Legislature(2005 - 2006)HOUSE FINANCE 519

03/29/2006 02:00 PM FINANCE


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02:37:50 PM Start
02:38:03 PM HB488
05:44:11 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Meeting Postponed to 2:30 PM Today--
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Major Producers:
Presentations by BP and Chevron
                  HOUSE FINANCE COMMITTEE                                                                                       
                       March 29, 2006                                                                                           
                         2:37 p.m.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Chenault called the House Finance Committee meeting                                                                    
to order at 2:37:50 PM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Richard Foster                                                                                                   
Representative Mike Hawker                                                                                                      
Representative Jim Holm                                                                                                         
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Beth Kerttula                                                                                                    
Representative Carl Moses                                                                                                       
Representative Bruce Weyhrauch                                                                                                  
Representative Bill Stoltze, Vice-Chair                                                                                         
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Steve  Marshall, President,  British Petroleum-Alaska;  Angus                                                                   
Walker, Commercial Vice President,  British Petroleum-Alaska;                                                                   
Tom  Williams, Alaska  Tax Counsel,  British Petroleum;  John                                                                   
Zager,   General  Manager,   Chevron-Alaska,  Kevin   Tabler,                                                                   
Manager, Lands & Government Affairs, Chevron-Alaska                                                                             
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
None                                                                                                                            
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
                Presentations by Producers:                                                                                   
                     British Petroleum                                                                                        
                          Chevron                                                                                             
                                                                                                                                
HB 488    "An Act repealing the oil production tax and gas                                                                      
          production  tax and providing for a  production tax                                                                   
          on the  net value of  oil and gas; relating  to the                                                                   
          relationship of the  production tax to other taxes;                                                                   
          relating to  the dates tax payments  and surcharges                                                                   
          are  due under  AS 43.55; relating  to interest  on                                                                   
          overpayments  under   AS  43.55;  relating  to  the                                                                   
          treatment  of  oil  and  gas production  tax  in  a                                                                   
          producer's  settlement   with  the  royalty  owner;                                                                   
          relating to flared gas,  and to oil and gas used in                                                                   
          the  operation of  a  lease or  property, under  AS                                                                   
          43.55; relating  to the prevailing value  of oil or                                                                   
          gas  under  AS  43.55; providing  for  tax  credits                                                                   
          against  the tax  due  under AS  43.55 for  certain                                                                   
          expenditures,  losses, and surcharges;  relating to                                                                   
          statements  or  other  information required  to  be                                                                   
          filed  with  or  furnished  to  the  Department  of                                                                   
          Revenue,  and relating to  the penalty  for failure                                                                   
          to file  certain reports, under AS  43.55; relating                                                                   
          to the powers of the  Department of Revenue, and to                                                                   
          the disclosure  of certain information  required to                                                                   
          be  furnished to the  Department of Revenue,  under                                                                   
          AS  43.55;  relating   to  criminal  penalties  for                                                                   
          violating  conditions governing  access to  and use                                                                   
          of  confidential information  relating  to the  oil                                                                   
          and gas production tax;  relating to the deposit of                                                                   
          money collected by the  Department of Revenue under                                                                   
          AS 43.55; relating to  the calculation of the gross                                                                   
          value  at the point  of production  of oil  or gas;                                                                   
          relating to  the determination of the  net value of                                                                   
          taxable  oil and gas  for purposes of  a production                                                                   
          tax on  the net value  of oil and gas;  relating to                                                                   
          the definitions of 'gas,'  'oil,' and certain other                                                                   
          terms for  purposes of AS 43.55;  making conforming                                                                   
          amendments; and providing for an effective date."                                                                     
                                                                                                                                
          HB 488 was heard and  HELD in Committee for further                                                                   
          consideration.                                                                                                        
                                                                                                                                
2:38:03 PM                                                                                                                    
                                                                                                                                
HOUSE BILL NO. 488                                                                                                            
                                                                                                                                
     "An  Act  repealing  the  oil  production  tax  and  gas                                                                   
     production  tax and  providing for  a production  tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     relationship  of  the  production  tax to  other  taxes;                                                                   
     relating to  the dates tax  payments and  surcharges are                                                                   
     due   under   AS   43.55;  relating   to   interest   on                                                                   
     overpayments under  AS 43.55; relating to  the treatment                                                                   
     of  oil   and  gas  production   tax  in   a  producer's                                                                   
     settlement  with the royalty  owner; relating  to flared                                                                   
     gas,  and to  oil and  gas used  in the  operation of  a                                                                   
     lease  or  property, under  AS  43.55; relating  to  the                                                                   
     prevailing  value   of  oil  or  gas  under   AS  43.55;                                                                   
     providing for  tax credits against the tax  due under AS                                                                   
     43.55 for certain expenditures,  losses, and surcharges;                                                                   
     relating to statements or  other information required to                                                                   
     be  filed  with  or  furnished   to  the  Department  of                                                                   
     Revenue,  and relating  to  the penalty  for failure  to                                                                   
     file certain  reports, under  AS 43.55; relating  to the                                                                   
     powers  of  the  Department   of  Revenue,  and  to  the                                                                   
     disclosure  of   certain  information  required   to  be                                                                   
     furnished to the Department  of Revenue, under AS 43.55;                                                                   
     relating to criminal penalties  for violating conditions                                                                   
     governing access to and use  of confidential information                                                                   
     relating to the oil and gas  production tax; relating to                                                                   
     the  deposit of  money collected  by  the Department  of                                                                   
     Revenue under  AS 43.55; relating to the  calculation of                                                                   
     the gross  value at  the point of  production of  oil or                                                                   
     gas; relating  to the determination of the  net value of                                                                   
     taxable oil and gas for purposes  of a production tax on                                                                   
     the  net  value   of  oil  and  gas;  relating   to  the                                                                   
     definitions  of 'gas,'  'oil,' and  certain other  terms                                                                   
     for purposes of AS 43.55;  making conforming amendments;                                                                   
     and providing for an effective date."                                                                                      
                                                                                                                                
2:39:15 PM                                                                                                                    
                                                                                                                                
STEVE   MARSHALL,   PRESIDENT,    BRITISH   PETROLEUM-ALASKA,                                                                   
provided the committee  with a written copy  of his testimony                                                                   
(copy on  file.)  He  related that he  has been  watching the                                                                   
oil tax  proceedings over  the last few  weeks with a  lot of                                                                   
interest.   He  emphasized the  significance of  the bill  in                                                                   
front of  the committee.  He  opined that it is  important to                                                                   
provide  the best  information  so that  the legislature  can                                                                   
make the most informed decision.   He noted concern about the                                                                   
changes made  to the bill and  the focus of  the discussions.                                                                   
He stated that the bill is moving  in the wrong direction and                                                                   
has the  potential to hurt Alaska.   He wondered if  the lure                                                                   
of the  short-term  revenues would  jeopardize the  long-term                                                                   
benefits.                                                                                                                       
                                                                                                                                
Mr. Marshall pointed  out that the common ground  between the                                                                   
industry and  the state is production.   The common  enemy is                                                                   
the natural decline of oil and  there are ways to offset that                                                                   
decline  with  investment,  technology,  new ideas,  and  new                                                                   
recovery  techniques.     He   spoke  about  the   danger  of                                                                   
polarization between the industry and the legislature.                                                                          
                                                                                                                                
