Legislature(2013 - 2014)BUTROVICH 205


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03:33:25 PM Start
03:33:50 PM SB21
05:20:35 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Industry Testimony <Invitation Only> --
                SB 21-OIL AND GAS PRODUCTION TAX                                                                            
3:33:50 PM                                                                                                                    
CO-CHAIR MICCICHE stated  the purpose of the meeting  was to hear                                                               
from the oil industry on SB 21.                                                                                                 
He noted the presence of Senator Giessel.                                                                                       
3:34:47 PM                                                                                                                    
KARA   MORIARTY,  Executive   Director,   Alaska   Oil  and   Gas                                                               
Association (AOGA),  explained that AOGA represents  16 companies                                                               
who  account  for  the  majority  of  oil  and  gas  exploration,                                                               
development, production, transportation, and  refining of oil and                                                               
gas on shore and off shore  in Alaska. She said her comments have                                                               
been unanimously approved by all members of AOGA.                                                                               
She agreed with Senate President  Charlie Huggins' comment in the                                                               
Anchorage  Daily News,  January  31, when  he  stated, "The  most                                                               
pressing issue  facing Alaska is  the downturn in  oil production                                                               
on  Alaska's North  Slope." She  applauded  Senator Huggins,  the                                                               
committee,  and  Governor  Parnell  for  recognizing  this  as  a                                                               
serious issue.                                                                                                                  
She drew  attention to  a chart  of the  most recent  forecast of                                                               
production  decline from  the Department  of  Revenue (DOR).  She                                                               
contrasted  it with  the  forecast from  2000  when everyone  was                                                               
focused on  oil price and the  state was facing a  billion dollar                                                               
shortfall at a  time when the budget was  significantly less than                                                               
it is today. In the past,  DOR projected that ten years from now,                                                               
50 percent of our oil production would be from new oil.                                                                         
She pointed out  that DOR's updated forecast includes  a new risk                                                               
modeling into  their forecast,  but noted  that the  forecast for                                                               
currently  producing fields  assumes  that the  current level  of                                                               
investment  in producing  fields will  continue, which  is by  no                                                               
means guaranteed.                                                                                                               
She informed the committee that  Alaska's production decline rate                                                               
has remained  at around 6 percent  per year for the  last decade,                                                               
or at  least 40,000 barrels a  day per year. She  maintained that                                                               
the accelerated decline is unacceptable,  especially at a time of                                                               
record and sustaining high oil prices over the last five years.                                                                 
3:38:17 PM                                                                                                                    
MS. MORIARTY  turned to a  graph that showed competition  at high                                                               
oil  prices. Production  in Texas  started  to level  off as  oil                                                               
prices  increased.  North  Dakota  has caught  up  and  surpassed                                                               
Alaska  in production.  California  is about  to surpass  Alaska.                                                               
Alaska  now  supplies   only  8  percent  of   the  nation's  oil                                                               
production.  She  showed  how  Alaska  is  headed  out  of  medal                                                               
contention in daily oil production.                                                                                             
She  related that  in November  2012,  the most  recent month  of                                                               
statistics  on  the  U.S. Energy  Information  Agency's  website,                                                               
production  in  Texas was  2.1  million  barrels per  day,  North                                                               
Dakota  was  731,000  barrels  per   day,  and  both  Alaska  and                                                               
California were at 553,000 barrels per day.                                                                                     
She  reminded  the  committee  that   she  represents  a  diverse                                                               
membership,  ranging from  companies exploring  and operating  in                                                               
Cook  Inlet  and on  the  North  Slope,  to companies  hoping  to                                                               
develop Arctic Outer Continental  Shelf (OCS) resources, to three                                                               
in-state refineries, as well as  the Trans-Alaska Pipeline System                                                               
3:40:33 PM                                                                                                                    
MS. MORIARTY pointed out that  current production is over 100,000                                                               
barrels per  day less than  when production from the  North Slope                                                               
began in 1977,  and Alyeska Pipeline Services  Company would like                                                               
to  see  that  decline  change. Alyeska  faces  increasing  daily                                                               
demands  and challenges  related to  providing safe  and reliable                                                               
transportation of oil to market.  All members of AOGA share those                                                               
concerns. Two  of the  three in-state  refineries rely  solely on                                                               
North  Slope   crude  delivered  through  TAPS.   Low  throughput                                                               
increases the  costs of refining, especially  in Interior Alaska.                                                               
For example, about 20 years ago,  when the oil reached North Pole                                                               
refineries,  it  was about  110  degrees  Fahrenheit and  now  it                                                               
ranges in the  30-degree range. Having to heat  the oil increases                                                               
energy costs.                                                                                                                   
3:42:21 PM                                                                                                                    
She spoke of  the challenges in Cook Inlet  of attracting workers                                                               
back to  the area and  finding enough drilling equipment  for new                                                               
production there.                                                                                                               
She related that the Arctic OCS  is believed to have an estimated                                                               
27 billion  barrels of oil and  130+ tcf of natural  gas. Even if                                                               
there is a  successful exploration season in 2013, it  will be 12                                                               
to 15 years  before production is seen from the  Chukchi Sea. The                                                               
pipeline needs to be healthy and viable then, as well as today.                                                                 
MS.  MORIARTY  discussed  producers of  the  existing  non-legacy                                                               
fields on  the North Slope and  the developers of any  new fields                                                               
that  may  be  discovered  there.  She said  they  need  as  much                                                               
production  as possible  flowing from  the legacy  fields through                                                               
