Legislature(2007 - 2008)HOUSE FINANCE 519

05/02/2007 01:30 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 8:00 am on 5/3/07 --
-- Testimony <Invitation Only> --
- ConocoPhillips Alaska, Inc: Wendy King,
Director of State Negotiations and Brian
Wenzel, Vice President, Finance and
- ExxonMobil Corporation: Martin Massey,
U.S. Joint Interest Manager
- Other: Dan E. Dickinson, CPA CMA
                  HOUSE FINANCE COMMITTEE                                                                                       
                        May 2, 2007                                                                                             
                        Continued on                                                                                            
                        May 3, 2007                                                                                             
                         1:38 P.M.                                                                                              
CALL TO ORDER                                                                                                                 
Co-Chair Chenault called the House  Finance Committee meeting                                                                   
to order at 1:38:41 PM.                                                                                                       
MEMBERS PRESENT                                                                                                               
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Harry Crawford                                                                                                   
Representative Les Gara                                                                                                         
Representative Mike Hawker                                                                                                      
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Mary Nelson                                                                                                      
Representative Bill Thomas Jr.                                                                                                  
MEMBERS ABSENT                                                                                                                
Representative Richard Foster                                                                                                   
ALSO PRESENT                                                                                                                  
Representative Mark  Neuman; Representative  Anna Fairclough;                                                                   
Representative  Ralph  Samuels; Representative  Paul  Seaton;                                                                   
Wendy   King,  Manager,   Alaska   North   Slope  (ANS)   Gas                                                                   
Development,  ConocoPhillips  Alaska,  Inc.;   Brian  Wenzel,                                                                   
Vice  President, Alaska  North Slope  (ANS) Gas  Development,                                                                   
ConocoPhillips Alaska,  Inc., Anchorage; Martin  Massey, U.S.                                                                   
Joint   Interest   Manager,   ExxonMobil   Corporation;   Dan                                                                   
Dickinson, Consultant, Tax Division, Department of Revenue                                                                      
HB 177    An  Act relating to  the Alaska Gasline  Inducement                                                                   
          Act;  establishing  the Alaska  Gasline  Inducement                                                                   
          Act  matching contribution  fund; providing  for an                                                                   
          Alaska Gasline  Inducement Act coordinator;  making                                                                   
          conforming   amendments;  and   providing  for   an                                                                   
          effective date.                                                                                                       
          HB 177 was HEARD & HELD in Committee for further                                                                      
HOUSE BILL NO. 177                                                                                                            
     An Act  relating to the  Alaska Gasline Inducement  Act;                                                                   
     establishing the Alaska Gasline  Inducement Act matching                                                                   
     contribution  fund;  providing  for  an  Alaska  Gasline                                                                   
     Inducement    Act   coordinator;    making    conforming                                                                   
     amendments; and providing for an effective date.                                                                           
1:40:17 PM                                                                                                                    
CONOCOPHILLIPS ALASKA                                                                                                         
BRIAN WENZEL,  VICE PRESIDENT,  ALASKA NORTH SLOPE  (ANS) GAS                                                                   
DEVELOPMENT, CONOCOPHILLIPS  ALASKA, INC.,  ANCHORAGE, stated                                                                   
ConocoPhillips  does not  support AGIA  as introduced  by the                                                                   
Governor  or  the  version  adopted  by  the  House  Resource                                                                   
Committee  (HRC).   The bill  requires  critical changing  in                                                                   
order  to  avoid   delays.    The  applicant   submitting  an                                                                   
application  should be  able to  obtain  the requirements  of                                                                   
AGIA's   intent   through   a  combination   of   terms   and                                                                   
commitments.    There  should   be  a  comprehensive  package                                                                   
including  critical up-stream  resource  terms balancing  the                                                                   
risks, while  continuing to provide  maximum benefits  to the                                                                   
State of Alaska.                                                                                                                
ConocoPhillips would  like to find  a way to make  the Alaska                                                                   
North Slope  (ANS) development commercially viable;  then the                                                                   
pipeline  becomes an  afterthought.   He  reiterated,  first,                                                                   
resource terms must be addressed.                                                                                               
1:42:38 PM                                                                                                                    
Mr. Wenzel  noted the question  is in relationship of  how to                                                                   
develop  gas  resources for  the  pipeline  to succeed.    He                                                                   
discussed the  need for dialogue  with the Administration  in                                                                   
the attempt to find common ground  fiscal resource terms that                                                                   
allow for the  viability of the project.  The  process should                                                                   
include negotiations rather than competitive bidding.                                                                           
1:44:38 PM                                                                                                                    
Mr. Wenzel encouraged  consideration of the  full package and                                                                   
that  the proposed  version of  AGIA does  not include  that.                                                                   
AGIA    stipulates    up-stream     terms    inadequate    to                                                                   
Representative   Gara  asked   what   "up-stream"  means   to                                                                   
industry.  Mr.  Wenzel replied, that is the  portion allowing                                                                   
production of gas.  Up-stream is a tax term.                                                                                    
1:46:01 PM                                                                                                                    
Mr. Wenzel said ConocoPhillips  supports changes to the terms                                                                   
of  AGIA,  with  specific regards  to  the  up-stream  fiscal                                                                   
terms.  The  inadequate resource terms of the  bill creates a                                                                   
situation of project  risks & uncertainties,  which more than                                                                   
out  weigh  the  returns.   He  reiterated,  unless  AGIA  is                                                                   
adjusted, ConocoPhillips is unable to make an application.                                                                      
1:47:42 PM                                                                                                                    
Mr. Wenzel discussed comments  from the newspaper, indicating                                                                   
the project  has a 50% rate of  return.  He claimed  that the                                                                   
return could be closer to a zero  percent and that the claims                                                                   
that the project is "wildly economic"  are misleading and are                                                                   
based on assumptions  that can not be guaranteed.   There are                                                                   
risks and  uncertainties, which out-weigh  potential benefits                                                                   
if there  is no clarity  incorporated regarding  the resource                                                                   
Mr.  Wenzel commented  that the  resource  risks have  always                                                                   
posed the  greatest obstacles.   Long-term  clarity  on State                                                                   
taxes and royalties is critical to the project.                                                                                 
1:50:02 PM                                                                                                                    
Mr. Wenzel mentioned  previous testimony heard  from Ms. King                                                                   
about AGIA's restrictive  approach and that  she encouraged a                                                                   
mechanism  be in  the bill,  allowing  the resource  lessees,                                                                   
resource terms.   He emphasized that AGIA's  bid requirements                                                                   
must  be changed  and warned  about  disadvantages to  Alaska                                                                   
awarding an exclusive license to a single entity.                                                                               
There is  a fundamental flaw in  the AGIA plan, which  is not                                                                   
founded   on  reasonable   commercial   expectations.     The                                                                   
development  of the  proposed  pipeline will  be  one of  the                                                                   
largest  public construction  projects in  the world.   There                                                                   
are certain standard practices  for structuring, planning and                                                                   
developing  such a resource;  AGIA tends  to ignore  business                                                                   
realities,  requiring certification  before  all details  are                                                                   
worked out.   Sanctioning  timelines for commercial  projects                                                                   
this size  are unreasonable.   He discussed  a clause  in the                                                                   
bill, which prevents cost overrides.                                                                                            
1:53:56 PM                                                                                                                    
Mr.  Wenzel argued  terms  used  in AGIA  language  regarding                                                                   
