Legislature(2005 - 2006)HOUSE FINANCE 519

03/30/2006 02:00 PM FINANCE


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02:07:46 PM Start
02:08:08 PM HB488
05:06:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Major Producers continued: Exxon Mobil,
ConocoPhillips, CRA Associates
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                       March 30, 2006                                                                                           
                         2:07 P.M.                                                                                              
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Chenault called the House Finance Committee meeting                                                                    
to order at 2:07:46 PM.                                                                                                       
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-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                                                                                                  
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative   Ethan   Berkowitz;  Richard   Owen,   Alaska                                                                   
Production  Manager,   ExxonMobil;  Jim  Bowles,   President,                                                                   
ConocoPhillips-Alaska;   Marianne   Kah,   Chief   Economist,                                                                   
ConocoPhillips-Houston,  Texas; David  Bramley, Consultant  &                                                                   
Specialist, CRA International Associates                                                                                        
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
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 & HELD in Committee for further                                                                      
          consideration.                                                                                                        
                                                                                                                                
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.                                                                                       
                                                                                                                                
2:08:08 PM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  convened the meeting of the  House Finance                                                                   
Committee   noting   that  producers   for   ExxonMobil   and                                                                   
ConocoPhillips would provide testimony.                                                                                         
                                                                                                                                
2:08:42 PM                                                                                                                    
                                                                                                                                
EXXON MOBIL:                                                                                                                  
                                                                                                                                
RICHARD OWEN,  ALASKA PRODUCTION  MANAGER, EXXONMOBIL  & VICE                                                                   
PRESIDENT   OF  EXXONMOBIL   ALASKA   PRODUCTION,   discussed                                                                   
ExxonMobil's  concerns with the  committee substitute,  CS HB
488 (RES).  [Testimony on File].                                                                                                
                                                                                                                                
ExxonMobil  has had  a presence  in  Alaska for  over a  half                                                                   
century,  investing  more than  $11  billion  dollars in  the                                                                   
State's   economy.     Currently,   ExxonMobil  has   working                                                                   
interests  in  Prudhoe  Bay, Kuparuk,  Endicott  and  Granite                                                                   
Point.  ExxonMobil's current working  interest oil production                                                                   
is approximately 180 thousand  BD and is the largest owner of                                                                   
the discovered gas resource.                                                                                                    
                                                                                                                                
Mr. Owen  noted they are proud  of the role they  have played                                                                   
in Alaska through:                                                                                                              
                                                                                                                                
   · Exploration                                                                                                                
   · Initial Field developments                                                                                                 
   · Construction of Trans-Alaska Pipeline System (TAPS)                                                                        
   · Development of new technology                                                                                              
  · Promotion of efficient reservoir management practices                                                                       
                                                                                                                                
Today,   ExxonMobil's  production   from  Alaska   represents                                                                   
approximately  4%  of the  worldwide  oil and  gas  produced,                                                                   
primarily  from  Prudhoe  Bay and  nearby  satellite  fields.                                                                   
Prudhoe  Bay,  along  with  Point  Thomson,  has  significant                                                                   
remaining potential.                                                                                                            
                                                                                                                                
Changes in the  taxation regime for oil directly  impacts how                                                                   
ExxonMobil   views   stability    of   the   Alaskan   fiscal                                                                   
environment,  which  in  turn,   impacts  the  evaluation  of                                                                   
ongoing  investment  decisions.    Tax  systems  need  to  be                                                                   
designed  to   ensure  the  desired  objective   of  resource                                                                   
development.  Quality of resources  means the size and nature                                                                   
of  the  oil  and  gas  reservoirs,  the  cost  &  technology                                                                   
required  to  develop  those   reservoirs,  the  distance  to                                                                   
market, as  well as the tax  and royalty system  that applies                                                                   
including long-term stability of the system.                                                                                    
                                                                                                                                
2:13:14 PM                                                                                                                    
                                                                                                                                
Mr.   Owen   continued,   HB   488   as   proposed   by   the                                                                   
Administration, represents a significant  tax increase on the                                                                   
industry.   ExxonMobil is  concerned that  a higher  tax rate                                                                   
could  prevent  some  of Alaska's  remaining  resources  from                                                                   
being  developed.    He  reiterated,  too  high  a  tax  rate                                                                   
discourages  investment.   When the State  limits or  reduces                                                                   
the benefit that  companies can achieve from  upside factors,                                                                   
the  State reduces  the  attractiveness  of those  investment                                                                   
opportunities.   ExxonMobil recommends the focus  of the bill                                                                   
be encouragement of investment and the growing production.                                                                      
                                                                                                                                
2:14:55 PM                                                                                                                    
                                                                                                                                
Mr. Owen pointed out the committee  substitute elimination of                                                                   
transition provisions.   The benefits from a  typical oil and                                                                   
gas investment  need many  years to  be realized.   Satellite                                                                   
and territory  recovery investment  decisions by  the company                                                                   
during  the last  five years,  were made  under the  Economic                                                                   
Limit  Factor  (ELF)  structure,  anticipating  a  lower  tax                                                                   
relative to that proposed under  the Petroleum Production Tax                                                                   
(PPT) bill.   The original proposal  of HB 488  recognizes it                                                                   
is not appropriate  to increase taxes on  investments without                                                                   
providing some  form of consideration  to the Industry.   The                                                                   
provisions in HB 488 contain a  5-year transition period into                                                                   
the proposed PPT system.  That is reasonable.                                                                                   
                                                                                                                                
2:16:16 PM                                                                                                                    
                                                                                                                                
Mr. Owen said  ExxonMobil was prepared to move  forward under                                                                   
the original proposed system,  HB 488, as it seeks to provide                                                                   
a balance  of revenues  to the State  and producers  across a                                                                   
range  of  oil prices,  providing  sufficient  incentive  for                                                                   
producers to undertake exploration  and development risks; it                                                                   
also  includes  reasonable  transition  provisions  for  past                                                                   
investments.                                                                                                                    
                                                                                                                                
He  commented   the  quality  of  the  resource,   the  risks                                                                   
undertaken  by a  producer,  and the  impact  on the  State's                                                                   
overall  investment  climate,  should be  factored  into  the                                                                   
design  of   a  tax  system.     While  the   industry  needs                                                                   
predictability and durability  from which to gauge investment                                                                   
decisions,  the  attractiveness  of that  predictability  and                                                                   
durability is lost if it comes at too high a cost.                                                                              
                                                                                                                                
Mr.  Owen  urged support  of  the  bill  as proposed  by  the                                                                   
Administration.                                                                                                                 
                                                                                                                                
2:17:46 PM                                                                                                                    
                                                                                                                                
Representative  Hawker asked if  ExxonMobil would  support CS                                                                   
HB 488 (RES) if  it were the version passed out  of the House                                                                   
Finance Committee.  Mr. Owens  replied that when the bill was                                                                   
changed,   there  were  implications,   which  need   further                                                                   
consideration &  negotiation.  He maintained  that increasing                                                                   
the tax structure undermines the health of the Industry.                                                                        
                                                                                                                                
2:19:34 PM                                                                                                                    
                                                                                                                                
Representative Holm  asked about the removing  the transition                                                                   
provision.   He  asked  what price  oil  the provisions  were                                                                   
based  upon.   Mr.  Owen  replied  that  they were  based  on                                                                   
investments made, in which the  company anticipated a revenue                                                                   
stream, which the tax structure  was in place.  The Petroleum                                                                   
Production  Tax (PPT)  legislation  proposes  to change  that                                                                   
structure.    He  argued  that  revenue  streams  from  those                                                                   
investments will  take many years  from start to  return, and                                                                   
that  some  of the  actual  oil  expected from  the  enhanced                                                                   
recovery projects has not come to fruition.                                                                                     
                                                                                                                                