TAPS in order  to keep the costs affordable to  ship their oil to                                                               
refineries. Unaffordable high  transportation costs could cripple                                                               
the economics of  any new fields that might be  found, as well as                                                               
economics of non-legacy fields currently in production.                                                                         
She compared  the North Slope  oil province  to a tree,  with the                                                               
two  great legacy  fields  being  its trunk  and  with the  other                                                               
fields being branches  rising out of the trunk. If  one peels the                                                               
bark off  all the way  around the  trunk and makes  it unhealthy,                                                               
all the other branches will  become unhealthy, too, no matter how                                                               
robust they might have been if the trunk stayed strong.                                                                         
3:44:29 PM                                                                                                                    
She  said  that Governor  Parnell  recognizes  that as  a  state,                                                               
Alaska needs increased  oil production in all  fields because the                                                               
current throughput  is unacceptable. He has  identified four core                                                               
principles that  "any tax  reform proposal  must adhere  to": the                                                               
tax  must be  fair to  Alaskans, must  encourage new  production,                                                               
must be  simple, so  it restores  balance to  the system,  and it                                                               
must be  durable for the long  term. She said that  AOGA endorses                                                               
these principles.                                                                                                               
She encouraged the committee to ask:                                                                                            
     · What is the state's goal and desired outcome?                                                                            
     · Does the state's policy reflect the constitutional                                                                       
       mandate of developing the natural resources here for the                                                                 
       maximum benefit of Alaskans, both today and tomorrow?                                                                    
     · Is the policy short, mid or long term?                                                                                   
     · Will it encourage additional investment across a wide                                                                    
       spectrum of projects/companies?                                                                                          
     · Will it encourage development through a fair and                                                                         
       predictable regulatory environment?                                                                                      
     · Will it encourage development through land sales and                                                                     
       competitive lease terms?                                                                                                 
She emphasized that the challenge  facing Alaska is not in having                                                               
too  many  companies pursuing  the  opportunities  that they  see                                                               
here, but in having too few.  To be effective, any reform measure                                                               
needs to avoid  tax changes that artificially  create winners and                                                               
3:46:17 PM                                                                                                                    
MS. MORIARTY shared thoughts on SB 21:                                                                                          
     Senate Bill  21 takes  some positive steps  towards the                                                                    
     goal  of more  production;  such as  the Gross  Revenue                                                                    
     Exclusion concept and  eliminating progressivity, which                                                                    
     has led  to Alaska being uncompetitive.  There are some                                                                    
     other  provisions that  need  further consideration  in                                                                    
     order  to  fully achieve  the  goals  set out  in  this                                                                    
     We support  the proposed elimination  of progressivity.                                                                    
     We have  reservations with what  the bill  proposed for                                                                    
     tax  credits  -  most  importantly  with  the  proposed                                                                    
     repeal   of   tax   credits   for   qualified   capital                                                                    
     expenditures  (QCE).  The trade-off  between  repealing                                                                    
     progressivity  and   losing  the  QCE  credit   is  not                                                                    
     beneficial  to industry  with a  rising cost  structure                                                                    
     and  low oil  price environment,  although it  would be                                                                    
     helpful with high prices.                                                                                                  
     We strongly support the  GRE (gross revenue exclusions)                                                                    
     concept   but   have    concerns   over   its   limited                                                                    
     applicability  to new  fields  only,  which is  further                                                                    
     compounded by the  loss of QCE credits as  a driver for                                                                    
     additional  investment.  We  believe the  GRE  and  tax                                                                    
     credit  restructuring proposed  in the  bill could  and                                                                    
     should  be  expanded and  better  tailored  to fit  the                                                                    
     majority  of  projects  for legacy  fields  that  would                                                                    
     increase the amount of oil and gas from them.                                                                              
     We  also believe  the  reasons that  led  the state  to                                                                    
     create  the   small  producer  tax  credits   under  AS                                                                    
     43.55.025  are also  still valid  today,  and the  bill                                                                    
     would  be improved  by extending  these tax  credits or                                                                    
     making them  permanent. Similarly, the bill  would also                                                                    
     be improved by  addressing the upcoming end  of the tax                                                                    
     caps for  Cook Inlet production and  non-Cook Inlet gas                                                                    
     sold for  in state use,  which will otherwise  occur at                                                                    
     the  end of  2021. Addressing  these known  issues now,                                                                    
     before  they  become  imminent,  would  strengthen  the                                                                    
     durability of the reformed tax.                                                                                            
     The members  of AOGA desire  the same outcome  that the                                                                    
     Governor and  the people of  Alaska want - more  oil in                                                                    
     the pipeline providing a solid  future for our industry                                                                    
     and continued revenues to the  state for the benefit of                                                                    
     all Alaskans.                                                                                                              
3:48:53 PM                                                                                                                    
     Our  member companies  want to  do business  in Alaska.                                                                    
     Some have  been exploring  and producing in  Alaska for                                                                    
     decades, while others have  arrived more recently. Both                                                                    
     groups have  a strong  desire to be  able to  remain in                                                                    
