                                                                                    
MR. MAYER  said such a  chart would  be less interesting,  but he                                                               
could provide that information.  Existing production in Alaska is                                                               
not as  profitable as large mature  assets in other parts  of the                                                               
world.                                                                                                                          
                                                                                                                                
MR.  MAYER  discussed  government take  for  existing  production                                                               
under SB  21. He noted the  graph is nearly completely  flat, but                                                               
slightly  regressive  without   progressivity.  At  $100/bbl  the                                                               
government  take  is  about  $60.   It  looks  similar  with  new                                                               
development. Under  ACES there is  limited ability to  use profit                                                               
based tax.  He described the  method of determining  that amount.                                                               
The  best way  to  incentivize new  development  is to  calculate                                                               
production tax.                                                                                                                 
                                                                                                                                
He explained a cash flow analysis  on new development under SB 21                                                               
using $100 bbl.  He compared it to ACES  with significant capital                                                               
development  but  negative  government  take.  Under  SB  21  the                                                               
project has better  rates of return. In the early  years there is                                                               
no benefit from capital credit.                                                                                                 
                                                                                                                                
3:45:53 PM                                                                                                                    
MR.   MAYER   addressed   regime  competitiveness   and   average                                                               
government take  at $60/bbl,  and up to  $160/bbl. Under  ACES at                                                               
$60/bbl  for   existing  producers   and  for   new  development,                                                               
government  take  is actually  lower  than  under SB  21  because                                                               
progressivity has  yet to kick in.  He said that SB  21 maintains                                                               
an even  take of 60  percent at about  $120, while the  take gets                                                               
continually higher.                                                                                                             
                                                                                                                                
CO-CHAIR  MICCICHE  requested  the  average  for  OECD  at  those                                                               
prices.                                                                                                                         
                                                                                                                                
MR. MAYER offered to provide that information.                                                                                  
                                                                                                                                
CO-CHAIR MICCICHE said it would be useful for comparison.                                                                       
                                                                                                                                
MR. MAYER addressed  making SB 21 more neutral at  the 66 percent                                                               
level  of   government  take,  such   as  if   progressivity  was                                                               
introduced back into the regime.  He showed a graph of government                                                               
take for  existing production  if progressivity  was reintroduced                                                               
at the  0.1 percent  level from  $30 PTV/bbl to  a maximum  of 35                                                               
percent.                                                                                                                        
                                                                                                                                
He  showed  a  graph  that  made  the  same  comparison  for  new                                                               
development and a graph depicting  the cash flow analysis for new                                                               
development with reintroduced progressivity.                                                                                    
                                                                                                                                
MR. MAYER  explained credits and  deductions. The  current credit                                                               
system is necessary  in ACES to offset high  government take, but                                                               
it introduces  numerous distortions and  unintended consequences.                                                               
The best example of this  relates to incentives for cost control,                                                               
when  one  combines  the  progressive nature  of  ACES  with  the                                                               
credits  that  exist.   The  best  example  is   the  40  percent                                                               
exploration credit.                                                                                                             
                                                                                                                                
In low price environments, or  in the case of significant success                                                               
attracting   new  producers   to  the   North  Slope,   it  poses                                                               
significant cash flow risk to the state.                                                                                        
                                                                                                                                
CO-CHAIR MICCICHE asked if "under  the current system" means ACES                                                               
and if it was  part of an effort to control  the downside risk to                                                               
the state for credit payouts.                                                                                                   
                                                                                                                                
MR.  MAYER  agreed.  He  said  that  risk  under  ACES  would  be                                                               
eliminated in SB 21.                                                                                                            
                                                                                                                                
He  continued to  say  that eliminating  the  20 percent  capital                                                               
credit  may   pose  greater  issues  for   small,  more  capital-                                                               
constrained producers.                                                                                                          
                                                                                                                                
3:54:07 PM                                                                                                                    
CO-CHAIR MICCICHE  questioned the  statement, "If  capital credit                                                               
were to be retained in some form,  it may be desirable to end the                                                               
ability to claim directly from the state."                                                                                      
                                                                                                                                