investment  business  criteria;  if  HB  177  is  adopted  as                                                                   
drafted,  the State makes  the choice  to provide  inadequate                                                                   
certainty regarding future tax  rates.  The manner that it is                                                                   
structured, every anticipated  a tax rate increase would have                                                                   
to be built into the economics of the project.                                                                                  
The ten-year  term proposed  in AGIA  does not recognize  the                                                                   
long  term role  of  shipping  commitments and  the  language                                                                   
could force  a project  developer to  amortize their  10-year                                                                   
investment,  increasing  the  tariff  on the  pipeline.    He                                                                   
reiterated  that   AGIA  does  not  recognize   realities  of                                                                   
financing the structure of such a large project.                                                                                
Mr.  Wenzel commented  on the  lack  of lending  recognition,                                                                   
dangerous  for Alaska  trying to  off-set the  risks for  the                                                                   
1:56:56 PM                                                                                                                    
Mr. Wenzel  encouraged legislative consideration  of industry                                                                   
recommendations that AGIA be changed  so that they can submit                                                                   
a  best  proposal.    As  currently  drafted,  AGIA  requires                                                                   
commissioner's  to reject  any proposal  that does not  match                                                                   
exactly  AGIA terms.   All processes  should be  transparent,                                                                   
allowing  the applicant  to put forth  the proposal,  meeting                                                                   
the needs of all stakeholders.                                                                                                  
1:58:43 PM                                                                                                                    
Mr. Wenzel  advised the process-forward  requires AGIA  to be                                                                   
amended to  include the fiscal  terms.  He surmised  that the                                                                   
quickest way forward would be  for BP, Exxon & ConocoPhillips                                                                   
to  provide a  combined proposal;  companies  that have  much                                                                   
expertise  & knowledge  in  gas resources.    They should  be                                                                   
included in the package.                                                                                                        
Mr.  Wenzel  continued,  ConocoPhillips   wants  to  adopt  &                                                                   
develop the  State's ANS gas  resources and participate  in a                                                                   
competitive process,  recommending that AGIA be  amended.  He                                                                   
claimed that no  one in the State can afford to  wait for the                                                                   
proposals.   Alaska  deserves  to see  comprehensive and  the                                                                   
best possible proposals.                                                                                                        
2:02:15 PM                                                                                                                    
Representative Gara  referenced the up-stream portion  of the                                                                   
project, noting the amount the  State has already volunteered                                                                   
to  pay  for  gas  field  development   costs.    Mr.  Wenzel                                                                   
responded  that all  expectations  regarding future  resource                                                                   
terms would  be built into  future economics of  the project.                                                                   
Currently,  Alaska has  an insufficient  framework  regarding                                                                   
resource terms.                                                                                                                 
Representative Gara  pointed out that  the State pays  42% of                                                                   
the  gas  field  development costs.    Additionally,  HB  177                                                                   
reduces  royalty  by 2%  by  eliminating the  higher  overall                                                                   
costs, worth  2% to the producers.   The contract  contains a                                                                   
70/30 debt ratio benefiting producers.                                                                                          
Representative  Gara continued,  included is  an $18  billion                                                                   
dollar federal  loan guarantee for the  pipeline construction                                                                   
and a  $500 million  dollar offer  to help  build a  pipeline                                                                   
with  a ten-year  tax lock-in.    He emphasized  that HB  177                                                                   
includes a lot of incentives.   Mr. Wenzel thought the listed                                                                   
incentives  had been mischaracterized.    He stated  that the                                                                   
Petroleum  Production  Tax (PPT)  had  been  designed with  a                                                                   
dollar  goal  for the  State.    Alaska could  receive  those                                                                   
dollars by either a production  tax, gross revenue or net tax                                                                   
and  the State  chose a  net tax  because  it helped  provide                                                                   
incentive investment.                                                                                                           
Mr. Wenzel referenced the 70/30  debt ratio, which he thought                                                                   
would  provide  an artificial  requirement  on  the  pipeline                                                                   
owner and would  not act as an incentive.  At  this time, the                                                                   
federal  loan  guarantees  do  not  have  regulations  &  the                                                                   
ability to use  them has yet to be determined.   That creates                                                                   
another  uncertainty.   There  will  be benefits  to  Alaska,                                                                   
however, producers  must look  forward to  the entire  mix of                                                                   
uncertainties and cost requirements for any project.                                                                            
Representative  Gara emphasized  that  the  producers get  to                                                                   
deduct 42.5%  of the  costs, charging it  back to  the State.                                                                   
In a normal  situation, a profits  tax could not  be deducted                                                                   
until there is a profit.  Alaska  allows the deduction of the                                                                   
gas  field costs  even before  there  are indicated  profits.                                                                   
Alaska has always  been a reliable partner compared  to other                                                                   
places  of industry  investments  such as  Argentina,  Russia                                                                   
(nationalization),  Nigeria, & Viet  Nam; Alaska  stacks high                                                                   
in comparison with those places.                                                                                                
Mr.  Wenzel  reminded  members  that  ConocoPhillips  invests                                                                   
heavily in  Alaska and that  every location around  the world                                                                   
carries  a  mix  of uncertainty  and  promise  and  that  the                                                                   
recommendations  made  at the  meeting  takes  that all  into                                                                   
account.  Concerns stem from the  size of the project and the                                                                   
dependency Alaska has on the revenue from oil and gas.                                                                          
2:09:22 PM                                                                                                                    
Representative  Gara voiced  concern with  a request  for tax                                                                   
certainty.   According  to the legislative  attorney,  a ten-                                                                   
year lock-in  might be  unconstitutional.   He questioned  if                                                                   
the Court rules  that the Legislature can not  lock-in future                                                                   
legislature's tax  rates, will the producer's back  out.  Mr.                                                                   
Wenzel  stated that  resolving the  up-stream resource  terms                                                                   
includes working  with the Administration and  Legislature to                                                                   
find  the  best  mechanism to  provide  clarity  on  resource                                                                   
terms.  He  knew there could not  be a 100% assurance  on the                                                                   
2:10:58 PM                                                                                                                    
Representative Gara  asked if ConocoPhillips could  commit to                                                                   
acceptable terms,  without the State fearing  they would back                                                                   
out of the  project if tax  certainty was not allowed  by the                                                                   
courts.      Mr.  Wenzel   recommended   determining   backup                                                                   
alternative  mechanisms and  encouraged that  the State  work                                                                   
jointly  with ConocoPhillips  (CP) to  provide the  necessary                                                                   
comfort for the project to move forward.                                                                                        
2:11:49 PM                                                                                                                    
Representative  Kelly questioned  if  CP could  alone make  a                                                                   
proposal.    Mr. Wenzel  did  not  know; through  AGIA,  they                                                                   
could.   However, their  ability to  advance a project  alone                                                                   
would  be  less  stable.    He   encouraged  that  the  three                                                                   
producers work together;  he wanted the support  of the other                                                                   
two producers.                                                                                                                  
Representative  Kelly worried that  a proposal including  all                                                                   
three  major  producers  could   not  be  competitive.    The                                                                   
Governor's  attempt  is  to take  elements  including  fiscal                                                                   
certainty.   He asked if  it was too  early to create  such a                                                                   