2:21:35 PM                                                                                                                    
                                                                                                                                
Representative  Holm asked how  ExxonMobil responds  that the                                                                   
people  of Alaska  have waited  seventeen years  for a  Court                                                                   
resolution for consequences  of the spill.  Mr.  Owen said it                                                                   
was  not his  intent to  discuss  that; he  only intended  to                                                                   
discuss  the  PPT  bill  and   the  future  of  oil  and  gas                                                                   
development throughout Alaska.                                                                                                  
                                                                                                                                
2:22:30 PM                                                                                                                    
                                                                                                                                
Representative Joule inquired  about the transition phase, as                                                                   
it  exists   in  other  parts   of  the  world.     Mr.  Owen                                                                   
acknowledged some, noting five  examples.  He offered to make                                                                   
the information available to the Committee.                                                                                     
                                                                                                                                
2:23:26 PM                                                                                                                    
                                                                                                                                
Representative  Kelly inquired  about the investment  "crawl-                                                                   
back" being  considered by the Senate.   Mr. Owen said  it is                                                                   
difficult to  determine how  that will work.   On  the Senate                                                                   
side, it is a plan to tie the  transition to future spending.                                                                   
The  revenue stream  is  not obvious  at  this  time and  the                                                                   
proposed legislation  creates a change  from one system  to a                                                                   
new tax system.  The original  bill made the transition based                                                                   
on calendar years, which was an effective mechanism.                                                                            
                                                                                                                                
2:25:15 PM                                                                                                                    
                                                                                                                                
Vice Chair Stoltze referenced  the dead-end response from the                                                                   
query made by  Representative Holm.  He asked  if there would                                                                   
be further consideration regarding the spill litigation.                                                                        
                                                                                                                                
Mr. Owen  replied that this  meeting was not  the appropriate                                                                   
forum for that discussion.                                                                                                      
                                                                                                                                
2:26:06 PM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  asked when  the actual negotiations  began                                                                   
on the  PPT with the Administration.   Mr. Owen  advised that                                                                   
from  the beginning,  ExxonMobil made  it clear  both to  the                                                                   
public and  the State that  predictability & durability  were                                                                   
necessary for the  gas pipeline to move forward.   As soon as                                                                   
negotiations  started,  ExxonMobil  began  to talk  with  the                                                                   
Administration about the "stability" surrounding oil terms.                                                                     
                                                                                                                                
2:27:21 PM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  asked when  if Alaska to  date has  been a                                                                   
stable  environment  for  ExxonMobil   to  work.    Mr.  Owen                                                                   
responded that  he did not have  a personal history  with the                                                                   
entire industry.   During  the period  of the Economic  Limit                                                                   
Factor  (ELF), there  was  stability in  the  year round  oil                                                                   
taxes;  however, nearly  every year, there  is discussion  to                                                                   
change it.                                                                                                                      
                                                                                                                                
2:28:34 PM                                                                                                                    
                                                                                                                                
Co-Chair Chenault  agreed, however,  in the worldwide  arena,                                                                   
there must  be similar conversations  occurring.   He thought                                                                   
that  during the  past six  years, there  has been  continued                                                                   
stability.  He  emphasized that the State of  Alaska has been                                                                   
stable  in how they  have treated  the oil  industries.   Mr.                                                                   
Owen agreed, and asked that his  comments were not reflective                                                                   
of the current situation but what  could happen over the next                                                                   
ten years in  relationship to predictability,  durability and                                                                   
stability.   He indicated  that ExxonMobil  was looking  at a                                                                   
huge initial investment over the  next ten years; for that to                                                                   
be possible,  it requires a  guarantee of large  returns over                                                                   
the next fifty years.                                                                                                           
                                                                                                                                
2:31:40 PM                                                                                                                    
                                                                                                                                
Representative Kerttula  reiterated the emotion  of statewide                                                                   
disappointment   from   ExxonMobil,  resulting   from   their                                                                   
behavior with the  oil spill and the lack of  settlement over                                                                   
the last seventeen years.                                                                                                       
                                                                                                                                
Mr. Owen replied to comments made  by Representative Kerttula                                                                   
that there are different tax structures  that could be put in                                                                   
place.     The   Administration  has   testified  about   the                                                                   
structural  issues  associated   with  the  existing  system.                                                                   
There are many  different systems that could be  put in place                                                                   
and the one  made by the Administration could  work in Alaska                                                                   
and it would be appropriate.                                                                                                    
                                                                                                                                
2:34:01 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula pointed out  the lack of  definition                                                                   
contained in the  Governor's legislation.  She  believed both                                                                   
groups could better define it.                                                                                                  
                                                                                                                                
2:34:19 PM                                                                                                                    
                                                                                                                                
Co-Chair  Meyer  referenced the  heavy  oil existing  on  the                                                                   
Alaska North Slope (ANS) and asked  if the best way to access                                                                   
it  would be  by keeping  the tax  rate down  or raising  the                                                                   
credit  portion.   Mr.  Owen  said  both are  important,  but                                                                   
ultimately,  the tax  rate is  the most important.   The  tax                                                                   
credit  is  a  way to  reduce  the  barrier  for  investment.                                                                   
ExxonMobil attempts  to get a  guaranteed revenue  stream for                                                                   
that investment.  A tax rate could  impact the revenue stream                                                                   
for  the entire  life, while  a  credit rate  only eases  the                                                                   
investment.    Ultimately,  they   must  be  balanced.    The                                                                   
investment  credit has  the  ability to  impact  the rate  of                                                                   
return, reducing up-front investment.                                                                                           
                                                                                                                                
2:36:01 PM                                                                                                                    
                                                                                                                                
Co-Chair Meyer pointed out that  the House Resource Committee                                                                   
(HRC) version  of the bill  uses the West Texas  Intermediate                                                                   
(WTI) gauge  rather than  the ANS.   He asked how  ExxonMobil                                                                   
felt  about  that.    Mr.  Owen  explained  that  WTI  has  a                                                                   
different crude mix to the ANS.   It is not representative of                                                                   
the ANS crude.  It is more appropriate  to make the tax based                                                                   
on the mark attempting  to actually be taxed.   The market is                                                                   
based on  sale contracts,  based on  price.  ExxonMobil  does                                                                   
not  discuss  price  or  price outlooks  with  any  of  their                                                                   
competitors.   The West  Coast market is  more of  a refinery                                                                   
market; where  crude is sold  is a real  market.  He  did not                                                                   
believe that there had been manipulation of that market.                                                                        
                                                                                                                                
2:40:08 PM                                                                                                                    
                                                                                                                                
Representative  Kelly asked  about  the progressivity  aspect                                                                   
added  by the HRC.   Mr.  Owen stated  that he  did not  like                                                                   
either option or the 25% tax rate.   ExxonMobil only supports                                                                   
the 20%  rate with  no progressivity.   Representative  Kelly                                                                   
thought that  a 25% rate would  be better for "bad  times" in                                                                   
Alaska.                                                                                                                         
                                                                                                                                
2:42:09 PM                                                                                                                    
                                                                                                                                
Mr.  Owen replied  that the  25%  rate was  damaging for  the                                                                   
Industry.     He  urged  a   base  tax  rate,   stating  that                                                                   
progressivity does  not work for  the Industry.  As  the cost                                                                   
of oil rises, the State continues  to receive a higher share.                                                                   
                                                                                                                                