     Alaska long term  for their own and  the state's mutual                                                                    
     Overall,   the   bill   as  introduced   represents   a                                                                    
     cornerstone  for significant  and  crucial tax  reform.                                                                    
     It will  take a monumental  effort just to  replace oil                                                                    
     from declining fields with a  mixture of new production                                                                    
     and  new stimulation  to legacy  fields, and  bring the                                                                    
     decline to  a stop.  AOGA stands  ready and  willing to                                                                    
     help Alaskans,  the Governor,  and this  legislature in                                                                    
     the   remaining  work   to  achieve   the  four   "core                                                                    
     Principles." We all need to  work together to make this                                                                    
3:50:15 PM                                                                                                                    
CO-CHAIR MICCICHE  commented that  everyone he  has spoken  to in                                                               
the 28th Legislative Session shares  concern about the decline of                                                               
throughput. The committee was formed  for that very reason and is                                                               
looking as SB  21 to consider throughput issues,  not tax issues.                                                               
He stated  that there  are two philosophies  in the  state: those                                                               
who  believe production  decline can  be reduced,  and those  who                                                               
believe arresting the decline is  unlikely and are concerned that                                                               
without guarantees, it  is a giveaway of state  revenue. He asked                                                               
how the legislature can ensure  for Alaskans that the probability                                                               
of increasing throughput  in TAPS is not only  a probability, but                                                               
a  relatively high  probability, if  Alaska were  to become  more                                                               
MS. MORIARTY  suggested looking at  other oil  producing regions.                                                               
Alaska  is  not  competitive  due to  its  tax  structure.  Other                                                               
regions have been successful increasing  production, even in old,                                                               
declining  fields. She  said to  ask what  kind of  policy Alaska                                                               
wants, one  with more production over  the long term, or  to take                                                               
as much as they can in the  short term. She argued that the state                                                               
can  have more  production over  the long  term in  a competitive                                                               
3:52:11 PM                                                                                                                    
CO-CHAIR  DUNLEAVY asked  if Ms.  Moriarty proposed  rolling Cook                                                               
Inlet into the tax concept.                                                                                                     
MS. MORIARTY  clarified that  AOGA supports the  fact that  SB 21                                                               
has  left Cook  Inlet harmless  and  has left  the tax  structure                                                               
there alone.  However, if  the bill was  to revisit  tax credits,                                                               
there  are several  tax credits  in Cook  Inlet that  are set  to                                                               
expire  in 2021  that  AOGA believes  would be  good  to keep  by                                                               
extending them or  making them permanent. She  suggested it would                                                               
be better to make those changes  now instead of right before they                                                               
expire because companies make investment decisions years out.                                                                   
CO-CHAIR DUNLEAVY stated that the  mandate of the committee is to                                                               
look at TAPS and issues related to North Slope resources.                                                                       
CO-CHAIR MICCICHE thanked Ms. Moriarty for her testimony.                                                                       
3:54:41 PM                                                                                                                    
THOMAS  BARRETT,  President,  Alyeska Pipeline  Service  Company,                                                               
introduced  himself. He  stated that  the steady  decline in  oil                                                               
production on the North Slope is  a crucial issue for Alyeska, as                                                               
the pipeline operator, and for the people of Alaska.                                                                            
3:55:17 PM                                                                                                                    
At ease                                                                                                                         
3:56:23 PM                                                                                                                    
MR. BARRETT said throughput decline  is a significant problem for                                                               
the state. During  the time the committee  is meeting, throughput                                                               
will decline  by over  2,000 barrels.  Since the  legislature has                                                               
convened, throughput has declined by over 725,000 barrels.                                                                      
He  related that  TAPS is  an 800  mile pipeline  that runs  from                                                               
Prudhoe Bay to the marine terminal  at Valdez. It was designed as                                                               
a warm oil  pipeline set to move 1.5 million  barrels per day. It                                                               
had a  peak production  of over  2.1 million  barrels per  day in                                                               
1988.  Circumstances have  changed;  throughput and  temperatures                                                               
continue to decline. At 580,000  barrels a day, segments of crude                                                               
oil in  the pipe will be  below 32 degrees Fahrenheit  during the                                                               
winter months.                                                                                                                  
He reported  that, so far,  TAPS has delivered over  $170 billion                                                               
over  the past  35  years to  the state  treasury.  More than  90                                                               
percent of government services are  paid for by oil revenue. Some                                                               
experts  suggest that  without  TAPS, Alaska's  economy might  be                                                               
half of its present size.                                                                                                       
He said in 2012 average  daily throughput decreased by 6 percent.                                                               
He  showed a  graph of  steadily declining  throughput. Declining                                                               
flow increasingly challenges  Alyeska's outstanding personnel who                                                               
run the pipeline every day all year long.                                                                                       
3:58:58 PM                                                                                                                    
MR. BARRETT showed a temperature  profile of the pipeline for the                                                               
last  two  weeks.  He  explained   as  throughput  declines,  the                                                               
temperature declines,  leading to increased ice  and wax buildup.                                                               
He said it ideal to operate  above 40 degrees. Severe cold in the                                                               
interior is currently a big challenge.                                                                                          
CO-CHAIR MICCICHE asked  about the cause of  warming between pump                                                               
stations 7 and 10.                                                                                                              
MR. BARRETT replied that heat is  added at pump stations 3, 4, 7,                                                               
8, 9, and just before the refinery.                                                                                             