MR. MAYER explained  there were a number of ways  to do that. For                                                               
example,  a  small  producer  could  sell  credits  to  a  larger                                                               
company. He  said the  next step  would be  to offer  credits for                                                               
future production.                                                                                                              
                                                                                                                                
He spoke of  the benefits of differentiating  between the various                                                               
credits.  He   said  credits  could  be   targeting  to  specific                                                               
development activity, but he cautioned  against it. He said SB 21                                                               
is appealing  in that  it strips  out the  complexity of  the tax                                                               
regime.  He  maintained it  is  not  always easy  to  distinguish                                                               
between maintenance and development spending.                                                                                   
                                                                                                                                
He  discussed  if current  deductions  should  be allowed  -  for                                                               
instance, in the case of the  pipeline tariff, which is likely to                                                               
be problematic  and add  complexity for  little gain.  He weighed                                                               
the advantages and disadvantages of  allowing a credit. He opined                                                               
that a simple regime has benefits.                                                                                              
                                                                                                                                
4:00:07 PM                                                                                                                    
MR.  MAYER  concluded  that Alaska's  future  petroleum  revenues                                                               
depend  on sensitivities  to oil  price, production  decline, and                                                               
fiscal terms.  He stated  that the  biggest sensitivity  is crude                                                               
oil  price.  It  is  the major  determinant  of  Alaska's  future                                                               
petroleum revenues.  He showed  a graph  with Alaska's  crude oil                                                               
production forecast.                                                                                                            
                                                                                                                                
CO-CHAIR DUNLEAVY asked if 2032 should be 2022.                                                                                 
                                                                                                                                
MR. MAYER said yes.                                                                                                             
                                                                                                                                
He  stated that  the other  major determinant  regarding Alaska's                                                               
future petroleum revenues  is the rate of decline  of North Slope                                                               
production. He  said fiscal terms  changes have a  smaller impact                                                               
than  oil prices  and the  decline rate.  He emphasized  that the                                                               
state  should  work  to stimulate  new  production  by  improving                                                               
fiscal terms.  If an  improvement in  fiscal terms  can stimulate                                                               
sufficient new investment  to stem declines, it has  the long run                                                               
potential to increase revenue, despite  the near-term cost of the                                                               
change.                                                                                                                         
                                                                                                                                
He said  to maintain revenues to  the state at a  steady level in                                                               
real terms, a reduction in government  take such as that under SB
21 would need  to spur sufficient investment to  reduce the North                                                               
Slope base  decline from  6 percent, as  currently forecast  to 1                                                               
percent. Re-introducing  0.1 percent progressivity into  SB 21 to                                                               
a  maximum  of 35  percent  production  tax would  require  lower                                                               
additional  production  post  2017  to  be  revenue  neutral.  To                                                               
maintain revenues to  the state at a steady level  in real terms,                                                               
a reduction  in government take such  as that under SB  21 with 1                                                               
percent progressivity  would need  to spur  sufficient investment                                                               
to  reduce  the  North  Slope  base decline  from  6  percent  as                                                               
currently forecast to 2 percent.                                                                                                
                                                                                                                                
He showed  graphs that  depicted both scenarios  under SB  21 and                                                               
tables that show incremental production  needed to be added every                                                               
year with and without progressivity.                                                                                            
                                                                                                                                
4:06:50 PM                                                                                                                    
CO-CHAIR  MICCICHE thanked  the  presenters  and asked  committee                                                               
members to submit further questions.                                                                                            
                                                                                                                                
4:07:17 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
4:39:59 PM                                                                                                                    
CO-CHAIR  MICCICHE  reconvened  the  meeting  and  opened  public                                                               
testimony. He  reminded that the  committee was looking at  SB 21                                                               
with regard to how it affects TAPS throughput.                                                                                  
                                                                                                                                