2:42:54 PM                                                                                                                    
                                                                                                                                
Representative  Joule  pointed  out that  ExxonMobil  is  the                                                                   
"long range fiscal plan" for the  State of Alaska and that it                                                                   
does  not leave  the  State many  alternatives  to finding  a                                                                   
healthy balance.                                                                                                                
                                                                                                                                
Mr. Owen recommended  that the idea of the  long-range fiscal                                                                   
plan, including  the Industry, would be a  helpful discussion                                                                   
for  the State  to  have.   Ultimately,  the  tax system  the                                                                   
Legislature is attempting  to come to terms with  needs to be                                                                   
one that  addresses resources that  exist in Alaska  and that                                                                   
will provide a long-term health  for the Industry.  Also, the                                                                   
prize for the  State would be getting volumes,  royalties and                                                                   
taxes.                                                                                                                          
                                                                                                                                
2:45:33 PM                                                                                                                    
                                                                                                                                
Representative  Hawker   commented  on  progressivity.     He                                                                   
counseled Mr. Owen  that nothing would pass out  of this Body                                                                   
that  does not  contain a  progressive structure.   He  noted                                                                   
that the  Governor's proposal would  not happen and  that the                                                                   
progressive   mechanism  proposed   by  the  House   Resource                                                                   
Committee  was a preferable  alternative at  this time.   Mr.                                                                   
Owen  replied,   ExxonMobil  encourages  the   House  Finance                                                                   
Committee  to  explore something  progressive,  reasonable  &                                                                   
desirable.   Representative  Hawker said  that since  the PPT                                                                   
was  designed   for  profitability,   the  aspects   of  that                                                                   
principle must be considered.                                                                                                   
                                                                                                                                
2:48:19 PM                                                                                                                    
                                                                                                                                
Representative  Hawker argued  that the  account receipts  do                                                                   
not factor  in inflation.   He requested  comments for  a net                                                                   
base scenario.                                                                                                                  
                                                                                                                                
2:48:59 PM                                                                                                                    
                                                                                                                                
Mr. Owen responded that discussion  was hypothetical and that                                                                   
moving to  progressivity brings a  whole new range  of issues                                                                   
and  does  not  take into  consideration  implications.    He                                                                   
warned that it should be addressed carefully.                                                                                   
                                                                                                                                
                                                                                                                                
ATEASE:        2:50:02 PM                                                                                                     
RECONVENE:     2:56:53 PM                                                                                                     
                                                                                                                                
                                                                                                                                
CONOCO-PHILLIPS:                                                                                                              
                                                                                                                                
JIM BOWLES, PRESIDENT, CONOCOPHILLIPS-ALASKA,  commented that                                                                   
ConocoPhillips supports the bill  proposed by the Governor as                                                                   
it  brings a  fair balance  to the  table, which  effectively                                                                   
doubles tax for the oil companies.   Mr. Bowles noted concern                                                                   
with  the  bill  from the  House  Resource  Committee  (HRC),                                                                   
pointing out  that nearly every  component had  been changed.                                                                   
He listed the negative changes:                                                                                                 
                                                                                                                                
   · The base tax rate changed with the escalation of the                                                                       
     porgressivity;                                                                                                             
   · The WTI pricing presents a negative change;                                                                                
   · The transition is a negative change.                                                                                       
                                                                                                                                
Many people think  that there would be only a  2-3% change in                                                                   
government  take; however,  the  proposed  changes result  in                                                                   
substantial dollars removed for each Industry involved.                                                                         
                                                                                                                                
3:00:11 PM                                                                                                                    
                                                                                                                                
Mr. Bowles  referenced  the handout.   (Copy  on File).   The                                                                   
first  slide indicates  the  government  take represented  in                                                                   
billions of  dollars.   The bottom  of the slide  illustrates                                                                   
the amounts for each of the following:                                                                                          
                                                                                                                                
*    The current ELF system,                                                                                                    
*    The original bill,                                                                                                         
*    The HRC version, and                                                                                                       
*    The Senate version.                                                                                                        
                                                                                                                                
He pointed out that the proposed  bill indicates the doubling                                                                   
of taxes  - extra $20 billion  dollars over a  20-year period                                                                   
for the  State of Alaska.   HRC version proposes  basically a                                                                   
tripling  of those  taxes;  the Senate  Committee  substitute                                                                   
would impose 3.5 times taxation.                                                                                                
                                                                                                                                
Mr. Bowles  emphasized that  the base  effective tax  rate is                                                                   
the key component of the business.                                                                                              
                                                                                                                                
3:02:07 PM                                                                                                                    
                                                                                                                                
Mr.  Bowles referenced  Page 2,  which  demonstrates how  the                                                                   
link works for  making decisions - Investment beats  Tax.  He                                                                   
stressed that  tripling taxes on Alaska's #1  economic engine                                                                   
is not  a winning  move.   He commented  on the State  taxing                                                                   
Industry to a breaking point and  then backing off just below                                                                   
the breaking  point, actions  which "trouble"  ConocoPhillips                                                                   
and the overall Industry.  Any  tax change has an incremental                                                                   
effect on how business is done.                                                                                                 
                                                                                                                                
3:04:11 PM                                                                                                                    
                                                                                                                                
He agreed that there should be  a competitive government take                                                                   
with  respect  to  business around  the  world;  however,  he                                                                   
warned   that   the   competitive  peer   group   should   be                                                                   
investigated very closely.                                                                                                      
                                                                                                                                
Mr. Bowles  acknowledged that  Industry profits are  high but                                                                   
the State  needs to consider  the amount of investment  costs                                                                   
associated  with   getting  the  royalty,  State   taxes  and                                                                   
statewide charity and educational program contributions.                                                                        
                                                                                                                                
3:06:05 PM                                                                                                                    
                                                                                                                                
Mr.  Bowles  acknowledged that  ConocoPhillips-Alaska  has  a                                                                   
vested interest in what comes  out of the tax bill.  They are                                                                   
the largest  oil and gas producer  in the State.   He pointed                                                                   
out that they employ 500 statewide employees.                                                                                   
                                                                                                                                
ConocoPhillips is:                                                                                                              
                                                                                                                                
   ·    Alaska's #1 oil producer                                                                                                
   ·    Alaska's #1 gas producer                                                                                                
   ·    Alaska's #1 explorer                                                                                                    
   ·    Largest owner of State and federal leases                                                                               
   ·    Largest industry-community supporter                                                                                    
   ·    Largest royalty and taxpayer                                                                                            
   ·    Key employer in the State                                                                                               
                                                                                                                                
3:07:57 PM                                                                                                                    
                                                                                                                                
Representative  Weyhrauch   asked  if  ConocoPhillips   could                                                                   
quantify their  total investment  under the original  HB 488.                                                                   
Mr. Bowles could  not.  He noted they could  provide a better                                                                   
insight regarding  how investment  decisions were made.   The                                                                   
assurance is looking at their track record in Alaska.                                                                           
                                                                                                                                
3:09:42 PM                                                                                                                    
                                                                                                                                
Representative Hawker  inquired about the tripling  of taxes,                                                                   
as indicated  on Slide 1.   Mr. Bowles responded that  at the                                                                   
$40 dollar rate,  taxes would be doubled and that  would be a                                                                   
substantial change.                                                                                                             
                                                                                                                                
3:10:48 PM                                                                                                                    
                                                                                                                                
DAVID  BRAMLEY,   BUSINESS  CONSULTANT   &  ASSOCIATE,   VICE                                                                   
PRESIDENT -  CRA FOR  INTERNATIONAL ISSUES, acknowledged  his                                                                   
history  with   ConocoPhillips   and  CRA  International,   a                                                                   
business   firm  specializing   in   economic   strategizing.                                                                   
Understanding the  application of the E&P fiscal  systems and                                                                   
their business implications is fundamental to his work.                                                                         
                                                                                                                                