CO-CHAIR MICCICHE  summarized that the lower  the throughput, the                                                               
more Alyeska has to spend on energy to operate the pipeline.                                                                    
CO-CHAIR DUNLEAVY asked who ends up paying that cost.                                                                           
MR. BARRETT  said it comes out  of operating costs and  is passed                                                               
on to the state and to the owners.                                                                                              
He shared an  example of a challenge due  to decreased throughput                                                               
from  the  point of  view  of  an  operator. He  explained  about                                                               
scraper pigs that  clean wax out of the pipeline.  Wax can damage                                                               
valves and cause  corrosion. He gave an example  of what happened                                                               
at pump station 9  on New Year's Day when a pig  was trapped by a                                                               
large amount  of wax caused  by extremely cold  temperatures. The                                                               
operators  did  an excellent  job  of  managing and  solving  the                                                               
problem  and   there  was  no  interruption   in  throughput.  He                                                               
concluded that it  is a challenged to manage  problems related to                                                               
throughput.  He stressed  that adding  more heat  will not  solve                                                               
complex problems  created by decline in  flow. Currently, Alyeska                                                               
is experimenting  with ways to  remove water from the  oil before                                                               
it enters the pipeline.                                                                                                         
He questioned  if finding ways to  move only 3,000 barrels  a day                                                               
is a desirable  outcome for Alaska. He showed a  slide that says,                                                               
"Taking action today, preparing for tomorrow."                                                                                  
4:04:30 PM                                                                                                                    
CO-CHAIR MICCICHE talked about minimum  flow issues and concluded                                                               
that  Alaskans, under  ACES, are  paying  more to  ship less  oil                                                               
every day. He asked if Mr. Barrett agreed.                                                                                      
MR.  BARRETT said  he would  frame it  as "the  cost of  moving a                                                               
barrel  of oil  down the  line as  the throughput  goes down,  is                                                               
headed up."                                                                                                                     
He   noted  that   even  though   Alyeska  has   "true  grit"   -                                                               
determination, ingenuity,  and partnership  - it needs  help with                                                               
increasing throughput.  He emphasized  that more  production from                                                               
fields  near  to  existing  infrastructure  is  highly  desirable                                                               
because it can come online into the pipe sooner.                                                                                
4:06:51 PM                                                                                                                    
CO-CHAIR DUNLEAVY  asked if OCS  comes on line and  the transport                                                               
system is the same, will the oil have to be heated.                                                                             
MR.  BARRETT  explained that  oil  comes  into  the line  at  105                                                               
degrees;  however, TAPS  is  half above  ground  where there  are                                                               
temperature concerns.                                                                                                           
CO-CHAIR DUNLEAVY  asked if  the decreased volume  of oil  is the                                                               
cause of the oil cooling off faster.                                                                                            
MR. BARRETT said  the flow rate is also slowing  down so there is                                                               
more exposure to the cold.                                                                                                      
CO-CHAIR DUNLEAVY  assumed that TAPS  could continue to  run with                                                               
decreased volume, but costs would increase.                                                                                     
MR. BARRETT  agreed that  there would  eventually be  an economic                                                               
limit. He  added that with  the current configuration,  a gravity                                                               
flow, warm  oil pipeline,  Alyeska can manage  the flow  into the                                                               
mid-300  barrels per  day range,  but  it would  be more  costly.                                                               
Alyeska is  evaluating the  ability to change  the pipeline  to a                                                               
cold, dry  flow. He emphasized that  it is not as  simple as some                                                               
might  think. Adding  heat will  not solve  the problem  and adds                                                               
other complications.                                                                                                            
He   reported  in   2012,  Alyeska   operated  at   99.8  percent                                                               
reliability - uninterrupted  cash flow - with the  safest year on                                                               
record  and  a  superb  environmental record.  He  predicted  the                                                               
uninterrupted cash flow would not continue into the future.                                                                     
4:11:36 PM                                                                                                                    
CO-CHAIR  MICCICHE  asked  Mr.  Barrett to  define  a  cold,  dry                                                               
MR. BARRETT explained  that currently the system is  wet; the oil                                                               
has  water in  it. In  a  cold, dry  system, the  water would  be                                                               
distracted from the  oil before it entered the  pipe. The science                                                               
is being evaluated now.                                                                                                         
He mentioned Alyeska's safety  performance and environment record                                                               
is very  good. He  shared a  personal story  from having  read No                                                             
Easy  Day.  He maintained  the  only  easy  day for  Alyeska  was                                                             
yesterday, and to repeat that will  be hard. He said the easy day                                                               
for TAPS  and Alaska was yesterday.  He suggested it was  time to                                                               
change the  paradigm or Alaska will  not be able to  sustain what                                                               
it had in the past.                                                                                                             
4:14:23 PM                                                                                                                    
MR. BARRETT  showed a slide of  a statute at the  Valdez terminal                                                               
that says, "We  didn't know it couldn't be done."  He pointed out                                                               
that  TAPS   is  Alaska's  pipeline.  Alyeska's   personnel  will                                                               
continue to do  its part and is  determined to do a  good job. He                                                               
asked for  the committee's  support to  move forward  to increase                                                               
production and throughput in TAPS.                                                                                              
CO-CHAIR MICCICHE appreciated the  quote and the presentation. He                                                               
said the  committee would be  working on some of  the operational                                                               
issues after passing SB 21 on to another committee.                                                                             
CO-CHAIR  MICCICHE   introduced  Mr.   Smith,  saying   that  the                                                               