4:42:28 PM                                                                                                                    
TONY TENGS,  representing himself, testified in  opposition to SB
21.  He said  he  was  speaking in  support  of  ACES. He  quoted                                                               
Governor Parnell  who emphasized Alaska's healthy  economy and is                                                               
one  of  the  best  run  governments in  the  nation.  Mr.  Tengs                                                               
attributed that success  to the benefits from  ACES. He suggested                                                               
that Alaska begin thinking like  a country, such as Norway, which                                                               
has a higher government take than  Alaska's. He spoke in favor of                                                               
letting Alaska continue to receive the benefits from ACES.                                                                      
                                                                                                                                
4:46:02 PM                                                                                                                    
PAM BRODIE,  representing herself, encouraged the  legislature to                                                               
protect  the public's  interest for  the long  term. She  said it                                                               
seems  unlikely  that SB  21  is  in  the long-term  interest  of                                                               
Alaskans.                                                                                                                       
                                                                                                                                
4:48:49 PM                                                                                                                    
ROBERTA HIGHLAND,  President, Kachemak Bay  Conservation Society,                                                               
testified in strong opposition to SB  21. She spoke in support of                                                               
ACES  and  recommended that  state  use  those funds  wisely  for                                                               
renewable energy.                                                                                                               
                                                                                                                                
4:50:46 PM                                                                                                                    
PATRICK   SCHLICHTING,   representing   himself,   testified   in                                                               
opposition to SB  21. He said ACES gave Alaska  a fair settlement                                                               
and allowed  the state to  maintain its  infrastructure. Governor                                                               
Parnell introduced a bill several  years ago and has been focused                                                               
on  it since.  He stated  that nothing  is broken  with ACES  and                                                               
nothing needs to be fixed.                                                                                                      
                                                                                                                                
4:54:34 PM                                                                                                                    
DAVID OTNESS,  representing himself,  testified in  opposition to                                                               
SB  21. He  said  the  current direction  is  detrimental to  the                                                               
state.  The  Governor's  bill  will create  a  welfare  state  in                                                               
Alaska. The producers are making  the same claims in North Dakota                                                               
as here. It is not in Alaska's best interest to pass SB 21.                                                                     
                                                                                                                                
4:57:28 PM                                                                                                                    
KELLY   WALTERS,  representing   himself,  testified   in  strong                                                               
opposition to SB 21. He stated  for the record that he took issue                                                               
with  Senator  Micciche's  statement  that  he  did  not  have  a                                                               
conflict  of interest.  He  said  that eliminating  progressivity                                                               
will rob Alaskans.  Removing the capital credit will  result in a                                                               
harvest mode.  Under ACES  there has  been record  employment and                                                               
numerous successes on the North Slope for three years.                                                                          
                                                                                                                                
5:00:35 PM                                                                                                                    
RACHAEL  PETRO,  President  and  CEO,  Alaska  State  Chamber  of                                                               
Commerce, testified  in support of  revising the current  oil tax                                                               
policy. Alaska has  a responsibility to be competitive  and get a                                                               
fair return for  its citizens. This legislation  is an investment                                                               
in Alaska's long-term sustainability.                                                                                           
                                                                                                                                
5:03:27 PM                                                                                                                    
WILLIAM WARREN, representing himself, said  he had been active on                                                               
instate gas  for years.  He said  the Governor,  the legislature,                                                               
and industry have  let the citizens down. The big  boys left Cook                                                               
Inlet and  just the small ones  are left. The chair  is correct -                                                               
we're  all in  the oil  and gas  business. He  spoke in  favor of                                                               
getting  the instate  gas line  in place  and taking  action this                                                               
year or everyone  will be looking for new jobs.  He said the eyes                                                               
of Alaska are upon you.                                                                                                         
                                                                                                                                
5:06:27 PM                                                                                                                    
RICHARD  JACOB   MAENPA,  representing   himself,  said   he  was                                                               
testifying in support of anything  that would make it possible to                                                               
work  and stay  in Alaska.  He  was worried  about the  declining                                                               
throughput. He  said at  some point  TAPS will  fail. He  said he                                                               
supported taking  action on  SB 21 or  any legislation  that will                                                               
increase throughput.                                                                                                            
                                                                                                                                