At  the  request of  ConocoPhillips,  CRA  International  has                                                                   
analyzed Alaska's  proposals for fiscal change  in comparison                                                                   
with  the  fiscal  environment   in  other  Organization  for                                                                   
Economic Cooperation and Development  (OECD) regions that are                                                                   
also mature and are significant  oil and gas producers.  They                                                                   
identified a  comparable group  of international oil  and gas                                                                   
producing areas and compared those  fiscal systems in context                                                                   
with  underlying economic  potential  and  current levels  of                                                                   
investment.     Through  the  comparisons,  they   sought  to                                                                   
illustrate how well Alaska's fiscal  system is aligned to the                                                                   
economic realities of the region.                                                                                               
                                                                                                                                
3:14:04 PM                                                                                                                    
                                                                                                                                
Mr. Bramley explained  that the proposed changes  to Alaska's                                                                   
fiscal  system  support new  investment.    He spoke  to  the                                                                   
impact of  the fiscal changes  on investor decisions  making.                                                                   
All potential investors  in the Alaskan oil  and gas business                                                                   
make their decisions on capital  allocation in the context of                                                                   
a  larger  portfolio  of  choices   about  where  to  invest,                                                                   
covering a range of competing options.                                                                                          
                                                                                                                                
3:16:35 PM                                                                                                                    
                                                                                                                                
Mr.   Bramley   compared   Alaska's   fiscal   proposals   in                                                                   
relationship  to overall  government take  of net cash  flows                                                                   
from  investing  in  new opportunity  areas.    The  analyses                                                                   
provide an  effective high-level  view of  the impact  on the                                                                   
investment of  current and proposed fiscal terms.   Comparing                                                                   
Alaska's  fiscal  proposal  to other  mature  OECD  producing                                                                   
areas is  the basis for a  realistic appraisal of  the impact                                                                   
on investment.                                                                                                                  
                                                                                                                                
3:19:21 PM                                                                                                                    
                                                                                                                                
Mr. Bramley reviewed Slide 4,  indicating Alaska's production                                                                   
decline by 6%  between the years 2000-2004.   Petroleum is an                                                                   
extractive industry and the overall  economic potential of an                                                                   
area is  a function of the  hydrocarbon reserves  present and                                                                   
the technical  and operational  costs  required to bring  oil                                                                   
and  gas to  market.   The  relative  level  of maturity  and                                                                   
remaining prospetivity of Alaska  versus the other OECD areas                                                                   
is therefore an important factor  in defining the context for                                                                   
comparisons  of the fiscal  regimes.   Overall production  of                                                                   
oil and gas  from an area rise  to a peak and then  undergo a                                                                   
long steady decline.   There are exceptions  to that pattern,                                                                   
in which the United Kingdom (UK) is one.                                                                                        
                                                                                                                                
3:21:24 PM                                                                                                                    
                                                                                                                                
Dr.  Bramley reviewed  Slide  5, the  remaining  oil and  gas                                                                   
reserves and their  size relative to past production  from an                                                                   
area  is a  fundamental  measure of  maturity.   The  figures                                                                   
reflect gas in the tank, although  any Industry insider would                                                                   
acknowledge how  elusive and verifiable reserve  figures are.                                                                   
The bar  chart indicates  historic oil  and gas production  &                                                                   
estimates of remaining production of remaining reserves.                                                                        
                                                                                                                                
3:22:24 PM                                                                                                                    
                                                                                                                                
Mr. Bramley highlighted Slide  6, the reserves and reflecting                                                                   
how  successful  an area  is  in replacing  its  year-by-year                                                                   
production with  proved petroleum reserves.   The chart shows                                                                   
the  comparison group.   Only  Alaska has  failed to  replace                                                                   
production on a proved reserve  basis over the past 10 years.                                                                   
                                                                                                                                
3:22:47 PM                                                                                                                    
                                                                                                                                
Mr. Bramley referenced  Slide 7, which indicates  the pattern                                                                   
of new field  developments in an area giving  another measure                                                                   
of potential  to add to the  producing base and  arrest long-                                                                   
term production decline.   The chart shows the  number of new                                                                   
fields brought on stream in each  of the comparison areas and                                                                   
the average size of those new  fields.  Alaska has the lowest                                                                   
number  of  new  producing  fields  with  the  smallest  size                                                                   
amongst the whole group.                                                                                                        
                                                                                                                                
3:23:25 PM                                                                                                                    
                                                                                                                                
Mr.  Bramley  spoke  to  Slide   8,  looking  at  exploration                                                                   
activity.  Alaska clearly lags  behind the other conventional                                                                   
oil and  gas areas in the  comparison group both in  terms of                                                                   
number  of  exploration  wells   drilled  and  success  rate.                                                                   
Canadian oil  sands were excluded  from the comparison  since                                                                   
exploration there does not make  good business sense with the                                                                   
major resources already discovered but undeveloped.                                                                             
                                                                                                                                
3:23:50 PM                                                                                                                    
                                                                                                                                
Mr.  Bramley  commented   on  Slide  9.    Based   on  recent                                                                   
development  history and  the  available  set of  forthcoming                                                                   
opportunities,  seeks  to develop  a  profile  of a  "typical                                                                   
field" in each  area.  It is a helpful way  of characterizing                                                                   
an  area's  economic potential  and  a  good base  for  later                                                                   
calculations  of  government take  in  economic  terms.   The                                                                   
results are shown in the tables.                                                                                                
                                                                                                                                
3:24:51 PM                                                                                                                    
                                                                                                                                
Mr. Bramley  continued, Slide 10,  draws together all  of the                                                                   
observations  of maturity and  indicates the overall  trends.                                                                   
Alaska emerges in  a predominately red category.   Alaska has                                                                   
little remaining  economic and  resource potential.   It does                                                                   
have  areas  under   review,  ranking  low  in   that  group.                                                                   
Maturity  analysis  raises  concerns   about  the  impact  of                                                                   
Alaska's existing fiscal terms.                                                                                                 
                                                                                                                                
3:26:24 PM                                                                                                                    
                                                                                                                                
Mr. Bramley  highlighted  Slide 11, which  provides a  direct                                                                   
comparison  of total  government take  throughout field  life                                                                   
for the  representative fields  of each  area.  To  calculate                                                                   
involved determining  a relevant  fiscal system  dividing the                                                                   
cash flow  from a  new field between  the government  and the                                                                   
company investor.  Overall government  take is a good measure                                                                   
of  the share  of  the  economic value  of  a field  that  is                                                                   
captured  by that  fiscal system.   The  chart shows  overall                                                                   
government  take for each  region, plotted  against the  unit                                                                   
technical cost of representative fields.                                                                                        
                                                                                                                                
3:28:52 PM                                                                                                                    
                                                                                                                                
Mr.  Bramley  continued,  Slide  12, adds  a  color  code  to                                                                   
reflect  relative levels  of maturity  and suggests  Alaska's                                                                   
positioning  is problematic  - a  mature region  with a  high                                                                   
cost base and with relatively high government intake.                                                                           
                                                                                                                                
3:30:52 PM                                                                                                                    
                                                                                                                                
Mr. Bramley  continued, Slide 13,  points out that  Norway is                                                                   
the  only country  in  the comparison  group  with levels  of                                                                   
government take higher than the  Alaska proposals; used as an                                                                   
example, since  Norway has been citied in  previous testimony                                                                   
as an  area with strong  similarities to  Alaska.   Norway is                                                                   
significantly  less  mature  than   Alaska  for  conventional                                                                   
resources.   There  are  a number  of  structural and  policy                                                                   
factors that are relevant:                                                                                                      
                                                                                                                                