committee  seeks to  allow  a  cross section  of  people who  are                                                               
operating on  the North Slope  to testify. So far,  the committee                                                               
has heard  from the  public, industry  support agencies,  and the                                                               
4:16:39 PM                                                                                                                    
DOUG SMITH,  President and  CEO, Little  Red Services  (LRS), and                                                               
President,  Alaska Industry  Alliance  (AIA) stated  that he  was                                                               
testifying  on  behalf of  AIA,  representing  600 companies  and                                                               
about  35,000  employees,  most  of   whom  are  dependent  on  a                                                               
successful oil tax policy.                                                                                                      
He  noted  that  it is  early  in  the  analysis  of SB  21.  The                                                               
committee  is focused  on production  in  TAPS. He  said that  if                                                               
there  was an  interruption in  the flow  of oil  in TAPS,  there                                                               
would be  ramifications felt in  the North Slope. He  recalled in                                                               
2011 when there  was an interruption and LRS  provided the freeze                                                               
protection  capacity on  the  North Slope.  He  pointed out  that                                                               
problems  caused by  decreased oil  flow affect  activity in  the                                                               
winter on the North Slope.                                                                                                      
He termed  increasing production a "bridge  building opportunity"                                                               
toward future production  on the North Shore and  other areas. He                                                               
spoke  of a  goal to  stem  decline in  order to  provide a  time                                                               
window to get to the next resource to put into TAPS.                                                                            
He related  that there  is pressure to  move support  services to                                                               
the Lower  48. He mentioned the  410 wells waiting to  be drilled                                                               
in North  Dakota and said Alaska  drilled that many wells  in the                                                               
last three years. He said AIA  must follow the investments of the                                                               
companies they work for.                                                                                                        
4:20:49 PM                                                                                                                    
MR. SMITH  suggested making  a fair,  equitable, and  durable tax                                                               
policy  now.  He said  he  was  opposed  to too  many  additional                                                               
consultants. He recalled information  provided in 2007 by Gaffney                                                               
Kline that  forecast almost $4  billion in capex for  drilling up                                                               
to 2012,  and an  incremental improvement  in production  of over                                                               
200,000  barrels per  day by  2012. He  said that  prediction was                                                               
very  far off.  He  cautioned  to look  at  the  track record  of                                                               
experts, at what investment capital  is doing, and at the market,                                                               
in  order  to  keep  jobs  and move  the  economy  in  the  right                                                               
4:22:31 PM                                                                                                                    
SENATOR MCGUIRE  thanked Mr. Smith  for diligently  following the                                                               
issue. She requested suggestions and recommendations from AIA.                                                                  
MR. SMITH read four considerations:                                                                                             
   · Ensure our tax policy adjustments do not increase taxes in                                                                 
     the range where producers will stress test the economics of                                                                
     investment opportunities, thought to be in the $80 to $85                                                                  
   · Ensure our tax policy does not disincentive development                                                                    
     within existing PA's where the largest production                                                                          
     improvement opportunities exist.                                                                                           
   · Oil policy must support the new entrants like Pioneer and                                                                  
     ENI who are producing oil into TAPS and spending millions                                                                  
     in our state economy. Our policy must encourage them to                                                                    
     continue that investment trend.                                                                                            
   · A new tax policy must make Alaska competitive for                                                                          
     investment but protect Alaska's interest. A fair and                                                                       
     balanced approach will be durable.                                                                                         
4:26:56 PM                                                                                                                    
CO-CHAIR MICCICHE asked  if LRS is expanding to  areas outside of                                                               
MR. SMITH  said safety  is of  the utmost  importance to  LRS. He                                                               
spoke of industries outside of Alaska  that are not as focused on                                                               
safety like  they are in Alaska.  Until that changes, LRS  is not                                                               
interested  in  going Outside.  He  spoke  of recent  efforts  to                                                               
encourage   oil  companies   to   have   allegiance  to   Alaskan                                                               
contractors. He said they moved  LRS manufacturing from Canada to                                                               
Anchorage and spent $2 million on a hot oil unit.                                                                               
CO-CHAIR MICCICHE asked how many people LRS employs.                                                                            
MR. SMITH  said 148, of which,  98 live in Alaska  and 70 percent                                                               
are Alaska hire.  He said LRS works closely with  NIT to identify                                                               
people with  CDL's, Hazmat, and  tanker endorsements.  Last month                                                               
LRS hired two wounded war veterans.                                                                                             
4:29:21 PM                                                                                                                    
CO-CHAIR  MICCICHE  reminded  the  audience  that  Alaska  has  a                                                               
citizen legislature and most legislators  have jobs. He announced                                                               
that he works  for ConocoPhillips, so to avoid  any appearance or                                                               
perception of conflict  of interest, he will hand  the gavel over                                                               
to Co-Chair Dunleavy who will lead the proceedings.                                                                             
4:30:18 PM                                                                                                                    
At ease                                                                                                                         
4:35:30 PM                                                                                                                    
SCOTT  JEPSEN, Vice  President, External  Affairs, ConocoPhillips                                                               
Alaska introduced himself. He stated  that he would be presenting                                                               
on Alaska's  production challenge, investment  considerations and                                                               
Alaska's cost environment, and ACES and SB 21.                                                                                  
He showed a graph depicting  Alaska's oil decline while the Lower                                                               
48 continues  to increase  in oil production.  Over the  past few                                                               