"deal".   Mr. Wenzel did not  think that the "deal"  had been                                                                   
lost, not8ing  that competitive could  work.  He  stressed if                                                                   
AGIA  is changed,  including  submission  of a  comprehensive                                                                   
proposal with the  resource terms, could leave  the door open                                                                   
for competitive bidding.                                                                                                        
Representative Kelly did not embrace  such a view; he worried                                                                   
about the "only  option" that would be provided  by the three                                                                   
major producers.   Mr.  Wenzel countered  that other  bidding                                                                   
companies could attempt  to be included in the  proposal.  He                                                                   
warned  that  there  must  be   a  trade  off  in  terms  and                                                                   
conditions  of the  open-season  in order  to guarantee  that                                                                   
enough risk is mitigated.                                                                                                       
Representative Kelly supported  Governor Palin's inclusion of                                                                   
as much  competitiveness as possible  in the legislation  and                                                                   
worried about the proposal submitted by ConocoPhillips.                                                                         
2:18:25 PM                                                                                                                    
Mr.  Wenzel  explained  in  order for  the  process  to  move                                                                   
forward, AGIA needs to be changed  to allow for comprehensive                                                                   
proposals; then  the three major producers will  come forward                                                                   
with  a package  proposal.   He addressed  the advantages  of                                                                   
competitive bidding.                                                                                                            
Representative  Kelly  recommended  reconsideration  of  both                                                                   
proposals [PPT & AGIA].                                                                                                         
2:21:30 PM                                                                                                                    
Representative  Gara  asked  if the  pipeline  is  developed,                                                                   
could  there be  a guarantee  that gas  would be  sold.   Mr.                                                                   
Wenzel stated that CP wants the  pipeline.  Regarding Prudhoe                                                                   
Bay, the fastest  move forward would not to  be attempting to                                                                   
nominate  the  gas,  which  are   practical  &  legal  issues                                                                   
regarding gas allocations.                                                                                                      
Representative  Gara  asked  if  the  pipeline  proposal  was                                                                   
passed,   including  a   low  enough   tariff  to   guarantee                                                                   
production is  economic, could  Alaska count on  an agreement                                                                   
with CP to sell gas to that project.   Mr. Wenzel pointed out                                                                   
the amount of  speculation regarding that concern.   He noted                                                                   
that the  goal of  CP is  development of  gas resources.   If                                                                   
there was  a mechanism to  accomplish that with  the criteria                                                                   
needed, CP will undertake it;  economics drive it.  There are                                                                   
big concerns regarding the capital costs of the project.                                                                        
Representative  Gara  discussed   the  determination  of  the                                                                   
anticipated profit margins and  that the State has determined                                                                   
the net  present value,  profit margins,  gas production  and                                                                   
best estimated tariff  rates.  He asked what  the current net                                                                   
value ratio required  by CP.  Mr. Wenzel explained  the rates                                                                   
can not be disclosed.   The best way for the  State of Alaska                                                                   
to manage  a development project  such as the  proposed would                                                                   
be to align with the project developer  and commodity seller.                                                                   
Alaska obtains revenue  from the net cash flow  and profit of                                                                   
the producers.                                                                                                                  
2:26:16 PM                                                                                                                    
Representative  Gara advised  that producers  need to  inform                                                                   
the State of the benchmarks in  order to address the internal                                                                   
profit needs.   Mr. Wenzel  maintained that the  Governor has                                                                   
been  attempting   to  "get   around  that",  offering   only                                                                   
competitive  bidding.   He argued,  a new  agreement must  be                                                                   
Representative  Thomas voiced  frustration with the  process,                                                                   
pointing  out the  limited time  left  in the  session.   Mr.                                                                   
Wenzel indicated that producers  raised their concerns during                                                                   
initial discussions & recommended  switching bid requirements                                                                   
to  bid  variables as  a  way  to provide  flexibility.    He                                                                   
recognized time is short & that  there is not sufficient time                                                                   
to deal with changes  needed in AGIA.  He urged  an alternate                                                                   
Representative  Thomas asked that  the producer's  amendments                                                                   
be brought forward.   Mr. Wenzel offered to  provide language                                                                   
creating an alternate proposal.                                                                                                 
2:31:33 PM                                                                                                                    
Representative Joule inquired  when the "window" closes.  Mr.                                                                   
Wenzel  did not  know.   He  suggested there  is  a sense  of                                                                   
urgency to move the project forward;  ConocoPhillips wants to                                                                   
see that happen.                                                                                                                
Representative Kelly  asked about the bid  alternate approach                                                                   
and the  economics of the project.   Mr. Wenzel  advised that                                                                   
if the project  does move forward, ConocoPhillips  is willing                                                                   
to  be creative  during the  negotiating process.   He  hoped                                                                   
that  applicants  would  be  encouraged  to  submit  multiple                                                                   
proposals.  He spoke against the  competitive bidding process                                                                   
established in AGIA.                                                                                                            
Representative Kelly asked if  current language prevents that                                                                   
from  happening.   Mr. Wenzel  indicated for  ConocoPhillips,                                                                   
there is  not adequate  resource funding  and that  there are                                                                   
too many risks and uncertainties.                                                                                               
Representative Kelly suspected  that the gas price and fiscal                                                                   
certainty were  the big  issues.  Mr.  Wenzel pointed  out in                                                                   
the current  draft of AGIA,  the producers were  prevented of                                                                   
from proposing any alternate up-stream terms.                                                                                   
Representative  Kelly  referenced   the  production  gas  tax                                                                   
issue;  he did not  think ConocoPhillips  was prevented  from                                                                   
offering  bid alternate  approaches.   Mr.  Wenzel  responded                                                                   
they would look at that.                                                                                                        
2:42:30 PM                                                                                                                    
Representative  Joule questioned  the  Legislature's role  in                                                                   
this process.  Mr. Wenzel responded  that the Legislature has                                                                   
a role in structuring  the basic needs for  citizens and also                                                                   
providing checks and balances  between the Administration and                                                                   
the industry.  The Legislature  must look at diversifying the                                                                   
State's  economy  and  motivate projects  which  provide  new                                                                   
2:46:10 PM                                                                                                                    
Representative Gara noted that  the Governor's proposal seeks                                                                   
additional  bids; it  includes  twenty terms  wished for  the                                                                   
contract to move forward.  Mr.  Wenzel thought there could be                                                                   
delays if sufficient  bids were not received.   He reiterated                                                                   
the need to receive all bids up-front.                                                                                          
2:48:39 PM                                                                                                                    
In response to a question by Representative  Gara, Mr. Wenzel                                                                   
stipulated  that the  procurement  process  seeks to  achieve                                                                   
uncertainty  among  the  bidders.     The  applications  must                                                                   
conform to the criteria and create the motivation.                                                                              
EXXONMOBIL CORPORATION                                                                                                        
MARTIN  MASSEY,  U.S.  JOINT   INTEREST  MANAGER,  EXXONMOBIL                                                                   
CORPORATION, advised  that ExxonMobil has been  in Alaska for                                                                   