   ·    Norway has chosen to give incentives for exploration                                                                    
   ·    Norway's upstream petroleum industry remains highly                                                                     
        concentrated and is led by largely government-owned                                                                     
        companies                                                                                                               
   ·    Norway   has   pursued   a   policy    of   'measured                                                                   
        development'                                                                                                            
                                                                                                                                
3:34:03 PM                                                                                                                    
                                                                                                                                
Mr.  Bramley  spoke  to  Slide   15,  indicating  the  fiscal                                                                   
response   to   changing   oil    price   is   an   important                                                                   
consideration.  The  base price considers oil  at $35 dollars                                                                   
per barrel.  He  urged that both a higher and  lower scenario                                                                   
be considered  to reflect the  way investors make  decisions,                                                                   
and in order to capture the full  range of possibilities that                                                                   
may  affect   future  investment   in  Alaska.     The  chart                                                                   
illustrates  the regressive  nature of  both the current  and                                                                   
proposed  fiscal  systems.   The  regressive  feature of  the                                                                   
Alaskan  regime   is  not  helpful  in   supporting  positive                                                                   
investment decisions.                                                                                                           
                                                                                                                                
3:35:35 PM                                                                                                                    
                                                                                                                                
Mr.  Bramley  continued,  Slide 16  observes  the  regressive                                                                   
nature  of the  Alaskan regime  and manifests  itself in  the                                                                   
context   of  changing   costs.    The   chart  provides   an                                                                   
examination  of the effect  of higher  and lower capital  and                                                                   
operating  costs on  total  government take.    As the  costs                                                                   
increase, so does the total government share.                                                                                   
                                                                                                                                
3:36:09 PM                                                                                                                    
                                                                                                                                
Dr. Bramley  explained that is  not a helpful  combination in                                                                   
supporting investment decision-making.                                                                                          
                                                                                                                                
3:36:40 PM                                                                                                                    
                                                                                                                                
In  response to  a  question  by Representative  Hawker,  Mr.                                                                   
Bramley explained  that the point of inflection  rests at the                                                                   
$35 dollar per  barrel price; three points have  been modeled                                                                   
also  including  $40  &  $50 dollars.    There  is  always  a                                                                   
continuous curve.                                                                                                               
                                                                                                                                
3:37:57 PM                                                                                                                    
                                                                                                                                
Representative Kerttula  pointed out that Dr.  Van Muers came                                                                   
up with  an opposite conclusion,  indicating that  Alaska was                                                                   
highly enticing  for new entrance; she asked  the difference.                                                                   
Mr.  Bramley  did  not  believe there  was  a  difference  in                                                                   
interpretation  of  the  roles   or  the  cash  flows.    The                                                                   
conclusions could  be different because of the  way they were                                                                   
basing their judgment of fiscal  competitiveness on the total                                                                   
government take, which is important  to investors.  They were                                                                   
more detailed  on their expectation of economic  potential in                                                                   
Alaska in  terms of  field size  and the  unit cost  in basic                                                                   
analysis.                                                                                                                       
                                                                                                                                
Additionally,  ConocoPhillips  has a  different  view on  the                                                                   
investment  behavior.   Other  consultants  have based  their                                                                   
models  on  threshold  comparisons.     ConocoPhillips  bases                                                                   
theirs on the market  and the affect of fiscal  take.  If the                                                                   
price goes up, the tendency to  buy will go down, which might                                                                   
result in a migration of capital.                                                                                               
                                                                                                                                
3:42:21 PM                                                                                                                    
                                                                                                                                
Representative Kerttula asked  if factors for including small                                                                   
companies had been  added.  Mr. Bramley affirmed  and pointed                                                                   
out  the  significance  of price  breaks  for  those  smaller                                                                   
companies.    There are  important  questions  regarding  the                                                                   
growth of those portfolios.                                                                                                     
                                                                                                                                
3:43:07 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula  questioned  if  ConocoPhillips  had                                                                   
factored  in  access  to  the  facilities  and  the  pipeline                                                                   
corridor.  Mr. Bramley affirmed  that those elements had been                                                                   
factored as part of costs doing business in Alaska.                                                                             
                                                                                                                                
3:43:49 PM                                                                                                                    
                                                                                                                                
Dr. Bramley  stated that  Slide 18,  considers the  impact of                                                                   
the new  proposals on future  investment; it is  essential to                                                                   
consider where  Alaska future  potential actually lies.   The                                                                   
table indicates  that Alaska  is in  the unusual position  of                                                                   
having the majority of its resource  potential in the form of                                                                   
known   but   undeveloped   hydrocarbons,    currently,   the                                                                   
uneconomic  heavy oil  and  gas resources.    There is  major                                                                   
potential   in  incremental   and   improved  recovery   from                                                                   
producing fields.  Each element  is larger than the resources                                                                   
available   through    new   exploration    and   undeveloped                                                                   
conventional  oil.  Conclusions  from  the study of  Alaska's                                                                   
investment attractiveness within  the OECD group, is that new                                                                   
proposals will inevitably reduce future investment.                                                                             
                                                                                                                                
3:45:26 PM                                                                                                                    
                                                                                                                                
Representative  Hawker questioned how  any increase  in taxes                                                                   
[including   PPT]   could   provide   an   incentive   toward                                                                   
production.   Mr. Bramley acknowledged  that the  increase in                                                                   
tax  goes  directly to  the  overall  government take.    The                                                                   
difference rests  between the  original and the  proposed HRC                                                                   
version.                                                                                                                        
                                                                                                                                
Representative Hawker  observed the PPT paradox.   Mr. Bowles                                                                   
commented there was no difference  between ConocoPhillips and                                                                   
the other  companies.  He spoke  to the credit  uplift, which                                                                   
masks the underlining  problem against the tax  rate.  Credit                                                                   
cannot  offset the  underlining issues.   ConocoPhillips  can                                                                   
only move the needle  so far on the credit side  and that the                                                                   
underline, base investment will  come from the larger fields.                                                                   
The key driver is the base tax rate.                                                                                            
                                                                                                                                
3:49:18 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula asked which  was the more  important                                                                   
factor:                                                                                                                         
                                                                                                                                
   · Entrance                                                                                                                   
   · Tax rate                                                                                                                   
                                                                                                                                
Mr. Bramley replied that they  could not provide a definitive                                                                   
answer  one way or  another.   Each situation  has issues  of                                                                   
access, and is  not unique to Alaska.  Mr. Bowles  added that                                                                   
there  is full  access capability  to the  pipeline and  with                                                                   
respect  to facilities;  Pioneer  is  the new  entry  player.                                                                   
There is no facility access question.                                                                                           
                                                                                                                                
3:50:56 PM                                                                                                                    
                                                                                                                                
Representative Kerttula inquired  how other places around the                                                                   
world tackle  these concerns.   Mr. Bramley responded,  there                                                                   
is no indication that Alaska is not working.                                                                                    
                                                                                                                                
Representative Kerttula pointed  out the number of so few new                                                                   
fields.   Mr. Bramley  responded that  the infrastructure  is                                                                   
the  complex  networks created.    It  is difficult  to  draw                                                                   
analogies   from  that;   the   Alaskan   situation  is   not                                                                   
fundamentally different from the others.                                                                                        
                                                                                                                                
Mr. Bowles added,  the lack of field size prospects  is a key                                                                   
driver.   The  availability of  large structures,  facilitate                                                                   
new  field developments.    New  field capability  creates  a                                                                   
better environment for small developers to enter.                                                                               
                                                                                                                                