5:08:30 PM                                                                                                                    
STEVE GIBSON,  representing himself,  testified in  opposition to                                                               
SB 21. He  said it appears that ACES is  fairer than the proposal                                                               
under SB 21. The long term  effects of SB 21 are hopeful, nothing                                                               
more.                                                                                                                           
                                                                                                                                
5:10:23 PM                                                                                                                    
GEORGE PIERCE,  representing himself, testified in  opposition to                                                               
SB 21.  He said not to  give the oil companies  incentives unless                                                               
they are  given on  a performance  basis. If  it weren't  for the                                                               
Senate last year,  the citizen's resources would  have been given                                                               
away.                                                                                                                           
                                                                                                                                
ERIC TREITER,  representing himself,  testified in  opposition to                                                               
SB 21. He  said the oil companies are good  at producing profits.                                                               
Tax breaks are  fine if they are tied  to performance objectives.                                                               
He concluded that the oil  is the people's resource and therefore                                                               
he believes in the principle of progressivity.                                                                                  
                                                                                                                                
5:16:33 PM                                                                                                                    
DAVID TRANTHAM, representing himself,  testified in opposition to                                                               
SB 21.  He said  he represents five  generations of  Alaskans and                                                               
they are  in survival mode.  They pay more  than $7 a  gallon for                                                               
fuel  and  he didn't  see  that  SB 21  would  help.  He said  he                                                               
supports ACES, although some minor  tweaking may be necessary. He                                                               
stated that  the people  need the  legislature's help  to protect                                                               
all Alaskans.                                                                                                                   
                                                                                                                                
5:19:53 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
5:44:50 PM                                                                                                                    
CO-CHAIR MICCICHE reconvened the meeting.                                                                                       
                                                                                                                                
5:45:11 PM                                                                                                                    
MONIKA KUNAT,  representing herself,  testified in  opposition to                                                               
SB 21. She said it wasn't good enough for future Alaskans.                                                                      
                                                                                                                                
5:47:22 PM                                                                                                                    
JAVEN OSE,  representing himself,  testified in opposition  to SB
21. He said  he didn't want to  give his tax dollars  away to the                                                               
current scheme.  He suggested  if you  give a  tax break  to make                                                               
sure you get something for it.                                                                                                  
                                                                                                                                
5:48:44 PM                                                                                                                    
AARON GRIFFIN,  representing himself, testified in  opposition to                                                               
SB 21.  He urged the  committee to  tie tax breaks  to production                                                               
benchmarks.                                                                                                                     
                                                                                                                                
5:51:22 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
6:12:57 PM                                                                                                                    
CO-CHAIR MICCICHE reconvened the meeting.                                                                                       
                                                                                                                                
6:13:10 PM                                                                                                                    
ANDREW PETER,  representing himself, expressed concern  about the                                                               
direction  things   appear  to  be  going   in  Alaska  regarding                                                               
corporate favoritism.                                                                                                           
                                                                                                                                
6:15:53 PM                                                                                                                    
DELICE CALCOTE, representing himself,  testified in opposition to                                                               
SB  21.  She cited  a  1970,  88  page  article by  the  Stanford                                                               
Research Institute,  regarding a plan  for Alyeska. She  said she                                                               
was  concerned  that money  is  being  given  away. She  did  not                                                               
support any  tax break for the  oil or mining companies  that are                                                               
making billion dollar profits.                                                                                                  
                                                                                                                                
CO-CHAIR MICCICHE asked what article she referenced.                                                                            
                                                                                                                                
MS. CALCOTE  said she would send  a link and reiterated  that she                                                               
wanted to see the document posted.                                                                                              
                                                                                                                                
6:20:13 PM                                                                                                                    
SENATOR GARDNER requested her address.                                                                                          
                                                                                                                                
CO-CHAIR MICCICHE asked her to send the link to the chair.                                                                      
                                                                                                                                
SENATOR   FAIRCLOUGH  inquired   about  future   plans  for   the                                                               
committee.                                                                                                                      
                                                                                                                                