over  50 years  and has  been a  key player  in Alaska's  oil                                                                   
industry development.   ExxonMobil holds the  largest working                                                                   
interest  at  Prudhoe  Bay  [36.4%]  and  their  current  net                                                                   
production  in Alaska  is approximately  150,000 barrels  per                                                                   
day.  ExxonMobil has benefited  from their involvement in the                                                                   
State   of  Alaska   and  believes   Alaska  has   benefited.                                                                   
Commercializing  Alaska's North Slope  (ANS) gas  would allow                                                                   
continuation of a mutually beneficial relationship.                                                                             
2:53:06 PM                                                                                                                    
Mr. Massey  continued that AGIA  is important to  Alaska, the                                                                   
nation  and ExxonMobil.   The  project has  the potential  to                                                                   
generate billions  of dollars in revenues for  the State, the                                                                   
U.S.  federal  government  and  Canada; it  could  provide  a                                                                   
stable  and secure  source  of clean  energy  for Alaska  and                                                                   
North  America for  decades  to come.    For ExxonMobil,  the                                                                   
project is  significant and has  the potential to add  over 1                                                                   
billion cubic feet per day of  gas sales, which would be more                                                                   
than  a 10%  increase  to  the  current worldwide  daily  gas                                                                   
production.   The  project could  add over  one billion  oil-                                                                   
equivalent  barrels  to  proved reserves,  nearly  enough  to                                                                   
replace a year  of production.  Given the  significant impact                                                                   
the  project  could  have,  ExxonMobil  supports  efforts  to                                                                   
advance a pipeline project.                                                                                                     
ExxonMobil has spent more than  $180 million dollars studying                                                                   
ways  to  commercialize  Alaska   gas.    Since  the  1970's,                                                                   
ExxonMobil  has  evaluated  LNG,   gas  to  liquids  and  gas                                                                   
pipeline  alternatives.    Based  on those  studies,  it  was                                                                   
determined that a project would  result in the best value for                                                                   
the State & the producers.                                                                                                      
Mr. Massey  stated that as  written, AGIA does  not encourage                                                                   
market-based  competition  due  to its  prescriptive  nature.                                                                   
AGIA does  not adequately  address the significant  up-stream                                                                   
issues and risks  associated with the scale  and magnitude of                                                                   
the project.  ExxonMobil believes  that AGIA would not create                                                                   
an  acceptable  framework for  the  world-scale  mega-project                                                                   
unless  it  allows  parties  undertaking   risks  to  make  a                                                                   
proposal that properly manages the risks.                                                                                       
The Administration's  model fails to recognize  the nature of                                                                   
such a  basin-opening project.   The  up-stream pays  for the                                                                   
mid-stream, which cannot be split  when evaluating commercial                                                                   
viability.     The  State's  economic   model  needs   to  be                                                                   
corrected.    For  best  results,  AGIA  must  establish  the                                                                   
State's key  objectives, allowing  applicants flexibility  to                                                                   
compete and define the parameters  that are necessary to make                                                                   
the  project commercially  viable.    Amending  AGIA must  be                                                                   
objectively   driven,   allowing    for   open   competition,                                                                   
maximizing  the  number  of  applicants  and  allowing  those                                                                   
applicants  to  propose  innovative  solutions  to  meet  the                                                                   
State's needs.                                                                                                                  
2:56:10 PM                                                                                                                    
Mr. Massey noted  the tendency to underestimate  the size and                                                                   
risk of  the project, the largest  in North America.   Due to                                                                   
the size, there is a greater chance  of cost over runs; steel                                                                   
prices  have doubled since  2001 and  worldwide projects  are                                                                   
putting pressure on other resources.                                                                                            
3:05:34 PM                                                                                                                    
Mr. Massey addressed the importance  of alignment between the                                                                   
State  and  the producers  and  the  benefits of  a  producer                                                                   
project.   Maximizing the  value to the  State of  Alaska and                                                                   
the  resource  holders  means   selecting  the  right  design                                                                   
concept and  then executing it  to deliver low cost  and fast                                                                   
completion.    On  this  size   &  magnitude  of  a  project,                                                                   
construction and  operating experience must be  a significant                                                                   
consideration.    Only  a limited  number  of  companies  can                                                                   
demonstrate the  capabilities, financial strength  and arctic                                                                   
experience to  effectively participate  in and manage  world-                                                                   
scale mega-projects.                                                                                                            
Mr. Massey  pointed out that  the three producers  have mega-                                                                   
project experience  in numerous  places throughout  the world                                                                   
and have demonstrated success  in meeting project objectives.                                                                   
ExxonMobil's   arctic    experience   is    extensive,   with                                                                   
developments  in  multiple  types   of  arctic  environments.                                                                   
ExxonMobil's  global project development  leads the  industry                                                                   
in project  cost and  schedule performance.   ExxonMobil  has                                                                   
also   demonstrated   leadership   in  safety,   health   and                                                                   
environmental  performance.    ExxonMobil has  the  financial                                                                   
strength to  make the project  a reality, maintaining  one of                                                                   
the  strongest  financial positions  of  any  company in  the                                                                   
world.   He  added  that  they  maintain the  highest  credit                                                                   
rating  from Standard  and Poor's  (S&P) &  Moody's triple  A                                                                   
Mr. Massey pointed out that it  is important to remember that                                                                   
the project is a basin-opening  project, benefiting the State                                                                   
and  the  industry  for  decades.     Basin-opening  projects                                                                   
throughout  the world  have  progressed  and been  successful                                                                   
when there is  alignment between the host government  and the                                                                   
leaseholders.    The producers  and  the  State both  want  a                                                                   
pipeline project  to commercialize the ANS gas  resources and                                                                   
open the  basin to  gas exploration.   ExxonMobil believes  a                                                                   
producer gas pipeline  project would result in  maximum value                                                                   
to the  State with maximum incentive  to control costs.   Low                                                                   
capital  and operating  costs will result  in lower  treating                                                                   
and transportation costs and access  to premium market price.                                                                   
The State will  receive the majority of the  revenue from the                                                                   
value  of gas  sales  via revenue  received  under the  lease                                                                   
royalty agreements  and from  production taxes;  valued based                                                                   
on net-back received from the gas.                                                                                              
Mr. Massey  commented 3  party  owners do not share  the same                                                                   
incentives;  they  actually benefit  from  increased  capital                                                                   
costs.   Based on  the demand for  workers which  the project                                                                   
generates,  Alaskans   are  primary  to   successful  project                                                                   
execution.   Financial strength,  experience and  the ability                                                                   
to get the job done should be  the critical components of any                                                                   
evaluation  of   proposals.    When  available   options  are                                                                   
considered, a  producer pipeline  will provide maximum  value                                                                   
to the State of Alaska.                                                                                                         
Mr.  Massey addressed  the fiscal  predictability  importance                                                                   
for a mega-project.   ExxonMobil must work with  the State to                                                                   
explore important  fiscal issues.  Because of  the nature and                                                                   
magnitude of  the risks associated  with the project,  fiscal                                                                   
terms that  are predictable and  durable are necessary.   The                                                                   