3:53:48 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula   observed  the  attractiveness   of                                                                   
Alaska; she  asked if  the profit  rates had been  considered                                                                   
over proposed  costs.  Mr.  Bramley replied that  is inherent                                                                   
in the manner in which the analysis is done.                                                                                    
                                                                                                                                
3:55:08 PM                                                                                                                    
                                                                                                                                
Representative Foster mentioned  the boost to Alaskan economy                                                                   
& the  "golden  egg" potential  and how  those things  affect                                                                   
marginal fields.   Mr. Bowles  agreed.  ConocoPhillips  hopes                                                                   
for a clear and fair tax rate  to help drive new players into                                                                   
the State.                                                                                                                      
                                                                                                                                
3:56:33 PM                                                                                                                    
                                                                                                                                
Representative Kelly addressed  credits versus progressivity.                                                                   
Mr. Bowles  replied that  all companies  have indicated  that                                                                   
the  base  tax  rate is  the  most  important  consideration.                                                                   
Progressivity moves  the tax rate up, which has  an impact on                                                                   
investment decisions.                                                                                                           
                                                                                                                                
3:59:22 PM                                                                                                                    
                                                                                                                                
Mr. Bramley  pointed out  Slide 19,  suggests an  appropriate                                                                   
level  of  government  take.   Based  on  the  analysis,  the                                                                   
Industry believes  that the balance of the  current proposals                                                                   
is slanted  towards  short-term revenue  collection over  the                                                                   
stimulation of new investment.                                                                                                  
                                                                                                                                
Slide 20,  highlights  that increasing  Alaska's oil  and gas                                                                   
taxes comes with a price:                                                                                                       
                                                                                                                                
   · The dilemma of balancing revenues and investment                                                                           
   · Alaska is mature, but has undeveloped potential                                                                            
   · Current fiscal proposals do not help competitiveness in                                                                    
     the OECD peer group                                                                                                        
                                                                                                                                
Mr. Bowles  recognized the dilemma  of balancing  revenue and                                                                   
investment  and  the work  has  focused  on the  question  of                                                                   
investment.   Alaska  is mature  and  has enormous  remaining                                                                   
potential,  but  the  challenges  to access  that  are  huge.                                                                   
Current fiscal proposals do not help competitiveness.                                                                           
                                                                                                                                
4:01:12 PM                                                                                                                    
                                                                                                                                
Representative Kelly asked if  there was a way to analyze the                                                                   
shape of the curve.  Mr. Bramley did not think so.                                                                              
                                                                                                                                
4:03:40 PM                                                                                                                    
                                                                                                                                
MARIANNE  KAH,  CHIEF  ECONOMIST,  CORPORATE  CONOCOPHILLIPS-                                                                   
HOUSON, TEXAS, spoke to the investment  criteria used and how                                                                   
the tax bill would appeal or not appeal to ConocoPhillips.                                                                      
                                                                                                                                
Typical investment criteria components are:                                                                                     
                                                                                                                                
   · Prospectivity                                                                                                              
   · Costs                                                                                                                      
   · Cycle time                                                                                                                 
   · Taxes                                                                                                                      
   · Legal regime                                                                                                               
                                                                                                                                
4:05:52 PM                                                                                                                    
                                                                                                                                
Ms.  Kah continued  -  Slide 2,  the investment  criteria  in                                                                   
relationship to Alaska's rating:                                                                                                
                                                                                                                                
   · Small expected field size & lower value heavy & high                                                                       
     sulfur crude                                                                                                               
   · High exploration, development and production cost and                                                                      
     high transportation cost                                                                                                   
   · Long lead times                                                                                                            
   · High tax rates given prospectivity & cost                                                                                  
   · Recent concern about stability of fiscal regime                                                                            
   · Strong rule of law/political stability                                                                                     
   · Concern about changing tax rate without grand fathering                                                                    
     recent investment                                                                                                          
                                                                                                                                
4:07:06 PM                                                                                                                    
                                                                                                                                
Ms.  Kah  noted  Slide  3 -  the  global  average  commercial                                                                   
discovery size  in comparison  to other countries  around the                                                                   
world.     The   Alaska  North   Slope   (ANS)  has   limited                                                                   
prospectivity and the tax rates need to reflect that.                                                                           
                                                                                                                                
4:07:35 PM                                                                                                                    
                                                                                                                                
Representative  Holm  pointed  out the  presented  investment                                                                   
criteria does not  indicate a return of investment.   Ms. Kah                                                                   
explained  that the  value, which  comes  at the  end of  the                                                                   
criteria, is  the return on investment.   All of  those items                                                                   
are the components.                                                                                                             
                                                                                                                                
4:08:14 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula  referenced   stability  &  the  tax                                                                   
rates.   She  suggested  it  be  considered that  Alaska  has                                                                   
maintained the same tax rate for  fifteen years.  She assumed                                                                   
that whatever  is put in  place at this  time will  likely be                                                                   
working for  many years.   Ms. Kah stated  that they  do give                                                                   
Alaska  credit for  the  stable fiscal  terms,  acknowledging                                                                   
there had  been no major change  for more than  thirty years.                                                                   
The  corporate world  wants  to guarantee  that  if there  is                                                                   
transition, the Industry is treated fairly.                                                                                     
                                                                                                                                
4:09:13 PM                                                                                                                    
                                                                                                                                
Ms. Kah continued, Slide 3 provides  a chart, indicating that                                                                   
exploration is  important.   ConocoPhillips will  continue to                                                                   
explore  in Alaska.   She pointed  out that  the core  fields                                                                   
still produce  over 80% of  the total North Slope  production                                                                   
into 2015.   Significant  capital is  needed to maintain  the                                                                   
infrastructure  as well as  for drilling and  well work.   It                                                                   
could be  many years  before the  full potential is  reached.                                                                   
Technology  to develop  resources requires  huge capital  and                                                                   
resources.   She warned  that if  members were interested  in                                                                   
Alaska's  future, they  should be interested  in keeping  the                                                                   
major Industry investors in the State.                                                                                          
                                                                                                                                
4:10:36 PM                                                                                                                    
                                                                                                                                
Representative    Weyhrauch    referenced   benefit    "grand                                                                   
fathering" of costs.   Ms. Kah stated that  "grand fathering"                                                                   
implies that if  you invested under the old  regime, you keep                                                                   
those  terms;  she realized  that  was  not possible  so  the                                                                   
alternative is transition credits.                                                                                              
                                                                                                                                
4:11:24 PM                                                                                                                    
                                                                                                                                
Representative Joule  asked if that concept was  true for the                                                                   
effective date.   Ms. Kah said  that was a  different matter,                                                                   
regarding whether  past rules apply.  It would  be consistent                                                                   
that the principle  of no retroactivity should  be applied to                                                                   
things moving forward.  Representative  Joule understood, but                                                                   
did not agree.                                                                                                                  
                                                                                                                                
4:12:49 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula  maintained  that  during  the  five                                                                   
years,  surely  some  costs  could be  amortized.    Ms.  Kah                                                                   
advised  that  when ConocoPhillips  makes  investments,  they                                                                   
factor in  price risk.   She referenced Alaska  attempting to                                                                   
"punish" companies.  Investments  take many years to pay off.                                                                   
It is  not fair to  use the new  tax regime with  expectation                                                                   
and price risk included.                                                                                                        
                                                                                                                                