Mr.  Marshall  related  that   a  final  concern  is  one  of                                                                   
consequence.  He  said he wished he shared  the confidence of                                                                   
consultants   that   increasing   taxes   will   not   reduce                                                                   
investment.   As a  significant investor  in Alaska  the last                                                                   
five years,  he said that one  of his roles has been  to seek                                                                   
capital to sustain  business.  It is a challenge  faced every                                                                   
year.  What  is being contemplated  is going to make  his job                                                                   
more difficult  every  year with projects  that will  compete                                                                   
less favorably than they will today.                                                                                            
                                                                                                                                
Mr. Marshall  emphasized that the  right question to  ask now                                                                   
is what  is the tax structure  and rate that  would encourage                                                                   
additional   investment,   increase    production,   maximize                                                                   
recovery, and provide the state with a fair share.                                                                              
                                                                                                                                
Mr. Marshall spoke of high prices  and profits as part of the                                                                   
reason  British Petroleum  (BP) is in  Alaska. He  maintained                                                                   
that high  prices masks production  decline.   The underlying                                                                   
decline of fields  is about 15 percent.   Through investment,                                                                   
that is  restored to about 6  percent.  He said  the industry                                                                   
has failed to meet projections  in recent years for a variety                                                                   
of reasons  such as  project delays,  less productive  wells,                                                                   
operational  difficulties,  and  the inherent  challenges  in                                                                   
working with a mature basin like the North Slope.                                                                               
                                                                                                                                
Mr.  Marshall pointed  out that  Alaska has  a business  plan                                                                   
that goes  out 50 years.   He spoke  of personal pride  to be                                                                   
involved  with the  creation of  a business  plan called  the                                                                   
"bridge  to  gas".   It  involves  maximizing the  light  oil                                                                   
production for the  past 28 years as well as  bringing on the                                                                   
technologies  that  can access  heavy  oil.   It  is  through                                                                   
providing investments  in the infrastructure that  will lower                                                                   
the unit costs.                                                                                                                 
                                                                                                                                
Mr.  Marshall  spoke  of  the privilege  to  have  led  5,000                                                                   
employees and contractors who  run the day-to-day operations.                                                                   
The 50-year plan  is a reflection of their  dreams and hopes.                                                                   
He shared the  excitement of how BP employees  have responded                                                                   
to the  challenges of the  future.  He  spoke of  being ready                                                                   
for future challenges.                                                                                                          
                                                                                                                                
Mr.  Marshall   addressed  lack  of  appreciation   for  BP's                                                                   
contributions.  He responded to  the criticism that BP is not                                                                   
exploring enough.   He clarified that BP's  business is about                                                                   
maximizing recovery and adding  barrels using technology.  He                                                                   
gave an example  of technology that has the  potential to add                                                                   
400 million  barrels of additional  reserves recovery  on the                                                                   
North Slope,  a big discovery.   Another example would  be an                                                                   
extra  1 percent  recovery  at Prudhoe  Bay,  or 250  million                                                                   
barrels.    New  technology  has the  potential  to  pay  off                                                                   
hugely.                                                                                                                         
                                                                                                                                
Mr.  Marshall concluded  that he  is hopeful  that the  House                                                                   
Finance Committee  will re-direct  the dialogue to  achieve a                                                                   
balanced structure  that results  in an infusion  of capital,                                                                   
reduces decline, creates growth  in state revenue, provides a                                                                   
better balance at high oil prices,  and secures a healthy oil                                                                   
business that  bridges to gas and  beyond.  BP is  willing to                                                                   
provide information  and follow-up so that the  most informed                                                                   
decision can be made.                                                                                                           
                                                                                                                                
2:49:43 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer inquired  about the relationship  of  the 50-                                                                   
year  plan  and  the  justification   to  London  of  capital                                                                   
expenditures each year.  He wondered  about starting out with                                                                   
a tax rate that may be too high,  but could be adjusted later                                                                   
on.                                                                                                                             
                                                                                                                                
Mr. Marshall spoke  of the challenge of producing  a business                                                                   
plan that addresses a vast array  of investments and projects                                                                   
that  are profitable  and  not  too risky.    Every year  the                                                                   
company requests a specific amount  of capital.  This year it                                                                   
was about $590  million for Alaska business.  One  of the key                                                                   
measures is the  economic merit.  Tax rate  - production tax,                                                                   
royalty,  federal  tax,  corporate  taxes  - is  one  of  the                                                                   
factors, as  are the capital cost  and operating cost.   When                                                                   
those  costs are  put  into the  economic  equation it  makes                                                                   
those  investments at  a higher  tax  rate, less  competitive                                                                   
than they  are today.  It  becomes harder to  attract capital                                                                   
to them.                                                                                                                        
                                                                                                                                
2:53:23 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  asked what  would  happen  if the  tax  rate                                                                   
changes  and BP reports  back  to London and  chooses not  to                                                                   
invest in  Alaska because  it is  no longer competitive,  and                                                                   
after a couple  years that tax rate is lowered.   He wondered                                                                   
if BP could recover the lost capital.                                                                                           
                                                                                                                                
Mr. Marshall spoke of the difficulty  of restoring production                                                                   
after  such a loss.   He  pointed out  that BP  is trying  to                                                                   
sustain a  more stable level of  activity, which is  a better                                                                   
way to run  the business.  It  is not easy to bring  back new                                                                   
rigs,  get them  drilling again,  and fill  in the  gap.   He                                                                   
suggested that  the industry has  had to struggle to  keep up                                                                   
with that 6 percent decline.                                                                                                    
                                                                                                                                
2:55:39 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer agreed  that  the state  shares  the goal  of                                                                   
lessening decline and increasing  production.  He stated that                                                                   
BP is re-investing  about $600 million.   He asked if  the 20                                                                   
percent  credit is  of more  value  than the  20 percent  tax                                                                   
rate.                                                                                                                           
                                                                                                                                
Mr.  Marshall  replied  that  the  most  important  thing  is                                                                   
production, in  terms of providing  revenues to the  state or                                                                   
to  the  industry.   Production  will  out  trump  tax  rate.                                                                   
"Growing the  pie will always  be better than a  bigger slice                                                                   
of the pie."   When comparing  tax rate vs. incentives  - tax                                                                   
rate will always out trump incentives.   20/20 as proposed in                                                                   
the governor's  bill, for BP in  2006, at current  prices and                                                                   
with  a  $590  million  capital  investment,  results  in  an                                                                   
effective  tax rate  of about  13  percent.   Under ELF,  the                                                                   
current  tax rate  is about  5.5 percent.   BP  sees that  as                                                                   
doubling the tax  rate.  Growing the barrels  attracts higher                                                                   
taxes, but  also higher royalties.   No amount  of incentives                                                                   
can offset a significant increase in tax rate.                                                                                  
                                                                                                                                
2:58:14 PM                                                                                                                    
                                                                                                                                
Co-Chair  Chenault  addressed   the  15  percent  decline  in                                                                   
production, which  drops to 6 percent due to  investment.  He                                                                   
asked  Mr.  Marshall   to  elaborate  on  "delays   in  large                                                                   
projects".                                                                                                                      
                                                                                                                                
Mr. Marshall responded  that some of the large  projects have                                                                   
been late  and costly.  North  Star was delayed due  to legal                                                                   
challenges and ended up costing  $1.2 billion instead of $400                                                                   
million.  There have been delays  in small projects, as well.                                                                   
He gave an example  of a well that was not  ready before June                                                                   
and had  to be put  into suspension  until December  when the                                                                   
ocean froze again.                                                                                                              
                                                                                                                                
Co-Chair  Chenault asked  if  the delays  are  caused by  the                                                                   
corporation, by  lack of investment  capital, or by  legal or                                                                   
permitting problems.                                                                                                            
                                                                                                                                