years there  has been an  oil production resurgence in  the Lower                                                               
48. He addressed the causes  for that: a resource of conventional                                                               
and  unconventional   plays,  improved  technology,   higher  oil                                                               
prices,  and  an  equitable  tax   environment.  Alaska  has  the                                                               
resource,  the  technology,  and  high  oil  prices,  but  not  a                                                               
favorable tax  environment. The tax  environment in  Alaska takes                                                               
away the  upside as  oil prices  increase. Costs  for exploration                                                               
are also high in Alaska.                                                                                                        
MR.  JEPSEN showed  a slide  that emphasizes  that Alaska  legacy                                                               
fields still  provide significant opportunity. The  legacy fields                                                               
are about  90 percent  of North Slope  production and  the lion's                                                               
share of  estimated future production.  Legacy fields are  key to                                                               
offsetting ANS decline.                                                                                                         
4:40:50 PM                                                                                                                    
CO-CHAIR  MICCICHE  noted on  the  previous  slide that  Alaska's                                                               
North Slope production is erratic  compared to other areas in the                                                               
Lower 48.                                                                                                                       
MR. JEPSEN attributed  variable production on the  North Slope to                                                               
weather variation  and major turnarounds. Also,  some fields came                                                               
on line between the dates shown - 2005 to 2012.                                                                                 
MR. JEPSEN  discussed investment criteria, or,  how Alaska rates.                                                               
He looked at exploration prospectivity,  costs, cycle time, taxes                                                               
and  legacy  field  opportunities.   The  first  four  investment                                                               
criteria  are  considered  unfavorable, with  only  legacy  field                                                               
opportunities  favorable.  He mentioned  a  pending  well in  the                                                               
Chukchi  Sea, which  is a  federal  operation with  a better  tax                                                               
He said Alaska  is disadvantaged by development  costs. The cycle                                                               
time for drilling a well takes longer.                                                                                          
SENATOR GARDNER  asked if the  state adopts a favorable  oil tax,                                                               
would it offset  the other four adverse  investment criteria. She                                                               
also wondered  if the ACES  credits had an impact  on exploration                                                               
development costs.                                                                                                              
MR. JEPSEN  believed there  were some  things that  could improve                                                               
Alaska's  investment climate.  Changing  the  tax environment  is                                                               
one. However,  SB 21 eliminates investment  credits. Alaska could                                                               
offer investment credits for new  production, including in legacy                                                               
fields, that will  level the playing field when it  comes to cost                                                               
and cycle time.  He noted that ACES credits have  not been a game                                                               
changer for ConocoPhillips.                                                                                                     
SENATOR  GARDNER asked  Mr. Jepsen  if he  considers the  credits                                                               
under the current regime to be level.                                                                                           
MR. JEPSEN suggested if progressivity  were eliminated under ACES                                                               
and the tax  credits kept, it would be  a significant improvement                                                               
in the business climate.                                                                                                        
SENATOR  GARDNER  asked  if  that would  enough  to  negate  high                                                               
exploration, development and production costs.                                                                                  
MR. JEPSEN said yes, with progressivity removed.                                                                                
4:46:01 PM                                                                                                                    
MR.   JEPSEN  stated   that   legacy   fields  have   significant                                                               
opportunities  for investment.  The  state  can improve  Alaska's                                                               
investment climate by changing taxes  and putting capital expense                                                               
incentives in place.                                                                                                            
CO-CHAIR MICCICHE saw several areas  the committee could address:                                                               
tax   rates,  and   the  permitting/regulatory   environment.  He                                                               
inquired  if   the  state  could   have  a  role   in  decreasing                                                               
transportation costs.                                                                                                           
MR. JEPSEN said  Mr. Barrett spoke of ways Alyeska  tries to keep                                                               
costs down.  He didn't know  if the state  has much to  say about                                                               
setting  tariffs   and  about   the  Federal   Energy  Regulatory                                                               
Commission's (FERC) role.                                                                                                       
CO-CHAIR  MICCICHE concluded  that  increased production  reduces                                                               
transportation costs.                                                                                                           
4:48:09 PM                                                                                                                    
MR.  JEPSEN agreed  that the  tariffs  are a  strong function  of                                                               
He turned  to a  graph that  PFC Energy  presented last  week. It                                                               
shows high cost and high  government take challenges in Alaska as                                                               
compared to  the Lower  48. He  said the  playing field  could be                                                               
equalized through investment incentives in Alaska.                                                                              
SENATOR  GARDNER  looked at  Alaska's  development  costs on  the                                                               
graph and wondered  if they included ACES  credits. The intention                                                               
of the  credits was to  "share the  risk." She noted  the state's                                                               
participation was about $1 billion a year.                                                                                      
BOB  HEINRICH, Vice  President,  Finance, ConocoPhillips  Alaska,                                                               
said he  did not  know the origin  of the data  on the  graph. He                                                               
explained that ConocoPhillips includes  the benefits they receive                                                               
from capital credits. He said that  much of the $1 billion credit                                                               
is going toward explorers, not those in the development stage.                                                                  
4:50:47 PM                                                                                                                    
CO-CHAIR DUNLEAVY  inquired why ConocoPhillips reports  a greater                                                               
profit margin per barrel of oil in the Lower 48 than in Alaska.                                                                 
MR. HEINRICH  replied that the ConocoPhillips'  numbers are often                                                               
misused. He  agreed on  an oil-for-oil basis,  they do  achieve a                                                               