Mr. Bowles pointed out that last  year when the tax structure                                                                   
changed,  ConocoPhillips   was  in  the  process   of  making                                                                   
satellite  investment decisions.   They  were unable  to make                                                                   
the  decision  on the  premise  that  those fields  could  be                                                                   
aggregated.  They sought out State  assurance that they would                                                                   
not  be   aggregated  and   went  forward  with   development                                                                   
decisions based on  the tax at that time.   Those fields have                                                                   
not yet produced.                                                                                                               
                                                                                                                                
4:16:05 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula pointed  out the incredible  profits                                                                   
that they  have received  in Alaska over  time.  She  did not                                                                   
understand why those  considerations had been made.   Ms. Kah                                                                   
advised there have  been years of good profits,  which offset                                                                   
the  years  when there  were  none.    It  is hoped  that  on                                                                   
average, they  earn above the  capital return.  The  truth is                                                                   
that the  Industry over  the past 20-years  has not  earned a                                                                   
higher return than many others.                                                                                                 
                                                                                                                                
4:17:24 PM                                                                                                                    
                                                                                                                                
Representative  Hawker emphasized  that profit  is not  a bad                                                                   
word and acknowledged  that there have been  poor returns for                                                                   
some years.                                                                                                                     
                                                                                                                                
The Governor's version contains  a five-year transition look-                                                                   
back; the  original HRC  version had  a three-year  look-back                                                                   
but  what actually  passed was  a three-month  recovery.   He                                                                   
asked what the  Industry wanted.  Ms. Kah replied  that five-                                                                   
years  is relevant  because that  is  the amount  of time  it                                                                   
takes  on the  slope from  the  time of  the initial  capital                                                                   
investment to  the time the  revenues actually start  to come                                                                   
in.  Mr.  Bowles indicated his  respect for the  HRC version,                                                                   
however,  the   Senate  version  recognizes   transition  and                                                                   
incentive investments  in the future.   Representative Hawker                                                                   
was troubled with the 5-year option.                                                                                            
                                                                                                                                
4:20:58 PM                                                                                                                    
                                                                                                                                
Ms.  Kah  referenced  Slide  4,   which  indicates  increased                                                                   
production costs  and that Alaska is the highest  cost region                                                                   
in the portfolio.   Costs in  Alaska are rising at  a greater                                                                   
rate than  other areas, because  of the aging  infrastructure                                                                   
and the declining field size.                                                                                                   
                                                                                                                                
4:21:52 PM                                                                                                                    
                                                                                                                                
Ms. Kah  continued Slide  5, showing  Alaska with high  costs                                                                   
and high  taxes.  Countries  with no  costs and no  taxes are                                                                   
the ones that  are really trying to attract  investment.  The                                                                   
quadrants are as follows:                                                                                                       
                                                                                                                                
   · Low Cost - Low Tax                                                                                                         
   · Low Cost - High Tax                                                                                                        
   · High Cost - Low Tax                                                                                                        
   · High Cost - High Tax                                                                                                       
                                                                                                                                
She foresaw Alaska  moving into the quadrant  with high costs                                                                   
and high taxes, which discourages development.                                                                                  
                                                                                                                                
4:23:53 PM                                                                                                                    
                                                                                                                                
Ms. Kah  highlighted Slide  6, which  shows Alaska  with high                                                                   
cost,  high   tax  and  low  prospectivity   and  development                                                                   
indicating that only the government takes.                                                                                      
                                                                                                                                
4:24:20 PM                                                                                                                    
                                                                                                                                
Representative Hawker  referenced the MacKenzie  projections.                                                                   
Ms. Kah  disagreed with  the Daniel  Johnson testimony.   She                                                                   
understood him to say that if  the government participates at                                                                   
all, it should be a government  take.  From the point of view                                                                   
of ConocoPhillips,  if the government is paying  their way as                                                                   
an investor, why should that then  be a government take.  She                                                                   
agreed  if  the  government was  being  carried  through  the                                                                   
exploration;  that  is  why  some   countries  were  removed.                                                                   
MacKenzie is more representative  of the industry and is more                                                                   
mainstream.                                                                                                                     
                                                                                                                                
4:26:36 PM                                                                                                                    
                                                                                                                                
Representative  Kerttula asked about  "carried equity".   Ms.                                                                   
Kah explained that sometimes the  government has the right to                                                                   
"back-in" to a development prospect  once discovered; in that                                                                   
scenario it  becomes a form  of government  take.    The main                                                                   
point is it does not change the answer, merely the details.                                                                     
                                                                                                                                
4:27:25 PM                                                                                                                    
                                                                                                                                
Representative Kelly  noted that Alberta is not  shown on the                                                                   
slide.  Ms. Kah replied they have  substantial royalty relief                                                                   
and attractive fiscal terms.                                                                                                    
                                                                                                                                
4:28:03 PM                                                                                                                    
                                                                                                                                
Representative  Hawker asked what  "development only"  meant.                                                                   
Ms. Kah  explained it does  not include exploration  or lease                                                                   
bonuses.                                                                                                                        
                                                                                                                                
4:28:31 PM                                                                                                                    
                                                                                                                                
Ms. Kah  noted Slide 6, which  adds bubbles; the size  of the                                                                   
bubble indicates the prospectivity.                                                                                             
                                                                                                                                
4:29:24 PM                                                                                                                    
                                                                                                                                
Ms. Kah disagreed that taxes can  be raised without affecting                                                                   
investment, as  some consultants  have suggested.   She noted                                                                   
three reasons that it will affect investment:                                                                                   
                                                                                                                                
   · Reduces after-tax cash flow available for investment                                                                       
   · Adversely changes risk/reward balance                                                                                      
   · Capital goes elsewhere to:                                                                                                 
   · Other countries                                                                                                            
   · Other energy sources                                                                                                       
   · Other industries                                                                                                           
                                                                                                                                
4:32:46 PM                                                                                                                    
                                                                                                                                
Ms. Kah reviewed  the major upstream projects  for investment                                                                   
from 2005 through  2011+ being considered  by ConocoPhillips.                                                                   
Investment in Alaska  must attempt to compete  with the other                                                                   
areas around the world.  A tax rate needs to be comparable.                                                                     
                                                                                                                                
4:33:31 PM                                                                                                                    
                                                                                                                                
Ms.  Kah discussed  Slide 9,  clarifying what  is wrong  with                                                                   
windfall profit taxes.  Windfall  profit tax introduces a lot                                                                   
of distortion,  decreases investment and doesn't  achieve the                                                                   
goal  intended.    She  observed opposition  to  the  tax  by                                                                   
elected officials  and the 250 economists.  She  noted that a                                                                   
non-partisan  congressional research  service concluded  that                                                                   
windfall  profits  tax  on domestic  crude  oil  removed  $79                                                                   
billion  dollars in  gross  revenues from  industry,  reduced                                                                   
domestic oil  production by  up to  $1.6 million dollars  and                                                                   
generated 20 percent of expected gross revenues.                                                                                
                                                                                                                                
4:36:17 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  observed  that  Ms. Kah  had  made  a                                                                   
strong  argument  against  windfall  taxes.   He  noted  that                                                                   
progessivity is  inevitable and questioned  if ConocoPhillips                                                                   
concerns could be alleviated by  the net profit tax.  Ms. Kah                                                                   
responded that neither alternative  is attractive as it would                                                                   
not  be inflating  the  base.   To attract  investment,  that                                                                   
would not work.                                                                                                                 
                                                                                                                                
4:37:55 PM                                                                                                                    
                                                                                                                                
Ms. Kah reviewed Slide 10, project  economics in development.                                                                   
(Impact  of   Progressivity  on  Risk/Reward   Balance).  She                                                                   
observed that a  "tornado chart" was created in  order to see                                                                   
the  range.   A series  of simulations  were run  to see  the                                                                   
expected value of  the project.  If a windfall  profit tax is                                                                   
introduced,  the upside  is taken  away and  both the up  and                                                                   
downside are taken into account.                                                                                                
                                                                                                                                