two risks:                                                                                                                      
   · Geologic and cost risks; and                                                                                               
   · Market risk is inevitable in a commodity business such                                                                     
     as oil and gas.                                                                                                            
The risk  of fiscal terms changing  is of a  different nature                                                                   
and  outside   the  producer's   control.    There   must  be                                                                   
agreements   allowing  development   of  the  project   under                                                                   
predictable  and durable  terms  with an  adequate degree  of                                                                   
certainty.   It does not mean  that taxes cannot  change over                                                                   
the  life of  the  project.   Predictability  means that  the                                                                   
State's  tax and terms  are understood,  defined and  modeled                                                                   
for the purpose of evaluating  the overall project economics.                                                                   
If  fiscal terms  can  change in  unpredictable  ways in  the                                                                   
future, then  the industry is  not able to make  well-founded                                                                   
investment  decisions on  behalf of  their shareholders,  nor                                                                   
would lenders  be as confident  in providing financing  for a                                                                   
project that size.  The project  requires massive investments                                                                   
before any revenue  is generated from the investments.   As a                                                                   
result, increases in taxes on  oil and gas related activities                                                                   
during the  life of the  project could impact  the commercial                                                                   
viability of the  project and could increase  lender concern.                                                                   
Because the fiscal  terms can be modified under  the proposed                                                                   
AGIA   legislation,   it   does  not   provide   the   fiscal                                                                   
predictability  necessary  to  ensure a  commercially  viable                                                                   
Mr. Massey  pointed out,  it is  important to recognize  that                                                                   
for  mega-project development,  governments  need to  provide                                                                   
long-term fiscal stability.  Contracts  should include fiscal                                                                   
stability protection  and in some cases, it will  run for the                                                                   
length  of the contract;  others  for 40+ years.   AGIA  must                                                                   
allow applicants to put forward  the best proposal on what is                                                                   
required to  make the  project commercially viable,  allowing                                                                   
the  State the  opportunity to  consider  the proposals  that                                                                   
have the  best chance  of actually  delivering an Alaska  gas                                                                   
Mr. Massey  outlined thoughts on  how AGIA could  be modified                                                                   
to ensure  the best chance  of a successful result,  allowing                                                                   
the State  to maximize  value.   Alignment between  the State                                                                   
and the leaseholders is essential  to a basin opening project                                                                   
of  such   magnitude;  therefore,   establishing  the   right                                                                   
approach when  moving forward is the most  important activity                                                                   
for a  project.  In  calculating up-stream revenue,  everyone                                                                   
must be  aware of the  taxes and royalties  from oil  and gas                                                                   
operations and set at a level,  making the project viable and                                                                   
should be  addressed at  the beginning.   To ensure  that the                                                                   
project is  constructed, it  must be commercially  attractive                                                                   
to the  shippers at the  time they make their  transportation                                                                   
commitments.     Shippers,   particularly   those  who   must                                                                   
substantially  invest,  develop  and produce  gas  resources,                                                                   
will  not be  willing  to enter  into  a long-term  financial                                                                   
commitment  for  the  transportation   of  gas  if  there  is                                                                   
likelihood  that  initial rates  would  be increased  in  the                                                                   
future to accommodate expansions.                                                                                               
Under the  Alaska Natural Gas  Pipeline Act, Congress  struck                                                                   
what  the proper  balance between  encouraging investment  by                                                                   
those  willing to  commit  to pay  for  initial capacity  and                                                                   
encouraging  exploration  by  providing  an  opportunity  for                                                                   
future access to the pipeline.   Because of the unique nature                                                                   
of  the  Alaska  gas pipeline  project,  the  Federal  Energy                                                                   
Regulatory Commission  (FERC) approved  policies to  enable a                                                                   
mandated  expansion benefiting  explorers.    In addition,  a                                                                   
pipeline  entity should  not  be required  to  accept a  FERC                                                                   
certificate irrespective of imposed conditions.                                                                                 
   · Under AGIA, the proposed up-stream inducements would                                                                       
     require  significant  modification   to  ensure  that  a                                                                   
     commercially viable project is obtained.                                                                                   
   · AGIA prescribes activities that must be completed                                                                          
     within a  specific timeframe  or date certain.   Setting                                                                   
     arbitrary  target  dates  is not  consistent  with  good                                                                   
     project management practices.                                                                                              
   · Milestones are not necessary if the project is                                                                             
     commercially viable.                                                                                                       
   · AGIA lacks specifics on key fiscal terms and other                                                                         
   · Because of the complexity and risk associated with the                                                                     
     project,  the   parties  must  have  an   efficient  and                                                                   
     impartial  means  of handling  disagreements  when  they                                                                   
     arise.    Arbitration  is  the method  used  to  resolve                                                                   
     disputes   under   the    State's   Royalty   Settlement                                                                   
3:16:48 PM                                                                                                                    
Mr.  Massey concluded  that ExxonMobil  is  committed to  the                                                                   
Alaska  Gas Pipeline  Project  moving forward;  however,  the                                                                   
project  cannot  move  forward  if  it  is  not  commercially                                                                   
viable.     AGIA,  as  written,   does  not  provide   for  a                                                                   
commercially  viable project.    The Administration's  stated                                                                   
goal for AGIA is to increase competition  through an open and                                                                   
transparent process.   The current  AGIA form will  result in                                                                   
less competition  because it fails to adequately  address the                                                                   
issues  raised by  parties who  will ultimately  pay for  the                                                                   
project.    AGIA  appears  to be  based  on  flawed  economic                                                                   
assumptions.   The existing prescriptive terms  in AGIA would                                                                   
preclude  ExxonMobil  from  being   able  to  make  an  open,                                                                   
competitive  and conforming proposal.   ExxonMobil  possesses                                                                   
the  financial strength  and project  experience required  to                                                                   
make  the project  a  success.   He  suggested  that AGIA  be                                                                   
amended  to provide  for a  broad, objective-driven  process,                                                                   
establishing  how the State  wants to  achieve the  goals and                                                                   
allows each applicant  to propose how to meet  the objectives                                                                   
and identify what is required of the project.                                                                                   
Representative Crawford  asked if the criteria  were changed,                                                                   
would  ExxonMobil  then  team-up  with the  two  other  major                                                                   
producers.   Mr.  Massey  anticipated  that they  would  work                                                                   
together,  pointing  out  that  nothing  prevents  submitting                                                                   
their own proposal.   In the end, the final deal  needs to be                                                                   
acceptable  to  all  three  majors and  the  State  before  a                                                                   
pipeline is built.                                                                                                              
3:24:12 PM                                                                                                                    
Representative  Thomas  questioned what  will  happen if  the                                                                   
Administration  does not accept  the industry's  proposal and                                                                   
decides  to use  the  earnings from  the  Permanent Fund  for                                                                   
financing  the project.   Mr. Massey  stated that a  decision                                                                   
could be  made from an analysis  of commercial  viability and                                                                   
3:26:22 PM                                                                                                                    