Mr. Marshall  said it is not  lack of capital.   The industry                                                                   
has experienced  a shortage of  people out of  college needed                                                                   
to sustain  the industry.  BP  has hired 200 people,  many of                                                                   
them engineers, in order to fulfill the investments.                                                                            
                                                                                                                                
3:01:18 PM                                                                                                                    
                                                                                                                                
Representative  Weyhrauch  asked  if  Mr.  Marshall  said  no                                                                   
amount  of  incentives  or  tax   credits  could  overcome  a                                                                   
problematic  tax  rate.   Mr.  Marshall  said  yes.   In  the                                                                   
analysis of  20/20, if the  incentive is increased  a nominal                                                                   
amount  there is  some  positive impact.    He described  the                                                                   
example  of  20/20 translated  to  13  percent as  the  "best                                                                   
comparison that can be made against today".                                                                                     
                                                                                                                                
Representative  Weyhrauch  asked   about  tradeoffs  and  the                                                                   
intent  of the  bill  to induce  incentives  to develop  oil,                                                                   
which is on a  decline.  He summarized BP's point  of view as                                                                   
being willing to  accept a tax rate that is  smaller than the                                                                   
one in the CS, with certainty  for the long term, and with no                                                                   
interest in  tax credits  or incentives.   He noted  that the                                                                   
incentive part  of the bill  is not the committee's  concern.                                                                   
Mr.  Marshall countered  that  the economic  analysis of  any                                                                   
project going  forward reflects  both the incentives  and the                                                                   
tax rate.   The incentives are  a factor, but the  net effect                                                                   
of  the tax  rate  has  more of  an  impact on  the  economic                                                                   
attractiveness of  any individual project than  the incentive                                                                   
itself.   Ultimately,  it is the  relative attractiveness  of                                                                   
the project  today vs. the  attractiveness of the  project in                                                                   
the  future  that   is  one  of  the  key   drivers  for  the                                                                   
investment.                                                                                                                     
                                                                                                                                
3:04:26 PM                                                                                                                    
                                                                                                                                
Representative Weyhrauch pointed  out that ELF was amended in                                                                   
1989.   He asked if  the bill is  adopted today, in  2006, if                                                                   
that is the end of the useful  life of a taxation scheme.  He                                                                   
inquired if there  are other international models  to look at                                                                   
to determine the useful life of  a tax program.  Mr. Marshall                                                                   
said he does  not know if 17  years is the correct  amount of                                                                   
time.   He  noted that  this project  is unprecedented,  very                                                                   
large, and  a significant  investment.  BP  is looking  for a                                                                   
period  of  certainty  for  oil that  allows  a  healthy  oil                                                                   
business  to  exist,  which  will   underpin  a  healthy  gas                                                                   
business.                                                                                                                       
                                                                                                                                
3:05:48 PM                                                                                                                    
                                                                                                                                
TOM WILLIAMS,  ALASKA TAX COUNSEL, BRITISH  PETROLEUM-ALASKA,                                                                   
discussed how  the tax  structure is viewed  in terms  of how                                                                   
well suited  it is  for the industry's  situation as  well as                                                                   
for  the.   He  elaborated  on the  history  of  the ELF  tax                                                                   
structure in  Alaska.  Oil  resources are being  depleted and                                                                   
it becoming  more challenging  to produce  it.  He  mentioned                                                                   
that the  current structure  might not  be the most  suitable                                                                   
one for the future.                                                                                                             
                                                                                                                                
3:08:52 PM                                                                                                                    
                                                                                                                                
ANGUS WALKER,  COMMERCIAL VICE PRESIDENT,  BRITISH PETROLEUM-                                                                   
ALASKA, referred  to a handout  entitled "BP Presentation  on                                                                   
CSHB 488  (PPT)" (copy on file.)    He addressed  the decline                                                                   
of production in the North Slope  of Alaska as shown on Slide                                                                   
5.  The  historical basin decline  has been around  6 percent                                                                   
per year since  peak production in 1988.  There  was a period                                                                   
of  flattened  production in  2000-01  with the  addition  of                                                                   
Alpine and Northstar.                                                                                                           
                                                                                                                                
Mr. Walker highlighted  the Department of  Revenue production                                                                   
forecasts.   These  forecasts have  been continually  revised                                                                   
downward.    The latest  forecast  projects  a decline  of  3                                                                   
percent  per  year.    He asked  why  the  industry  and  the                                                                   
Department  of Revenue  continually  overestimate  production                                                                   
and fail to  meet expectations when the resources  are there.                                                                   
He explained  that the first reason  is that the  industry is                                                                   
overly optimistic and some things  have proven more difficult                                                                   
and  expensive, such  as  viscous oil.    Some projects  take                                                                   
longer and some  projects don't work.  That is  the nature of                                                                   
the  oil  and  gas  business.   The  primary  reason  is  the                                                                   
unrealistic  expectation  of  investment  in  Alaska.    A  3                                                                   
percent  decline is forecast  and investment  must double  to                                                                   
support  the industry.    Production is  "King"  in terms  of                                                                   
revenue to the state - 100,000  barrels of production is $500                                                                   
million less in  revenues at today's prices.  It  is of great                                                                   
concern that  production is declining  and the  forecasts are                                                                   
continually being revised downwards.                                                                                            
                                                                                                                                
3:14:44 PM                                                                                                                    
                                                                                                                                
Mr. Walker referred to Slide 6  - Investment Offsets Decline.                                                                   
He  explained three  decline rate  scenarios  and what  would                                                                   
happen  if  investment  were  stopped  in  the  North  Slope.                                                                   
Production would  decline very  rapidly and terminate  around                                                                   
2012.   The green line,  the 6 percent  decline line,  is the                                                                   
extrapolation of  historical decline.  In order  to achieve 6                                                                   
percent,  the industry  is spending  between  $1 billion  and                                                                   
$1.5  billion  a year.    One  should not  underestimate  the                                                                   
effort that  goes into  achieving that  6 percent decline:  a                                                                   
workforce of 5,000 and between  $600-$700 million in capital,                                                                   
and about  $1 billion  in operating  costs.  To  move to  a 3                                                                   
percent decline requires an investment  of between $2 billion                                                                   
to $3  billion a  year.   Unless investment  is attracted  to                                                                   
Alaska the forecast will be revised downward in the future.                                                                     
                                                                                                                                
3:18:18 PM                                                                                                                    
                                                                                                                                
Mr. Walker addressed Co-Chair  Meyer's question about setting                                                                   
too high of a tax rate.  He emphasized  that production would                                                                   
fall quickly, after 2-3 years  on the wrong decline line, and                                                                   
would be impossible to recover from.                                                                                            
                                                                                                                                
Representative Holm  referred to Mr. Marshall's  presentation                                                                   
where  he  stated that  BP  is  investing $500  million  into                                                                   
Alaska  operations.    He  requested  clarification  about  a                                                                   
mention of investing  $1 billion to $1.5 billion  into Alaska                                                                   
to keep the industry going.                                                                                                     
                                                                                                                                
Mr. Walker responded  that the $1 billion to  $1.5 billion is                                                                   
the investment  required by the  whole industry on  the North                                                                   
Slope.   The  $2  billion  to $3  billion  is what  would  be                                                                   
required  to meet  the 3 percent  decline line.   He  related                                                                   
that  the  current  level  of   investment,  which  has  been                                                                   
attracted to Alaska and predicated  on the ELF tax system, is                                                                   
looking at a  $1 billion increase in taxes  at current prices                                                                   
under the new system.   A tax increase does not  equate to an                                                                   
increase in  investment.  The  new 20/20 tax  structure would                                                                   
result  in less  investment  than  is currently  being  made.                                                                   
Many  examples  around the  world  show that  lowering  taxes                                                                   
increases investment.                                                                                                           
                                                                                                                                