much better  profit and cash margin  in the Lower 48  than Alaska                                                               
due to the lower cost structure and the access to markets.                                                                      
SENATOR GARDNER asked  if Alaska offers good rates  of return and                                                               
strong cash margins.                                                                                                            
MR.  HEINRICH  explained  that the  cash  margins  ConocoPhillips                                                               
receives in Alaska  are significantly less than  what it receives                                                               
in new projects in West Texas  - Eagle Ford, and North Dakota. He                                                               
defined the cash  margin as taking the net income  per barrel and                                                               
adding back  depreciation per barrel. It  is in the range  of $30                                                               
to $35 in Alaska; in the Lower 48 it is in the $40 to $45 range.                                                                
SENATOR  GARDNER  asked if  there  are  projects in  Alaska  that                                                               
ConocoPhillips is not doing because of the current tax regime.                                                                  
MR.  JEPSEN recalled  ConocoPhillips' testimony  last year  about                                                               
the  challenges   under  ACES,   when  Northeast  West   Sak  was                                                               
mentioned.  It  is  a very  highly  challenged  development  that                                                               
requires new roads, pads, pipelines,  and over 100 wells to fully                                                               
develop  it.  Based  upon  the   investment  climate  with  ACES,                                                               
ConocoPhillips decided to do only part of that project.                                                                         
SENATOR GARDNER asked to define "problematic under ACES."                                                                       
MR. JEPSEN  explained that  it means  ConocoPhillips will  take a                                                               
look  at it  periodically  and  decide whether  or  not it  meets                                                               
investment requirements.                                                                                                        
4:53:41 PM                                                                                                                    
MR. JEPSEN  related that  the easy  oil in  the legacy  fields is                                                               
gone. He  shared an  experience from  when he  came to  Alaska in                                                               
1982. Companies are now focused  on challenged oil which requires                                                               
complex, high  cost wells.  Most fields are  faulted and  the oil                                                               
isolated.  Multi-lateral wells  have to  be drilled  in order  to                                                               
target five  or six  sands. Flank oil  around reservoir  edges is                                                               
currently being  pursued. In the  80's if the reservoir  was less                                                               
than 15  feet thick  it was  not economic to  develop. Now  it is                                                               
common to  develop 10 foot  sands due to improved  technology. He                                                               
concluded  that in  order to  stem  the decline,  Alaska needs  a                                                               
better investment climate.                                                                                                      
MR. JEPSEN discussed  costly water handling due  to the abundance                                                               
of water in  wells on the North Slope. He  said a billion dollars                                                               
does not go  as far as it  used to. He compared a  picture of the                                                               
initial Alpine development, with a  cost $1.4 billion, to the CD-                                                               
5 drill  site, that will  cost about  $1 billion, with  much less                                                               
capacity.  He  said  inflation has  created  this  situation.  He                                                               
agreed  that oil  companies  focus on  costs  and concluded  that                                                               
Alaska is disadvantaged by high costs.                                                                                          
4:59:20 PM                                                                                                                    
MR. HEINRICH  focused on government  and industry  marginal share                                                               
under ACES as  prices increase. The marginal share  is the change                                                               
in distribution  of cash for  every dollar increase in  price. He                                                               
explained  that the  state's share  also includes  the effect  of                                                               
royalties,  property  taxes,  and  state income  tax.  The  graph                                                               
illustrates  the  effect  of   progressivity  with  the  producer                                                               
receiving less and  less as the price of oil  increases. He noted                                                               
that  oil  companies  do  evaluate projects  across  a  range  of                                                               
prices.  The  difference in  marginal  take  at different  prices                                                               
impacts investment decisions.                                                                                                   
CO-CHAIR  MICCICHE referred  to a  press release  about the  high                                                               
barrel of  oil equivalency (boe) ConocoPhillips  earns in Alaska.                                                               
He  wondered  if  the  company  earns  more  per  barrel  of  oil                                                               
equivalency in Alaska than in the Lower 48.                                                                                     
MR.  HEINRICH  replied that  the  numbers  do confuse  sometimes.                                                               
ConocoPhillips has  90 percent of  their business in  Alaska from                                                               
oil production.  Only 10 percent  of boe  is from gas  in Alaska,                                                               
largely from  Cook Inlet. He said  that in the Lower  48, over 70                                                               
percent  of   their  business  is   from  gas  and   gas  liquids                                                               
production. When you  compare recent depressed gas  prices in the                                                               
Lower 48,  and the  lower price received  per barrel  for natural                                                               
gas  liquids, to  oil  price  revenue in  Alaska,  it  is a  hard                                                               
comparison to  make. On a  boe basis,  when blending gas  and oil                                                               
together,  ConocoPhillips  does  have  a higher  net  income  per                                                               
barrel in Alaska.  When comparing oil to oil, the  net income per                                                               
barrel is much higher in the Lower 48.                                                                                          
MR.  JEPSEN emphasized  that ConocoPhillips  is not  investing in                                                               
natural gas in the Lower 48 anymore.                                                                                            
CO-CHAIR MICCICHE requested a breakdown of oil and gas boe.                                                                     
MR. HEINRICH offered to provide that information.                                                                               
5:05:00 PM                                                                                                                    
SENATOR GARDNER  said progressivity was  designed so that  as the                                                               
tax  rate  increased,   the  tax  payer  could   make  a  capital                                                               
investment in  which the state participated,  thus lowering their                                                               
tax  rate. She  asked if  that provision  has had  any impact  on                                                               
ConocoPhillips' investment decisions.                                                                                           
MR. JEPSEN  replied that the  extremely high tax rate  under ACES                                                               
impacts overall investment decisions in  the Basin. He added that                                                               
ACES impacts  cash flow long  term. ConocoPhillips looks  at more                                                               