4:40:25 PM                                                                                                                    
                                                                                                                                
Representative Hawker  questioned if the profit  tax remained                                                                   
on the net, would the bar remain  balanced.  Ms. Kah observed                                                                   
that inflation would  be reduced, but the upside  would still                                                                   
be reduced.                                                                                                                     
                                                                                                                                
Representative Hawker questioned  if progressivity started at                                                                   
$50  dollars  on the  net,  and  escalated to  $120  dollars,                                                                   
taxing  at 80 percent.   Ms.  Kah responded  that the  upside                                                                   
would  be 80  or 90  percent.   The  company  never sets  one                                                                   
price.  She estimated that it would still be 90 percent.                                                                        
                                                                                                                                
Representative  Hawker observed that  the State of  Alaska is                                                                   
attempting  to  take a  bigger  chunk  of  the profits.    He                                                                   
questioned  if  a plateau  were  established  if the  results                                                                   
would  not be  as eschewed.    Ms. Kah  responded that  there                                                                   
would then not  be an investment.  ConocoPhillips  counts the                                                                   
upside   price  risk   and   gives  it   a   25%  weigh   in;                                                                   
ConocoPhillips is  in the business  of managing risk  and the                                                                   
upside is essential in the project value.                                                                                       
                                                                                                                                
4:44:46 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  requested  more  information  on  the                                                                   
definitions of "upside".                                                                                                        
                                                                                                                                
4:45:05 PM                                                                                                                    
                                                                                                                                
Representative Holm  observed that if the price  analysis had                                                                   
been done 14 months ago, what  would the highs & lows be.  He                                                                   
guaranteed that  ConocoPhillips would  not have achieved  the                                                                   
current  level  and  maintained   that  the  models  for  the                                                                   
investment  had been  made on  a  reduced level.   The  State                                                                   
government does not  own the oil; the citizens  of Alaska own                                                                   
that oil.   A different climate  exists today.  The  State is                                                                   
not taxing  the industry.  He  felt that as the  value grows,                                                                   
the profits should also grow.                                                                                                   
                                                                                                                                
4:47:24 PM                                                                                                                    
                                                                                                                                
Ms.   Kah  observed   that  Slide   11  illustrated   finding                                                                   
development and production  costs.  Some of what  is seen, as                                                                   
a windfall tax is actually higher  reserve replacement costs.                                                                   
Development  costs have  doubled.   She  maintained that  $25                                                                   
dollars  a barrel  needs to  be  added up-front  in terms  of                                                                   
investment.   No  compensation  is included  in  the cost  of                                                                   
capital.  Replacement cost is  usually stated in terms of WTI                                                                   
and  that crude  is not  as valued  as  WTI, which  increases                                                                   
costs.   Replacement  costs  today  are  over $50  dollars  a                                                                   
barrel.   There are estimates  of replacement costs of  $50 -                                                                   
$60 dollars.  Spending levels  and costs continue to rise, as                                                                   
does inflation.   ConocoPhillips  is facing high  replacement                                                                   
costs.   There  have been  increases  in steel  prices.   The                                                                   
industry  is investing  in prospects that  are smaller,  more                                                                   
complex and more remote.  Costs  are not going down.  She was                                                                   
concerned  that  the windfall  would  only  be used  for  the                                                                   
higher replacement cost environment.                                                                                            
                                                                                                                                
4:50:53 PM                                                                                                                    
                                                                                                                                
Ms. Kah summarized Slide 12:                                                                                                    
                                                                                                                                
   · Current tax rate is already uncompetitive given cost                                                                       
     and progressivity;                                                                                                         
   · Proposed tax increase will reduce investment and                                                                           
     production in Alaska; and                                                                                                  
   · U.S. federal windfall profits taxes lowered production                                                                     
     and failed to produce expected revenues.                                                                                   
                                                                                                                                
Ms. Kah  concluded that ConocoPhillips  has been  a long-term                                                                   
investor  in the  State  and wants  to  be  part of  Alaska's                                                                   
future.                                                                                                                         
                                                                                                                                
4:52:21 PM                                                                                                                    
                                                                                                                                
Mr. Bowles recognized the difficult  task of the Legislature,                                                                   
but emphasize the key points:                                                                                                   
                                                                                                                                
   · Higher taxes have a direct impact on investment,                                                                           
   · The 20 percent tax rate strikes a good balance, and                                                                        
   · Windfall profits tax do not encourage investment.                                                                          
                                                                                                                                
4:54:08 PM                                                                                                                    
                                                                                                                                
Representative  Hawker  summarized previous  testimony  [from                                                                   
the Administration]  that stability is needed and  PPT is the                                                                   
key.   He questioned  if ConocoPhillips  would be willing  to                                                                   
move forward on the gas line without  a PPT bill.  Mr. Bowles                                                                   
said they  reached agreement with  the Governor,  without the                                                                   
PPT  legislation.     ConocoPhillips  is  now   more  nervous                                                                   
regarding  the climate of  the State,  given the current  PPT                                                                   
proposals.                                                                                                                      
                                                                                                                                
4:57:03 PM                                                                                                                    
                                                                                                                                
Representative Kelly did not understand  why the proposal was                                                                   
considered a  tax given  the contract of  cost of  goods sold                                                                   
and how the value changes.                                                                                                      
                                                                                                                                
4:59:17 PM                                                                                                                    
                                                                                                                                
Representative  Holm  observed   a  handout  he  distributed.                                                                   
[Copy on  File].  The  handout indicates that  ConocoPhillips                                                                   
made $11 million  dollars yesterday [3/29/06].   He commented                                                                   
things are not  as bleak as the information  being presented.                                                                   
He  wanted a  guarantee  that  the value  for  the people  of                                                                   
Alaska was realistic.                                                                                                           
                                                                                                                                
5:00:59 PM                                                                                                                    
                                                                                                                                
Representative   Hawker   asked   if  the   accountants   for                                                                   
ConocoPhillips had been consulted  about the possibility of a                                                                   
major tax date change without  regulations promulgated by the                                                                   
State.    Mr.   Bowles  agreed  with  the   complexities  and                                                                   
acknowledged the concerns.  He  urged a reasonable timeframe.                                                                   
Representative  Hawker recommended  regulations are  in place                                                                   
first.                                                                                                                          
                                                                                                                                
5:02:33 PM                                                                                                                    
                                                                                                                                
Representative  Joule spoke  to a process,  supported  by the                                                                   
Industry, excluding the Legislature.   That bothered him.  He                                                                   
asked  everyone  to keep  an  open  mind in  the  negotiation                                                                   
process.   Mr. Bowles  recognized  that and  the role of  the                                                                   
entire  State.    The  initial   intent  was  to  layout  the                                                                   
Industry's  process  in  relationship  to  the  formation  of                                                                   
taxation.                                                                                                                       
                                                                                                                                
5:04:42 PM                                                                                                                    
                                                                                                                                
Representative Foster  commented on comparison  with aviation                                                                   
business and  how the  net profits work  seasonally.   He was                                                                   
outraged with proposals submitted by the Committee.                                                                             
                                                                                                                                
Representative  Weyhrauch agreed  that  profit is  important.                                                                   
He added that any law could be amended down the road.                                                                           
                                                                                                                                
HB 488 was HELD in Committee for further consideration.                                                                         
5:06:47 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 5:06 P.M.                                                                                          
                                                                                                                                

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