3:22:16 PM                                                                                                                    
                                                                                                                                
Representative Kerttula pointed  to BP's profit, which allows                                                                   
for continued  investment on the  North Slope.   She referred                                                                   
to the United  Kingdom and Norway where taxes  were raised in                                                                   
juxtaposition  with  certain  incentives.   She  requested  a                                                                   
response to those two concerns.                                                                                                 
                                                                                                                                
Mr.  Walker  put off  the  question  of comparison  to  other                                                                   
regimes to later on in the presentation.   He spoke of recent                                                                   
excellent  profits as  a function  of high  prices.  He  said                                                                   
that  when  prices  are  very   low,  no  profits  are  made.                                                                   
Everyone benefits from high prices.                                                                                             
                                                                                                                                
Representative  Kerttula noted  that the committee's  purpose                                                                   
is to try  to determine a  balance between the state  and the                                                                   
industry.                                                                                                                       
                                                                                                                                
3:25:07 PM                                                                                                                    
                                                                                                                                
Mr. Marshall spoke  of disappointment with the  Badami Fields                                                                   
reservoir that was more compartmentalized  than expected.  He                                                                   
noted that  there have  been a number  of examples  of fields                                                                   
which have  disappointed  and are not  reflected in  profits.                                                                   
He  spoke  of  a dry  hole  experience  loss  in  the  Mukluk                                                                   
project.  He  asked the committee to consider  the risks that                                                                   
the industry has taken.                                                                                                         
                                                                                                                                
Representative Kerttula  asked how long ago Badami  was.  Mr.                                                                   
Marshall said that  it was restarted last year.   Investments                                                                   
were made  in the late 1990s,  and production was  started in                                                                   
1998-9 and did not achieve expected rates.                                                                                      
                                                                                                                                
Mr.  Walker reiterated  that decline  is  the most  important                                                                   
issue facing the industry and the state.                                                                                        
                                                                                                                                
3:28:19 PM                                                                                                                    
                                                                                                                                
Mr.  Walker referred  to Slide  7 to  discuss the  industry's                                                                   
strategy and how BP is addressing  the decline.  The strategy                                                                   
is to create a 50-year business  in Alaska by focusing on the                                                                   
large known resources  that exist on the North  Slope such as                                                                   
light  oil,  viscous  oil,  and  gas.   The  future  is  very                                                                   
different  than   the  past  and  it  has   many  challenges.                                                                   
Technology is being pursued to  develop the Liberty Field and                                                                   
heavy oil.   BP has been  investing in infrastructure  to get                                                                   
ready for the future  and has spent $1 billion  on four ships                                                                   
and  $400 million  to update  the  pipeline.   Each of  these                                                                   
investments  is designed  to reduce  costs  and increase  the                                                                   
wellhead value  of oil  for the benefit  of the industry  and                                                                   
the state.  Mr. Walker noted that  200 people have been hired                                                                   
this year for the additional projects and investments.                                                                          
                                                                                                                                
3:32:05 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula asked  if  the costs  spent on  TAPS                                                                   
would go  through the  normal process  with the state  paying                                                                   
one-quarter of the cost.                                                                                                        
                                                                                                                                
Mr.  Walker  explained  that  the costs  spent  on  TAPS  are                                                                   
incorporated  into the tariff  that is paid  by all  users of                                                                   
the system.   He explained  how the  investment in  the ships                                                                   
results in a reduction of shipping  costs, which results in a                                                                   
higher wellhead  value, which results in higher  royalties to                                                                   
the state.                                                                                                                      
                                                                                                                                
Representative  Kerttula pointed out  that the state  ends up                                                                   
paying a quarter on every dollar spent on TAPS.                                                                                 
                                                                                                                                
Mr. Williams  explained that  it is  not the TAPS  settlement                                                                   
methodology.    It is  the  fact that  if  it goes  into  the                                                                   
tariff, both the  royalty and severance tax are  based on the                                                                   
net value.  They work the same way.                                                                                             
                                                                                                                                
Mr. Walker  noted that  BP would spend  $14 billion  over the                                                                   
next ten  years in  Alaska to  execute this  strategy.   Half                                                                   
will be  spent on  gas - half  on oil.   The total  is double                                                                   
what has been  spent in recent years on the  upstream portion                                                                   
of the  business.  In  order to deliver  the strategy,  BP is                                                                   
concerned  that the  wrong outcome  from these  deliberations                                                                   
would be a tax that is too high for the industry.                                                                               
                                                                                                                                
3:34:35 PM                                                                                                                    
                                                                                                                                
In  response to  a  question  by Representative  Hawker,  Mr.                                                                   
Williams explained  that once the new pipeline  is built, the                                                                   
new gas would be found to fill it.                                                                                              
                                                                                                                                
Representative Hawker  referred to the Administration's  high                                                                   
volume and low  volume scenarios.  He observed  that there is                                                                   
a  presumption of  a long-term  scenario  that every  3 to  6                                                                   
years new reserves  would be brought on line.   BP's scenario                                                                   
appears to be  more linear.  He questioned  if BP anticipates                                                                   
new discoveries.                                                                                                                
                                                                                                                                
Mr. Walker observed  that the state's assumption  is flat and                                                                   
then declines on the new gas line  scenario.  Based on recent                                                                   
history,  it is  known  that the  North  Slope is  declining.                                                                   
BP's  view  is  that  the  new   gas  line  scenario  is  too                                                                   
optimistic.                                                                                                                     
                                                                                                                                
Representative  Hawker  pointed out  that  they were  talking                                                                   
about  "new   oil"  not   new  gas.     Mr.  Walker   agreed.                                                                   
Representative Hawker  asked if Mr. Walker believes  that the                                                                   
state's model is  not as realistic as the  industry believes.                                                                   
Mr. Walker noted a problem in  Alaska of the massive resource                                                                   
base  and said  that any  of the  scenarios  are possible  in                                                                   
total  volume -  in the sense  that  the oil is  there.   The                                                                   
questioned  is,  can  the  development   occur  in  light  of                                                                   
investments.   The industry agrees  that there would  be more                                                                   
oil development  if the gas line  were built.  It  would take                                                                   
issue  with  the  assumption that  an  alpine-type  field  is                                                                   
discovered  every three  years.   The  industry's profile  is                                                                   
based  on   multiple,  repetitive  investments   in  existing                                                                   
fields.                                                                                                                         
                                                                                                                                
Mr. Walker added  that the strategy is to concentrate  on the                                                                   
known resource  base, since  that is  where the  oil is.   He                                                                   
acknowledged the importance of exploration.                                                                                     
                                                                                                                                
3:41:10 PM                                                                                                                    
                                                                                                                                
Representative  Joule referred  to the  model of the  50-year                                                                   
vision  and questioned  if  a model  has  been developed  for                                                                   
offshore  oil.   Mr.  Walker  explained that  development  of                                                                   
Liberty  is the only  oil included  in federal  waters.   The                                                                   
view  is  specific  to  BP.   An  industry  view  would  look                                                                   
different.                                                                                                                      
                                                                                                                                
3:42:25 PM                                                                                                                    
                                                                                                                                
Mr. Walker reviewed Slide 8, the  link between production and                                                                   
revenue.   There are  three decline  scenarios that  show the                                                                   
volume of oil until the North  Slope is shut down.  Operating                                                                   
expenses and industry investments  were included.  If BP were                                                                   
successful  in  moving to  a  3 percent  decline,  production                                                                   
would double.   The cost to  operate would also double.   The                                                                   
industry investment  required  above operating expense  would                                                                   
increase from $20 billion to $60 billion.                                                                                       
                                                                                                                                