metrics than just NPV or IRR.  It also looks at undiscounted cash                                                               
flow.  Alaska's  investment system  is  impaired  because once  a                                                               
project is  on line  "your cash flow  takes a  pretty significant                                                               
hair  cut from  there  on out."  Consequently, ConocoPhillips  is                                                               
investing in Alaska at a  moderate rate and developing resources,                                                               
but is not investing its discretionary cash flow.                                                                               
SENATOR GARDNER restated  her question. She asked  if the ability                                                               
to reduce the  tax rate under ACES has resulted  in an investment                                                               
that has been beneficial to ConocoPhillips.                                                                                     
MR. JEPSEN  explained that ConocoPhillips  takes tax  credits and                                                               
progressivity  into account,  but also  progressivity. They  also                                                               
look  at projects  for the  long  term regarding  cash flow.  Tax                                                               
credits are only  a part of the equation because  they reduce the                                                               
amount of  tax, but do not  impact the amount of  capital that is                                                               
SENATOR GARDNER  asked what ConocoPhillips'  hurdle rate  for oil                                                               
investments is.                                                                                                                 
MR. JEPSEN said that is confidential information.                                                                               
5:07:50 PM                                                                                                                    
CO-CHAIR  DUNLEAVY  asked  about  a  gas-to-liquids  approach  to                                                               
monetizing gas.                                                                                                                 
MR. JEPSEN replied  that ConocoPhillips is not  now pursuing gas-                                                               
to-liquids  options  in  Alaska.  The current  focus  is  on  the                                                               
evaluation of a  large diameter, large scale LNG  plant using ANS                                                               
MR. HEINRICH turned  to a slide about annual  earnings per barrel                                                               
by the state  and by ConocoPhillips. It shows  the annual average                                                               
crude oil  price from 2007  to 2011. ConocoPhillips  Alaska's net                                                               
income  remained  flat during  that  time  due to  progressivity,                                                               
whereas the state had a 90 percent increase.                                                                                    
5:09:43 PM                                                                                                                    
MR. HEINRICH  showed a graph  that represents the  producer share                                                               
under  SB  21 and  under  ACES.  The producer  share  calculation                                                               
depends on  cost structure and  capital credits. The  graph shows                                                               
results  for  FY  2014  as  though SB  21  were  in  effect.  The                                                               
crossover  point is  about $93  per barrel.  To the  left of  $93                                                               
represents a tax increase to the producers.                                                                                     
The  shape of  the curve  is similar  to other  fiscal structures                                                               
found  in  the Lower  48,  but  does  not  tilt the  equation  to                                                               
encourage investment  due to high  costs in Alaska.  He suggested                                                               
ways to make Alaska investments more favorable.                                                                                 
5:13:09 PM                                                                                                                    
SENATOR  GARDNER  asked  if the  statement  "does  not  encourage                                                               
investment  relative to  ACES in  a downward  trending oil  price                                                               
environment"   is   part  of   the   risk   calculation,  or   if                                                               
ConocoPhillips sees the  world as having a  downward trending oil                                                               
price environment.                                                                                                              
MR. HEINRICH  replied that  it is a  complement to  the statement                                                               
"makes  Alaska more  competitive at  $100+ prices"  and is  not a                                                               
perspective on an outlook.                                                                                                      
CO-CHAIR  MICCICHE commented  that Alaskans  are going  to expect                                                               
that the committee  needs to fully understand the  effects of the                                                               
data presented. He  assumed that the various  entities would work                                                               
together on the data and models.                                                                                                
SENATOR  FAIRCLOUGH  said  the  legislative  consultant  is  also                                                               
trying to reconcile models.                                                                                                     
5:15:00 PM                                                                                                                    
CO-CHAIR  DUNLEAVY noted  there  were graphs  that  needed to  be                                                               
MR. JEPSEN appreciated that effort.                                                                                             
MR. HEINRICH  listed observations related  to ACES and SB  21. He                                                               
commented  that under  ACES, progressivity  takes the  upside and                                                               
discourages investment. The tax  credit investment incentives are                                                               
positive,  but  they  do  not  offset  the  negative  effects  of                                                               
He said  that there  are positive  elements to  SB 21,  but noted                                                               
that  there were  also areas  for improvement.  It is  a positive                                                               
step  toward improving  Alaska's business  climate and  it solves                                                               
the high marginal  tax problem. It makes  Alaska more competitive                                                               
at higher oil prices.                                                                                                           
He stressed that the bill  does not contain sufficient investment                                                               
incentives  for  legacy  fields  to  offset  Alaska's  high  cost                                                               
environment. It  does not encourage  investment relative  to ACES                                                               
in a downward trending oil price environment.                                                                                   
5:17:10 PM                                                                                                                    
CO-CHAIR  DUNLEAVY asked,  if the  right  fiscal environment  was                                                               
created, would ConocoPhillips invest in Alaska.                                                                                 
MR. JEPSEN said they would  - under the right investment climate,                                                               
which was dependent on tax changes.                                                                                             
5:18:31 PM                                                                                                                    
CO-CHAIR DUNLEAVY returned the gavel to Co-chair Micciche.                                                                      
CO-CHAIR  MICCICHE   requested  that  committee   members  submit                                                               
amendments  related to  throughput increases.  He Alaska  to stay                                                               
engaged and involved.  He cautioned Alaskans to  not assume where                                                               
members are  on the issues. He  opined he would like  to see some                                                               
changes made before he could support SB 21.