Representative Thomas  inquired if ExxonMobil  had amendments                                                                   
prepared.   Mr.  Massey  responded  that they  would  provide                                                                   
recommendations for legislative consideration.                                                                                  
3:28:05 PM                                                                                                                    
Representative Gara suggested  that the producers should take                                                                   
their  recommendations  and concerns  to  the  Administration                                                                   
rather  than  to   the  Legislature.    He   asked  how  long                                                                   
ExxonMobil has known  that they would not submit  a bid under                                                                   
the AGIA plan.  Mr. Massey indicated  they have made it clear                                                                   
since  the beginning,  they would  not apply  under the  AGIA                                                                   
Representative  Gara  noted  for  the  record,  he  was  more                                                                   
comfortable   with  the   AGIA  proposal   and  feared   that                                                                   
ExxonMobil would  not be willing  to sell  gas to any  of the                                                                   
other bidders;  he asked  if ExxonMobil  would be willing  to                                                                   
make  a public  commitment.   Mr.  Massey  proposed that  the                                                                   
process be  open and that all  bids are public record.   AGIA                                                                   
does not  allow for that.   At this time, ExxonMobil  can not                                                                   
determine  if they  will commit  their gas  and will look  at                                                                   
each proposal for commercial viability.                                                                                         
3:32:29 PM                                                                                                                    
Representative Gara  asked if Exxon would commit  to sell gas                                                                   
to any  pipeline project  that provides  an economic  return.                                                                   
Mr. Massey  reiterated, they  would look  at each project  as                                                                   
proposed and would make a determination then.                                                                                   
Representative Gara grilled ExxonMobil  regarding withholding                                                                   
of  gas.   Mr.  Massey informed  members,  he  would want  to                                                                   
consult ExxonMobil's attorneys.                                                                                                 
3:34:29 PM                                                                                                                    
Representative Gara agreed that  a predictable, fiscal system                                                                   
is  important.    Mr. Massey  maintained  that  in  any  mega                                                                   
project, fiscal certainty is the  norm.  He would not address                                                                   
specifics & terms.                                                                                                              
Representative  Gara mentioned  the 10-year  tax lock-in  and                                                                   
that it  might not  be enforced by  the Alaska Court  System.                                                                   
Mr.  Massey commented  that the  State  could maintain  their                                                                   
long-range,  predictable terms  under the State  Constitution                                                                   
and acknowledged it could be challenged.                                                                                        
3:38:16 PM                                                                                                                    
Representative Kelly understood  that each contract has terms                                                                   
and conditions; he  questioned which items are  of concern to                                                                   
the  producers.   Mr.  Massey  stated  the structure  is  too                                                                   
detailed and that the State should  establish objectives.  He                                                                   
addressed the  inappropriate target  dates, which  would lead                                                                   
to poor management.                                                                                                             
3:41:17 PM                                                                                                                    
In  response   to  a  question  from  Representative   Nelson                                                                   
regarding  deadlines,  Mr. Massey  responded  that  producers                                                                   
would  be dictated  by  attempting  to meet  the  unreachable                                                                   
deadline.   The  project  will be  completed  at the  maximum                                                                   
viable pace; deadlines are not necessary.                                                                                       
Representative  Kelly asked the  greater issues.   Mr. Massey                                                                   
responded that  the expansion requirements are  too detailed.                                                                   
Additionally, the  rolled-in rates need work.   He added that                                                                   
the $500 million dollars is not  in the State's best interest                                                                   
and establishes an  opportunity for those that  should not be                                                                   
involved,  to be  players.   Representative  Kelly  indicated                                                                   
that the $500 million dollars is not mandatory.                                                                                 
Mr.  Massey spoke  to the  Alaska hire,  indicating that  any                                                                   
applicant  should  propose  how they  would  maximize  Alaska                                                                   
hire; however,  there must not  be a Project  Labor Agreement                                                                   
3:46:59 PM                                                                                                                    
In response  to further questioning by  Representative Kelly,                                                                   
Mr. Massey noted  the PPT gas tax rate that is  too high.  He                                                                   
observed that the Administration  has acknowledged a need for                                                                   
predictable and  durable terms; he emphasized  that all terms                                                                   
must be predictable  throughout the agreement  and must occur                                                                   
in all forms.                                                                                                                   
Representative  Kelly asked when  the industry needs  to know                                                                   
about  the PPT taxes.   Mr.  Massey replied,  they must  know                                                                 
before the project is started.                                                                                                  
3:49:46 PM                                                                                                                    
Representative Kelly  asked about any "sweet  deal" supported                                                                   
by the  industry.   He questioned how  Exxon justified  a no-                                                                   
agreement with  a 15% floor,  inquiring if that  would affect                                                                   
the project.  Mr. Massey stipulated  that the 15% was not the                                                                   
only variable but significant.   Currently, there are only 35                                                                   
TCF discovered  resources &  50 are needed  to keep  it full.                                                                   
There must be  a structure which encourages  exploration.  He                                                                   
noted  that  up-stream   terms  will  determine   if  &  when                                                                   
exploration is done.                                                                                                            
3:55:54 PM                                                                                                                    
Representative  Kelly  asked if  the PPT  up-stream  elements                                                                   
were  set  aside,  would  Exxon then  accept  the  floor  and                                                                   
provide bid  variables.   Mr. Massey  advised they  could not                                                                   
present   a  "commercially   viable   proposal"  with   those                                                                   
restrictions and that the 15% must be removed.                                                                                  
3:58:13 PM                                                                                                                    
Representative Gara inquired if  ExxonMobil operates in other                                                                   
places around the world that are  subject to rolled-in rates.                                                                   
Mr. Massey commented  that the difference is  the significant                                                                   
size of the proposed project.                                                                                                   
Representative   Gara  asked   if  there   was  a  risk   for                                                                   
affordable,  new  shipper  pipeline expansion.    He  thought                                                                   
there  would be  competing economic  interests  and asked  if                                                                   
they  were   subject  to  rolled-in  rate   requirements  for                                                                   
expansions around  the world.  Mr.  Massey did not know.   He                                                                   
said he  has discussed  regulating facilities throughout  the                                                                   
United States  (U.S.) and  Canada.   The State has  available                                                                   
options for  addressing that scenario &  requires, initially,                                                                   
the shippers  to subsidize.   In  dealing with the  up-stream                                                                   
concerns, dictates if the project will move forward.                                                                            
Representative  Gara acknowledged  the  State  might need  to                                                                   
adjust the  gas tax; however,  did not accept  the industry's                                                                   
unwillingness to  discuss lack of up-stream  incentives.  PPT                                                                   
subsidizes  the gas  field  development cost  by  42.5%.   He                                                                   
reiterated that  the incentives are substantial.   Mr. Massey                                                                   
replied that  the PPT taxes had  increased and that  there is                                                                   
no way  to know  the terms;  without knowing  the terms,  the                                                                   
economic projection is un-determinable.                                                                                         
4:04:30 PM                                                                                                                    