Mr.  Walker reported  that the  affect on  state revenue  was                                                                   
reviewed.   There would be an  impact on the whole  of Alaska                                                                   
in terms of  jobs, industry, infrastructure, etc.   The total                                                                   
state  revenue  derived  from property  tax,  royalty,  state                                                                   
corporate income tax, and severance  tax was included.  It is                                                                   
clear that the  most important aspect is to  get "volume down                                                                   
the pipeline", in terms of generating  revenue for the state.                                                                   
He  maintained  that  PPT  is  relatively  unimportant.    He                                                                   
suggested that  a production tax could  be set at zero  if it                                                                   
stimulated investment.                                                                                                          
                                                                                                                                
3:46:41 PM                                                                                                                    
                                                                                                                                
Representative Holm  noted that the assumption is  that it is                                                                   
in the  best interest of  the state of  Alaska to  insure the                                                                   
fastest  use  of  a  non-renewable   resource.    Mr.  Walker                                                                   
responded  that if the  decline continues  at the same  rate,                                                                   
industry  would not be  able to  support the  infrastructure.                                                                   
Once the  oil has declined, the  industry will be gone.   The                                                                   
decision is how  long can the industry last and  how much oil                                                                   
can be  brought out  of the  ground.   The industry  will not                                                                   
return  after  it  leaves,  that   is  why  Alaska  is  being                                                                   
encouraged  to develop  as much  of  its resource  as it  can                                                                   
while it still has infrastructure to support it.                                                                                
                                                                                                                                
Mr. Marshall maintained if that  is successful, it could last                                                                   
30-40  years  or longer.    He  explained that  the  industry                                                                   
continues to find new ways to  maximize recovery.  There is a                                                                   
finite  limit  of oil.    The  challenge  is  to get  to  the                                                                   
technical limit,  which has changed.  Sustaining  momentum is                                                                   
the key.                                                                                                                        
                                                                                                                                
3:51:38 PM                                                                                                                    
                                                                                                                                
Representative Hawker referred  to slides 3 and 8 and noted a                                                                   
discrepancy.  Mr. Walker explained  that slide 3 refers to an                                                                   
investment of two  to three billion on an  annual investment.                                                                   
Slide 8 looks at spending more  money over a longer period of                                                                   
time.                                                                                                                           
                                                                                                                                
Mr.  Walker   concluded  that  less  investment   means  less                                                                   
revenues  and  more  investment   means  more  revenues.  The                                                                   
question is what is necessary to increase investment.                                                                           
                                                                                                                                
3:54:17 PM                                                                                                                    
                                                                                                                                
Mr. Walker reviewed  Slide 9 and the impact of  the tax rate.                                                                   
He concluded  that the tax  rate does  matter.  The  state of                                                                   
Alaska  already  has  one  of  the highest  tax  rates.    He                                                                   
maintained that progressivity  would result in a  tax rate of                                                                   
75 percent.   He compared Alberta's  tax rate and  noted that                                                                   
they  have  been  successful  in  attracting  development  by                                                                   
reduction  taxes.   Their  tax  rate is  39  percent until  a                                                                   
project pays  out, when it reverts  to 54 percent.   The Gulf                                                                   
of Mexico has also been successful  in attracting investment.                                                                   
                                                                                                                                
Representative  Holm questioned what  a marginal tax  rate of                                                                   
61 percent included.   Mr. Walker responded  that leaseholder                                                                   
royalties were  included.  He  explained that all  taxes paid                                                                   
were  included: property  tax, royalty,  federal income  tax,                                                                   
severance tax, and corporate income tax.                                                                                        
                                                                                                                                
3:58:12 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula   wondered  if  all   other  states'                                                                   
severance taxes are comparable  to Alaska's.  Mr. Walker said                                                                   
he does  not have the numbers.   Mr. Williams  indicated that                                                                   
every state could  have a severance tax and most  of them do.                                                                   
In  1977, Louisiana  had the  highest severance  tax of  12.5                                                                   
percent.   Alaska is  at 12.25 percent.   He discussed  lower                                                                   
rates of taxes based on category  of well.  He described West                                                                   
Virginia's severance tax.                                                                                                       
                                                                                                                                
Representative  Kerttula  asked  what  the offset  is.    Mr.                                                                   
Walker  said the  numbers are  an amalgamation  of all  taxes                                                                   
paid.    Representative  Kerttula   asked  about  commonality                                                                   
between states.                                                                                                                 
                                                                                                                                
4:01:23 PM                                                                                                                    
                                                                                                                                
Mr. Marshall  added that as  BP looks at comparisons  between                                                                   
countries and states,  the missing ingredient is  geology.  A                                                                   
100 million  barrel field found  in Alaska is  different than                                                                   
one  found  in Norway  or  in  West  Texas.   The  costs  are                                                                   
different and the efficiencies  do not compare.  An important                                                                   
ingredient in the economic analysis is capital efficiency.                                                                      
                                                                                                                                
Mr.  Williams  restated  Representative  Kerttula's  question                                                                   
about commonality  factors.  The  primary assumption  is that                                                                   
                th                                                                                                              
percent corporate  federal income tax rate,  which is another                                                                   
major common element.  Most of  the states have a 5-8 percent                                                                   
severance tax rate.                                                                                                             
                                                                                                                                
Representative  Kerttula  asked  why Alaska  is  already  the                                                                   
highest cost region  to operate and if that is  based on PPT.                                                                   
Mr. Walker  pointed out that the  yellow bar, AK ELF,  is the                                                                   
current situation.   Mr. Walker  commented that the UK  is an                                                                   
excellent  role model  for any  country  looking to  increase                                                                   
investment.  He referred to two quotes by Daniel Johnston:                                                                      
                                                                                                                                
     The "gross benefits" to the  UK Government go way beyond                                                                   
     direct  tax revenues  and  royalties  received from  the                                                                   
     upstream  sector   of  the  petroleum  industry.     The                                                                   
     economic impact  of the industrial hyperactivity  in the                                                                   
     UK  sector of  the North  Sea,  a direct  result of  the                                                                   
     "lenient" terms of the 1990's,  is difficult to measure.                                                                   
                                                                                                                                
     The  UK   offshore  became  the  most   active  offshore                                                                   
     province in the world.  Reducing  the Government take in                                                                   
     the  following  years  managed  to  sustain  that  boom.                                                                   
     Activity and employment in  the British petroleum sector                                                                   
     is healthy and robust.                                                                                                     
                                                                                                                                
He spoke to the difficulty of comparing two systems.                                                                            
                                                                                                                                
4:06:52 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  asked if  the UK  recently  increased                                                                   
their tax structure  by 10 percent.  Mr. Walker  said that is                                                                   
correct.    The  UK increased  their  corporate  income  tax.                                                                   
Representative  Hawker  noted  the UK's  tax  reduction  mode                                                                   
previously vs. raising taxes now.   Mr. Walker responded that                                                                   
the country made decisions based  on its needs to attract new                                                                   
players  and stimulate  investment.   Now they are  reversing                                                                   
those tends.  Representative Hawker  asked for a copy of that                                                                   
report.                                                                                                                         
                                                                                                                                