CO-CHAIR  MICCICHE  said  the  next  meeting  would  be  Tuesday,                                                               
February  5,  and  the  oil  industry would  testify  on  SB  21.                                                               
February 7 would be the last  meeting on the subject. He reminded                                                               
the public that the committee  was reviewing the bill solely from                                                               
the perspective  of declining throughput  in TAPS. If there  is a                                                               
need for additional public testimony, arrangements will be made.                                                                
                                                                                                                                
6:23:32 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
7:15:43 PM                                                                                                                    
CO-CHAIR MICCICHE reconvened the meeting.                                                                                       
                                                                                                                                
7:15:56 PM                                                                                                                    
KATHLEEN   PEARSON,  representing   herself,   said  she   didn't                                                               
understand why  the state should  give its resources away  to the                                                               
oil companies.                                                                                                                  
                                                                                                                                
7:17:22 PM                                                                                                                    
MICHAEL  DZURSLIN,  representing  himself, said  he  thought  the                                                               
current tax  system was  fair. He testified  in opposition  to SB
21.                                                                                                                             
                                                                                                                                
7:19:36 PM                                                                                                                    
LYNETTE   MORENO  HINZ,   representing   herself,  testified   in                                                               
opposition to SB  21. She said the Governor  should represent the                                                               
people and  not the oil companies.  She said it is  a conflict of                                                               
interest.                                                                                                                       
                                                                                                                                
7:21:49 PM                                                                                                                    
ED NELSON,  representing himself,  testified in opposition  to SB
21. He  said the Governor  has been more  a lobbyist for  the oil                                                               
companies than for the people of Alaska.                                                                                        
                                                                                                                                
7:23:27 PM                                                                                                                    
HARRY WALKER,  representing himself,  testified in  opposition to                                                               
SB 21. He said the bill is not fair or good for Alaska.                                                                         
                                                                                                                                
7:25:10 PM                                                                                                                    
DAVE DARRON, representing himself,  testified in opposition to SB
21. He said the fact that  the Governor refused to debate Senator                                                               
Wielechowski swayed him to oppose the legislation.                                                                              
                                                                                                                                
7:28:00 PM                                                                                                                    
KATE  VEH,  representing  herself,  said  she  submitted  written                                                               
testimony. She said  ACES was working and she did  not support SB
21.                                                                                                                             
                                                                                                                                
7:29:15 PM                                                                                                                    
JIM BYRNES,  representing himself, testified in  opposition to SB
21.  He  said if  the  royalty  rate  is  changed, it  should  be                                                               
increased.  Alaska is  the safest  place that  the oil  companies                                                               
operate, but it should not be the most profitable.                                                                              
                                                                                                                                
7:31:02 PM                                                                                                                    
BEN CREASY,  representing himself, testified in  opposition to SB
21. He said he  has a degree in economics and  hasn't seen a good                                                               
cost benefit  analysis that demonstrates that  the legislation is                                                               
a good idea.  He was a bit disappointed in  the analysis that had                                                               
gone  into the  bill thus  far.  He thought  oil companies  would                                                               
continue to come to Alaska.                                                                                                     
                                                                                                                                
7:34:28 PM                                                                                                                    
CO-CHAIR  MICCICHE  closed  public  testimony.  He  said  written                                                               
testimony  would be  taken.  He told  committee  members to  have                                                               
amendments to  his office by  7:00 p.m. Wednesday.  He reiterated                                                               
that the committee  was looking at SB 21 with  the mission of how                                                               
it might affect increasing throughput in TAPS.                                                                                  

Document Name Date/Time Subjects
Alaska Senate TAPS Throughput Committee January31.pdf STTP 1/31/2013 1:00:00 PM
SB 21
Alaska Senate TAPS Throughput Committee January 31- Supplementary Slide.pptx STTP 1/31/2013 1:00:00 PM
SB 21
SB 21 written testimony in support.PDF STTP 1/31/2013 1:00:00 PM
SB 21
SB 21 written testimony in opposition.PDF STTP 1/31/2013 1:00:00 PM
SB 21
SB 21 Deb Brollini Email 1-31-13.PDF STTP 1/31/2013 1:00:00 PM
SB 21