Representative Crawford realized  that consumers would end up                                                                   
paying for the pipeline.  If AGIA  does not pass, perhaps the                                                                   
State could  initiate a reserves  tax.  He observed  that the                                                                   
industry  has not  compromised with  the State.   Mr.  Massey                                                                   
agreed with Representative Crawford  for a need of good-faith                                                                   
negotiations.   He  acknowledged  that the  project is  huge,                                                                   
complex and involves significant risks.                                                                                         
4:08:37 PM                                                                                                                    
Representative Kelly concurred  that a deal should not happen                                                                   
until  it is favorable  for both  sides.   Mr. Massey  stated                                                                   
that ExxonMobil  will not give  up because of  the importance                                                                   
of the  pipeline to the State,  the industry and  the nation,                                                                   
but reiterated the need for producers  to have a commercially                                                                   
viable  project.   He lobbied  for  further consideration  to                                                                   
open-up AGIA to a more flexible process.                                                                                        
DAN DICKINSON, LEGISLATIVE BUDGET AND AUDIT                                                                                   
4:10:39 PM                                                                                                                    
Co-Chair  Chenault  summarized  previous  questions  received                                                                   
from the Administration:                                                                                                        
   · How gas was taxed under the PPT and the PPT credit                                                                         
     implications of the gasline;                                                                                               
   · Are PPT gas credits applicable to GTP in the AGIA bill;                                                                    
   · How does PPT progressively work on gas;                                                                                    
   · What is the link to oil; and                                                                                               
   · How attractive is the pipeline using the IRR method.                                                                       
DAN  DICKINSON,  CONSULTANT,  LEGISLATIVE  BUDGET  AND  AUDIT                                                                   
(LBA)  DIVISION, referenced  the  questions, indicating  that                                                                   
gas is  taxed the same  as oil, on net  value.  When  the net                                                                   
value is calculated, if there  are investments down-stream to                                                                   
the point of  production, they would not be  eligible for the                                                                   
credit.   In order to  determine how  gas is taxed  under the                                                                   
PPT, it is important to look in five different places.                                                                          
AT EASE:       4:14:57 PM                                                                                                     
RECESSED:      4:15:20 PM      /    MAY 2, 2007                                                                           
RECONVENED:    8:29:42 AM      /    MAY 3, 2007                                                                           
DAN  DICKINSON,   CONSULTANT,   LEGISLATIVE  BUDET   &  AUDIT                                                                   
COMMITTEE,  present a  power  point addressing  answers  from                                                                   
questions  asked by the  Legislative Budget  and Audit  (LBA)                                                                   
The first question:                                                                                                             
   • How gas is generally taxed under the PPT and what were                                                                     
     the PPT credit implications of gasline work                                                                                
Mr. Dickinson  stated that  gas is taxed  the same as  oil on                                                                   
net  value.   He  added that  investment  down-stream of  the                                                                   
point of production  is not eligible for credit.   He pointed                                                                   
out how  gas taxed occurred  under the  PPT and that  oil and                                                                   
gas are taxed under five different measures:                                                                                    
   • 22.5% of net value                                                                                                         
   • North Slope floor triggered by oil price                                                                                   
   • Progressivity triggered by single taxpayer net value                                                                       
   • Private royalty @ 1.67% for gas - 1/3 of oil                                                                               
   • Cook Inlet ceiling                                                                                                         
Representative   Hawker  noted   that   progressivity  is   a                                                                   
production tax and  in addition to royalties.   Mr. Dickinson                                                                   
said correct, pointing out that  royalties are a large piece.                                                                   
8:33:39 AM                                                                                                                    
Mr.  Dickinson  added  that production  taxation  amounts  to                                                                   
22.5% of the net value.  To calculate net value:                                                                                
   • Total up-stream costs deducted from the revenue streams                                                                    
     from oil and gas sales                                                                                                     
   • Gas Revenue Exclusion (GRE) mechanism provides an                                                                          
     administratively simple way of adjusting the effective                                                                     
     rate without changing the nominal rate or making many                                                                      
8:35:23 AM                                                                                                                    
Mr. Dickinson  directed  comments to the  North Slope  floor,                                                                   
which is triggered by the oil  price including an alternative                                                                   
floor and applicable to those prices.                                                                                           
   · In considering the future, if Prudhoe Bay is producing                                                                     
     250,000 bbls oil and 3 bcf of gas and                                                                                      
   · If the heating value is 1,000,000 btu per mcf, that                                                                        
     translates to the equivalent of 500,000 bbls a day                                                                         
One-third  of  the  field's  production   would  be  used  to                                                                   
establish the trigger.                                                                                                          
8:36:53 AM                                                                                                                    
Mr.  Dickinson  noted  that Question  #3  addresses  how  PPT                                                                   
progressivity   works   on  gas   and   the   link  to   oil.                                                                   
Progressivity is triggered by a single taxpayer net value.                                                                      
   • Progressivity is determined for each taxpayer on its                                                                       
     total mix of oil and gas and all up-stream costs.                                                                          
   • It is calculated on a monthly basis & monthly up-stream                                                                    
     costs are one twelfth of the total annual costs.                                                                           
Slide 8 indicates  an example of the progressivity  triggered                                                                   
by a single taxpayer's net value  with a destination value of                                                                   
$63.76 dollars;  the gross value  left to the State  would be                                                                   
$58.76 dollars  and a  2.94% progressivity  percentage.    He                                                                   
thought  that gas price  could "drag  down" progressivity  on                                                                   
oil.   A significant influx of  gas will probably  reduce the                                                                   
progressivity paid on oil.                                                                                                      
8:41:06 AM                                                                                                                    
Representative  Gara noted  that at  this time,  there is  no                                                                   
proposal  to rewrite  the  PPT;  he asked  the  value of  Mr.                                                                   
Dickinson's presentation  comparison to  PPT.  Mr.  Dickinson                                                                   
stressed that  there needs  to be a change  made to  the PPT.                                                                   
From conversations  last  year, there  was discussion  on the                                                                   
comparison of distance gas to  oil and assumed it was part of                                                                   
Question #3.  Representative Gara  asked if the intent was to                                                                   
"gear up"  for another  special session  in order to  discuss                                                                   
PPT.   Co-Chair Chenault thought  eventually that  would need                                                                   
to be discussed.                                                                                                                
8:42:58 AM                                                                                                                    
Mr.   Dickinson  referenced   Slide   9,  which   establishes                                                                   
progressivity   charges   at  various   destination   values,                                                                   
including net deductions.                                                                                                       
Representative  Gara  inquired  about the  tax  rate  charged                                                                   
during  those  periods  tax  payments  had been  made.    Mr.                                                                   
Dickinson could not respond.                                                                                                    
8:44:15 AM                                                                                                                    
Mr.  Dickinson  highlighted  the private  royalty  amount  of                                                                   
1.67%  of  the gross  for  gas.    The Cook  Inlet  area  has                                                                   
specific ceilings:                                                                                                              
   • With no direct effect on North Slope gas;                                                                                  
   • Expiring in 2022;                                                                                                          