Mr. Walker concluded  by stating that Alaska has  lots of oil                                                                   
and gas,  but declining  production.  Significant  investment                                                                   
is needed  to stem the decline.   Maximizing  production will                                                                   
maximize state  revenues and benefits  to Alaska.  With  a 20                                                                   
percent tax rate,  Alaska will have the highest  tax rate and                                                                   
the highest cost  structure in the U.S.  The  bill as drafted                                                                   
will not maximize  benefits to Alaskans.  The  UK and Alberta                                                                   
have  successfully   attracted  significant   investment  and                                                                   
increased  production by  reducing taxes  and are thus  great                                                                   
role models.                                                                                                                    
                                                                                                                                
4:10:56 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer noted  that the common goal is to  get as much                                                                   
oil  as possible  down the  pipeline.   He  pointed out  that                                                                   
20/20  is the highest  tax  rate in  the U.S.   He asked  how                                                                   
Alaska would compete domestically  with such a high rate.  He                                                                   
asked if  the industry  is proposing a  smaller number.   Mr.                                                                   
Walker responded that  the right answer for Alaska  is a rate                                                                   
less  than  20/20,  but  BP has  agreed  not  to  oppose  the                                                                   
governor's bill because it is a steppingstone to gas.                                                                           
                                                                                                                                
Representative  Kelly  asked  if three  different  tax  rates                                                                   
would work  better for  the different types  of fields.   Mr.                                                                   
Walker  said  that  the  vast  resources  in  Alaska  are  in                                                                   
existing  fields and  the focus  should  be on  incentivizing                                                                   
development across  the board.   He said there should  be one                                                                   
rate.                                                                                                                           
                                                                                                                                
4:14:34 PM                                                                                                                    
                                                                                                                                
Representative  Hawker referred  to Slide  12, critiques  and                                                                   
challenges of the  proposed bill.  He said he  tends to agree                                                                   
with the  points made.   He  noted that  complexity is  not a                                                                   
good objective in tax structures.   He asked for a comment on                                                                   
WTI not being a proxy for ANS  crude.  Mr. Williams explained                                                                   
that WTI is a sweet crude and  has low sulfur content.  North                                                                   
Slope  oil  is  moderately  sulfurous,  which puts  it  in  a                                                                   
different category.   During windfall  times, those  who have                                                                   
trouble are the  ones who are least flexible.   "Spot prices"                                                                   
is  the  marketplace  and  is  based  on  real  sales.    The                                                                   
composition  of North Slope  oil is going  to move  away from                                                                   
that of WTI.  There will be more  viscous oil that is ANS and                                                                   
will be more expensive to refine.   It will move further away                                                                   
from WTI.  He explained that wherever  the windfall threshold                                                                   
is, eventually a point will be  reached that matches it.  All                                                                   
of the  value out of  the ground is  consumed by the  cost of                                                                   
getting it out of the ground.                                                                                                   
                                                                                                                                
4:20:30 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  noted   that  three  major  producers                                                                   
dominate ANS,  which allows for  manipulation.   Mr. Marshall                                                                   
responded that  ANS is a unique  market because of  the Jones                                                                   
Act, which  only allows transport  between U.S. ports.   West                                                                   
Texas has  access to many  refineries, but ANS  is restricted                                                                   
to the West Coast.   WTI is not a good benchmark  because the                                                                   
market is weak.  Many refineries  have tried to copy ANS.  BP                                                                   
tries to maximize  the value of  ANS to Alaska.  The  goal is                                                                   
to get full benefit for every barrel of Alaskan crude.                                                                          
                                                                                                                                
Mr.  Williams  added that  there  were  a handful  of  export                                                                   
transactions  allowed  during   the  Clinton  administration.                                                                   
Representative  Hawker related  that  back when  there was  a                                                                   
surplus,  there was  more of an  ability to  affect the  West                                                                   
Coast  market.    Mr.  Marshall  did not  want  to  leave  an                                                                   
impression that the market could  be manipulated.  One of the                                                                   
challenges that ANS  faces is that it is difficult  to find a                                                                   
buyer.                                                                                                                          
                                                                                                                                
4:26:03 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula asked about  the profit side  of the                                                                   
industry  in Alaska  compared to  other places.   Mr.  Walker                                                                   
replied that if  it costs less to get oil out  of the ground,                                                                   
and  there is  less tax,  then  there would  be more  profit.                                                                   
Representative Kerttula requested more information.                                                                             
                                                                                                                                
Representative  Holm suggested  that the  higher tax  rate is                                                                   
needed is because  the value of oil has increased.   He asked                                                                   
about the rate of return at $60  per barrel.  Mr. Walker said                                                                   
BP  is excited  about current  prices.   BP does  not make  a                                                                   
profit until oil is above $22.50  per barrel.  BP can justify                                                                   
the  20/20  tax  due  to  adjusting  the  share  between  the                                                                   
industry and the state at higher prices.                                                                                        
                                                                                                                                
Representative  Holm noted  that the  increase value  between                                                                   
$25 and  $60 is  $11 billion  a year.   Mr. Walker  responded                                                                   
that  their   analysis  shows  a  significant   reduction  in                                                                   
industry take  under PPT and a  balancing of state take.   He                                                                   
offered to share that information.                                                                                              
                                                                                                                                
4:31:26 PM                                                                                                                    
                                                                                                                                
Representative Kelly noted that  when prices so high they are                                                                   
a lot less sensitive  to BP's investment.   Concern is higher                                                                   
at $30 than at  $60.  Mr. Walker replied that  he would sleep                                                                   
better  at night  if  prices were  high.    He repeated  what                                                                   
happens at a  $22.50 situation and noted that  there are many                                                                   
factors involving doing business in Alaska.                                                                                     
                                                                                                                                
4:34:34 PM                                                                                                                    
                                                                                                                                
Representative  Foster requested  a copy of  the slide.   Mr.                                                                   
Walker said  it is a  compilation of  page 12 of  the written                                                                   
testimony.                                                                                                                      
                                                                                                                                
Mr. Williams  addressed Representative Kelly's  concerns.  He                                                                   
said $33 is  not a high price  today, but in 1980  it was the                                                                   
price  that Sohio  put on North  Slope oil  delivered on  the                                                                   
West  Coast.   Minus inflation  those prices  have not  since                                                                   
been matched  at today's prices.   It would be  equivalent to                                                                   
$72 per barrel today.                                                                                                           
                                                                                                                                
4:36:57 PM                                                                                                                    
                                                                                                                                
Representative  Joule inquired  about the  50-year vision  in                                                                   
Slide  4.    He maintained  that  the  legislature  is  at  a                                                                   
disadvantage  because it  lacks  information about  gas.   He                                                                   
wondered  if  the  legislature   is  supposed  to  trust  the                                                                   
industry on oil because much would be made up for in gas.                                                                       
                                                                                                                                
Mr.  Williams replied  that in  due  course, the  legislature                                                                   
will get to  see the details of  the gas contract.   The bill                                                                   
should be considered  as the right thing to do  for oil.  The                                                                   
oil industry needs  to be healthy and investment  needs to be                                                                   
attracted to Alaska.                                                                                                            
                                                                                                                                
4:38:36 PM                                                                                                                    
                                                                                                                                
Representative Weyhrauch  asked if the oil industry  would be                                                                   
amenable   to   resolve   all    disputes   through   binding                                                                   
arbitration, without appeal.   Mr. Williams said he could not                                                                   
take a position on that.                                                                                                        
                                                                                                                                
AT EASE:       4:39:40 PM                                                                                                     
RECONVENE:     4:51:09 PM                                                                                                     
                                                                                                                                
BRITISH PETROLEUM PRESENTATIOIN                                                                                               
                                                                                                                                
JOHN ZAGER,  GENERAL MANAGER,  CHEVRON-ALASKA, referred  to a                                                                   
handout  "Chevron - Alaska  Area" (copy  on file)  throughout                                                                   
his  presentation.    He discussed  the  current  asset  base                                                                   
formed  by the  combination of  heritage  Chevron and  Unocal                                                                   
assets.  Both  companies have been active in  Alaska for many                                                                   
                         th                                                                                                     
years.  Chevron  is the 4  largest producer in  the state and                                                                   
     rd                                                                                                                         
the 3  largest  operator.  It has 382 employees  or full time                                                                   
contractors, 272  of which are based on the  Kenai Peninsula,                                                                   
with a  payroll of more than  $45 million.   Chevron supports                                                                   
other  companies by  supplying them  energy: Tesoro,  Enstar,                                                                   
Chugach Electric,  Agrium and Aurora  Power.  Chevron  is the                                                                   
only producer in the state with  a relative balance of assets                                                                   
in the Cook Inlet and on the North Slope.                                                                                       
                                                                                                                                
Mr.  Zager referred  to  Slide 3,  which  portrays the  North                                                                   
Slope fields,  a net  production of  about 16,000 barrels  of                                                                   
oil equivalent  per day  (BOEPD).   He reported that  Chevron                                                                   
owns a little bit of most of the  major fields and 50 percent                                                                   
of the fields in ANWAR that have been leased.                                                                                   
                                                                                                                                
4:55:39 PM                                                                                                                    
                                                                                                                                
Mr.  Zager  showed  Slide  4,  the  Cook  Inlet  assets  both                                                                   
offshore and onshore.  In recent  years exploration has taken                                                                   
place in the Kenai area.  Slide  5 depicts pictures of assets                                                                   
in Trading  Bay,  which has  difficult operating  conditions.                                                                   
Chevron takes great  pride in the environmental  care used in                                                                   
this area.                                                                                                                      
                                                                                                                                
Mr. Zager  noted that  most of his  testimony would  focus on                                                                   
Cook Inlet  assets.  Cook Inlet  is different than  the North                                                                   
Slope  assets and  deserves special  consideration  regarding                                                                   
the new  tax regime.   Slide 6  depicts Cook Inlet  Offshore.                                                                   
He described  the percent of barrels  that are water  cut and                                                                   
how costly it is to operate this area.                                                                                          
                                                                                                                                
Slide 7 shows  Trading Bay Unit, the single  biggest asset in                                                                   
Cook Inlet.   It has decreased  drastically in the  number of                                                                   
barrels per day and has a greater percentage of water cut.                                                                      
                                                                                                                                
Slide 8  depicts the Cook  Inlet net oil production  history,                                                                   
which  has declined  from  about 12,000  barrels  per day  to                                                                   
6,400.                                                                                                                          
                                                                                                                                
Slide  9 shows  the  Cook Inlet  Offshore  oil  and the  high                                                                   
operating  costs  and  risks.   Cook  Inlet  Offshore  cannot                                                                   
afford  an additional  tax  burden.   He  spoke of  earnings,                                                                   
which involves adding back depreciation.   Further production                                                                   
declines will raise breakeven prices even further.                                                                              
                                                                                                                                
5:02:47 PM                                                                                                                    
                                                                                                                                
Slide  10, Chevron  Cook Inlet  Strategic  Study, deals  with                                                                   
when Chevron acquired Unocal in  2005.  A strategic study was                                                                   
done  and  it  was  determined  that  there  are  incremental                                                                   
investment opportunities  in Cook  Inlet.  In  February 2006,                                                                   
Chevron announced a decision that  it would retain all of the                                                                   
Cook  Inlet assets,  with  the intent  to  begin a  multiyear                                                                   
investment program.   Chevron will retain the  current office                                                                   
locations.    Alaska  is  now   a  major  part  of  Chevron's                                                                   
portfolio.                                                                                                                      
                                                                                                                                
5:05:25 PM                                                                                                                    
                                                                                                                                
Slide  10   deals  with   the  fact   that  the  Cook   Inlet                                                                   
reinvestment   program  was  evaluated   using  the   current                                                                   
severance tax assumption (zero  severance tax).  He explained                                                                   
that  when  modeled   under  the  proposed  20/20   PPT,  the                                                                   
economics  on some projects  are degraded  and some  projects                                                                   
are improved.   Overall, it  results in poorer  economics for                                                                   
the program.   He addressed the  fact that oil taxes  will go                                                                   
up dramatically.   It will  cause investment decisions  to be                                                                   
reconsidered.   Higher taxes  will cause  less capital  to be                                                                   
spent.   Enhanced PPT  terms could  significantly expand  the                                                                   
list  of economic  projects  in  the investment  program  and                                                                   
significantly extend the life of offshore oil production.                                                                       
                                                                                                                                
Representative  Hawker asked about  the surtax that  is being                                                                   
charged on  the gross price  of oil.   Mr. Zager  agreed that                                                                   
the surtax should  be based on net rather than  on gross.  He                                                                   
shared a concern on the cash flow of the net profits tax.                                                                       
                                                                                                                                
5:11:02 PM                                                                                                                    
                                                                                                                                
Mr.  Zager referred  to  Slide 12  - "Cook  Inlet  Production                                                                   
Forecast with  Four Year Capital  Plan".  He  highlighted the                                                                   
decline without  further investment.  In about  2009, Trading                                                                   
Bay would be depleted.  With investment  the projection would                                                                   
be held flat for four years.                                                                                                    
                                                                                                                                
Slide  13 -  "Alaska  Oil Production  -  January 2006  BOPD".                                                                   
Cook Inlet is only about 2 percent  of the state's production                                                                   
of oil.  He  mentioned that the benefit of the  impact of tax                                                                   
on  Cook Inlet  oil  for the  state would  be  insignificant.                                                                   
Slide 14 depicts the same information  with gas added in.  He                                                                   
spoke of  how important  gas is  to the  Anchorage area.   He                                                                   
defined the  strategic value of  these assets as  making sure                                                                   
production is there for future years.                                                                                           
                                                                                                                                
5:15:08 PM                                                                                                                    
                                                                                                                                
Mr.  Zager asked  the  committee to  consider  Cook Inlet  as                                                                   
different than  the North Slope.   Slide 15 shows  reasons to                                                                   
lower taxes and provide incentives  for additional Cook Inlet                                                                   
investment.  He  pointed out that gas is running  out, and he                                                                   
suggested alternatives  such as coal, nuclear,  hydroelectric                                                                   
power, and  L & G import,  and addressed their  difficulties.                                                                   
He spoke  of a current lack  of significant exploration.   He                                                                   
said that  production tax is a  pass through on  most utility                                                                   
contracts.  Oil redevelopment  will maintain and add new jobs                                                                   
and will extend field life.  Cook  Inlet competes for capital                                                                   
with other  areas in North America  and does not  compete for                                                                   
global  capital.   Under  PPT,  Alaska  will have  the  worst                                                                   
fiscal terms in the U.S.                                                                                                        
                                                                                                                                
5:19:02 PM                                                                                                                    
                                                                                                                                
Mr.  Zager   explained  that   Slide  16  lists   Cook  Inlet                                                                   
provisions in the bill to date.   The House Resources version                                                                   
of the  bill has no  incentives for Cook  Inlet.   The Senate                                                                   
Resources version provides a 5,000  BOPD exemption, but fails                                                                   
to provide  any real help  to Cook Inlet.   He suggested  two                                                                   
reasons given  not to consider  a Cook Inlet provision.   The                                                                   
first is that it complicates the  bill.  The second reason is                                                                   
that the  system must be uniform  over the entire state.   He                                                                   
argued that  there are  statutes that distinguish  geographic                                                                   
areas.                                                                                                                          
                                                                                                                                
Slide 17  refers to the  Senate version  of PPT.   He related                                                                   
the Senate formula  for the 5,000-barrel exemption.   Chevron                                                                   
produces 40,000  a day and would  get 187 barrels  credit out                                                                   
of the 5,000.  He noted the amount  for other producers.  The                                                                   
reduction would be trivial for Chevron.                                                                                         
                                                                                                                                
5:24:22 PM                                                                                                                    
                                                                                                                                
Mr. Zager reviewed Slide 18, which  shows that any Cook Inlet                                                                   
provision should be specific to  Cook Inlet.  When looking at                                                                   
incremental investments in the  state, total business must be                                                                   
considered.   Credit  sits on  the bottom  and anything  that                                                                   
raises  the "boat"  engages the  tax.   Anything above  5,000                                                                   
would  be hit  by  the PPT  tax.     He summarized  that  any                                                                   
provisions for Cook  Inlet must be specific to  Cook Inlet or                                                                   
areas outside of the North Slope.                                                                                               
                                                                                                                                
Mr.  Zager stated  that  the  biggest disappointment  of  the                                                                   
House Resources CS  is that it does not recognize  the unique                                                                   
value  and  challenged  position  of  the  Cook  Inlet.    He                                                                   
concluded that  the revisions,  as proposed, would  lower the                                                                   
economics of  capital investments in  the Cook Inlet  and put                                                                   
the  capital  program  in  jeopardy.    Without  capital  the                                                                   
McArthur River  Field will be  gone in about four  years, and                                                                   
with it the critical mass for Cook Inlet oil industry.                                                                          
                                                                                                                                
5:26:59 PM                                                                                                                    
                                                                                                                                
Representative  Holm asked  what price  of oil the  four-year                                                                   
capital  assumption was  based  on.   Mr. Zager  acknowledged                                                                   
that it  was based on a  price lower than the  current price.                                                                   
Representative  Holm  suggested   that  $60  barrel  oil  was                                                                   
"pretty good" for the four-year plan.                                                                                           
                                                                                                                                
Mr. Zager pointed out that the  breakeven point is well above                                                                   
$25-$30 per barrel.                                                                                                             
                                                                                                                                
Representative  Holm noted  that Chevron  had spoken  against                                                                   
severance  taxes.   Mr. Zager  disagreed with  Representative                                                                   
Holm's statement.   He concluded  that the lower the  tax the                                                                   
better.                                                                                                                         
                                                                                                                                
5:29:31 PM                                                                                                                    
                                                                                                                                
Mr. Zager  discussed ideas to  help Cook Inlet  producers, as                                                                   
summarized on Slide 20. He observed  that Cook Inlet could be                                                                   
left  under  the current  system.    There  could also  be  a                                                                   
special exemption  for Cook Inlet.   He added that  PPT could                                                                   
apply to Cook Inlet, adjusted to lower tax rates.                                                                               
                                                                                                                                
Mr. Zager concluded that the balance  of the original bill is                                                                   
gone.   He spoke in support  of a 20  percent tax rate  and a                                                                   
tax credit  of $12 million as  replacement for a  $73 million                                                                   
standard  deduction.   He  pointed  out that  the  transition                                                                   
capital  credit was  taken  out of  the CS.    He noted  that                                                                   
progessivity is a  big issue, especially for Cook  Inlet.  He                                                                   
argued against windfall taxes.   He noted that pricing cycles                                                                   
are not measured in terms of days.   Decisions are made based                                                                   
on distribution, field size, well productivity, and prices.                                                                     
                                                                                                                                
Mr. Zager reiterated the difference  between WTI and ANS.  He                                                                   
observed that  gas and North Slope  oil are tied to  WTI.  He                                                                   
noted that  many of the contracts  in the Cook Inlet  are not                                                                   
tied  to Henry  Hub.   He emphasized  that  Chevron does  not                                                                   
support  progressivity,   but  maintained   that  if   it  is                                                                   
included,  the indexing price  should be  also included.   He                                                                   
did not think  the commencement date of April  was realistic.                                                                   
He spoke to the interest rate and the penalty.                                                                                  
                                                                                                                                
5:37:11 PM                                                                                                                    
                                                                                                                                
Mr. Zager reviewed Slide 22.   He discussed the issue of "get                                                                   
it now" vs. "grow  the pie".  He was optimistic  that the pie                                                                   
could be grown.   He observed that consultants  would someday                                                                   
leave and "we will  be left to deal with our  decisions".  He                                                                   
maintained that  over the coming years, investors  would vote                                                                   
with  their  dollars.    He  emphasized   that  the  original                                                                   
industry support  was astounding, however, investors  are now                                                                   
concerned  with the  House  Resource version  of  HB 488.  He                                                                   
expressed concern that the CS  would discourage investment in                                                                   
Alaska.                                                                                                                         
                                                                                                                                
Mr. Zager  summarized that Chevron  could not support  the CS                                                                   
in its  current form.   He urged the  committee to  return to                                                                   
the  original  PPT  terms,  while   inserting  a  Cook  Inlet                                                                   
provision.   He  recommended inclusion  of  an additional  5%                                                                   
capital  credit (20/25)  for heavy oil  or tertiary  recovery                                                                   
projects  statewide.   Chevron has  been in  Alaska for  many                                                                   
years  and intends  to  continue  an active  exploration  and                                                                   
production  operation in  the  state if  a  sound and  stable                                                                   
fiscal regime can be offered.                                                                                                   
                                                                                                                                
5:41:16 PM                                                                                                                    
                                                                                                                                
KEVIN TABLER,  MANAGER, LANDS & GOVERNMENT  AFFAIRS, CHEVRON-                                                                   
ALASKA,  clarified that  Chevron  is not  asking  "not to  be                                                                   
taxed",   but  to   maintain  their   current  tax,   without                                                                   
additional tax.                                                                                                                 
                                                                                                                                
Co-Chair  Meyer  clarified that  the  state receives  an  ELF                                                                   
payment in  addition to royalties,  property tax,  and income                                                                   
tax.   He  agreed that  the natural  gas from  Cook Inlet  is                                                                   
vital to Alaska.   He also agreed that Cook Inlet  is a small                                                                   
amount  in the  whole oil  production  picture and  suggested                                                                   
that Chevron be exempted from  PPT.  Mr. Tabler observed that                                                                   
there is  a domino affect once  a platform goes down.   There                                                                   
are number of reasons the base should be maintained.                                                                            
                                                                                                                                
5:44:11 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer pointed out that  Cook Inlet has been explored                                                                   
since the  50's and estimated  that if there  were additional                                                                   
resources that  they would  be found.   Mr. Zager  noted that                                                                   
there are  some potential reserves  at deeper levels.   There                                                                   
are always possibilities.                                                                                                       
                                                                                                                                
Representative  Kelly referred  to SB 185  and asked  how the                                                                   
credits would affect  Chevron.  Mr. Zager responded  that one                                                                   
well  would  be  affected.    The  intent  was  for  a  broad                                                                   
interpretation.    Chevron got  a  small  part of  what  they                                                                   
expected  due  to  the  narrow  interpretation.    There  are                                                                   
stringent limits on what qualifies.                                                                                             
                                                                                                                                
Co-Chair Chenault noted that SB 185 was not intended for                                                                        
Cook Inlet.  It was modified to cover Cook Inlet.                                                                               
                                                                                                                              
#                                                                                                                             
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 5:48 PM.                                                                                           
                                                                                                                                

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