   • If a gas line is built from the North Slope to Cook                                                                        
     Inlet, it could effect the differential taxation rates;                                                                    
   • A ceiling is potentially different for each producer,                                                                      
     with an average of 4.947% of $3.585 per mcf.                                                                               
8:45:29 AM                                                                                                                    
Mr. Dickinson  pointed out that  Slide 12 addresses  Question                                                                   
#2, regarding PPT gas credits  being applicable to the GTP in                                                                   
the  AGIA bill,  and  that under  the PPT,  the  GTP was  not                                                                 
eligible for the credits.  He  added there are only up-stream                                                                   
costs qualifying  as credits indicated  in AS  43.55.023 (a),                                                                   
AS 43.55.023 (k) & AS 43.55.165 (a).                                                                                            
Mr. Dickinson  addressed "point of production",  noting those                                                                   
areas are defined so that the  gas processing is up-stream of                                                                   
the point of  production and gas treatment is  down-stream of                                                                   
the point of production.                                                                                                        
   • In AS 43.55.900                                                                                                            
   • (21) gas processing                                                                                                        
   • (23) gas treatment                                                                                                         
   • (27) point of production                                                                                                   
8:47:16 AM                                                                                                                    
Mr.  Dickinson  provided  the definitions  from  Statute  (AS                                                                   
43.55.011(27) of the point of production for oil:                                                                               
   • (i)  not   subjected  to  or  recovered   by  mechanical                                                                   
     separation  or run through  a gas processing  plant, the                                                                   
     first point where the gas is accurately metered;                                                                           
   • (ii) subjected to or recovered  by mechanical separation                                                                   
     but not  run through a  gas processing plant,  the first                                                                   
     point  where   the  gas  is  accurately   metered  after                                                                   
     completion of mechanical separation;                                                                                       
   • AS 43.55.011(27) "point of production" means                                                                               
   • (B) for gas;                                                                                                               
   • (iii)  run through  a gas  processing  plant, the  first                                                                   
     point where the gas is accurately  metered downstream of                                                                   
     the plant;                                                                                                                 
   • (C)  for gas run  through an  integrated gas  processing                                                                   
     plant  and   gas  treatment   facility  that   does  not                                                                   
     accurately  meter the gas  after the gas  processing and                                                                   
     before the gas treatment,  the first point where the gas                                                                   
     processing is  completed or where gas  treatment begins,                                                                   
     whichever is further upstream.                                                                                             
AS 43.55.011 (21) provides definition of gas processing:                                                                        
   • (A) means processing a gaseous  mixture of hydrocarbons;                                                                   
   • (i)  by  means  of  absorption,  adsorption,  externally                                                                   
     applied refrigeration,  artificial compression  followed                                                                   
     by adiabatic  expansion using the Joule-Thomson  effect,                                                                   
     or  another  physical  process that  is  not  mechanical                                                                   
   • (ii)  for  the  purpose  of  extracting  and  recovering                                                                   
     liquid hydrocarbons [producing ngls/oil].                                                                                  
The  PPT  definition  for  gas   treatment  is  found  in  AS                                                                   
43.55.011 (23):                                                                                                                 
   • (A) means conditioning gas and removing from gas non-                                                                      
     hydrocarbon substances for the purpose of rendering the                                                                    
     gas acceptable for tender and acceptance into a gas                                                                        
     pipeline system.                                                                                                           
   • (B) includes incidentally removing liquid hydrocarbons                                                                     
     from the gas.                                                                                                              
Mr.  Dickinson   referenced  Slide  20,  which   defines  gas                                                                   
treatment, language taken from AS 43.55.011 (23):                                                                               
   • (C) does not include                                                                                                       
        - (i) dehydration required to facilitate the                                                                            
          movement of gas from the well to the point where                                                                      
          gas processing takes place;                                                                                           
        - (ii) the scrubbing of liquids from gas to                                                                             
          facilitate gas processing.                                                                                            
He continued that under current law:                                                                                            
   • Gas Processing: Starts with gaseous mixture of                                                                           
     hydrocarbons, producing natural gas liquids and gas by                                                                     
     removing hydrocarbon liquids.                                                                                              
   • Gas treatment:  Starts with produced gas and removes                                                                     
     non-hydrocarbons to prepare the gas for tender to the                                                                      
     pipeline.  Nothing is produced.                                                                                            
8:49:29 AM                                                                                                                    
Mr.  Dickinson  explained  that  Slide  22  demonstrates  the                                                                   
definition  of gas  processing  taken from  AS 43.55.900  (7)                                                                   
"Gas processing"  means  the treatment  of gas downstream  of                                                                   
the point  of production to  extract natural gas  liquids"; &                                                                   
AS  43.55.900  (7)  "Gas  processing"  means  post-production                                                                   
treatment of gas to extract natural gas liquids".                                                                               
Mr.  Dickinson  pointed  out  the  AGIA  definitions  of  gas                                                                   
processing found in AS 43.55.900  (7) has the same meaning as                                                                   
"gas processing"  in AS 43.55.900  (21).  He noted  the graph                                                                   
on Slide 24 of the PPT point of production chart for gas.                                                                       
8:53:51 AM                                                                                                                    
Mr. Dickinson  stated  that if  gas simply  comes out of  the                                                                   
ground, the  point of  production is  measured from  where it                                                                   
comes  out,  the  first  time.   If  there  is  a  mechanical                                                                   
separation,  it  is again,  the  first point  measured  after                                                                   
mechanical separation.  He referenced  Slide 27, indicating a                                                                   
gas processing plant.  Slide 28  is the most important focus,                                                                   
the integrated  gas processing  and treatment  plant,  with a                                                                   
point  of   production  furthest   up-stream,  where   either                                                                   
treatment begins or processing  ends.  Slide 29 indicates the                                                                   
Prudhoe Bay  point of production  under the PPT,  central gas                                                                   
8:56:31 AM                                                                                                                    
Mr. Dickinson explained that if  CGF remains a separate plant                                                                   
and sends  gas to a Gas  Treatment Plant (GTP), gas  would be                                                                   
produced as  it is metered out  of the plant.  The  GTP would                                                                   
be down-stream  of the point of  production for the  gas and,                                                                   
thus,  associated  operating  and  capital  costs  would  not                                                                   
qualify  as lease  expenditures  under AS  43.55.165 (a)  nor                                                                   
would capital  costs qualify  for credit  treatment under  AS                                                                   
43.55023 (a).                                                                                                                   
8:58:13 AM                                                                                                                    
If CGF  remains integrated into  a gas treatment  plant (GTP)                                                                   
(produced  gas  is  not  metered),  then  the  gas  would  be                                                                   
produced  within that  integrated facility,  at the  furthest                                                                   
point up-stream of the beginning  of gas treatment or the end                                                                   
of gas  processing.  If the  plants are integrated,  the risk                                                                   
is  that some  gas  processing will  move  downstream of  the                                                                   
point of  production, not  that gas  treatment will  move up-                                                                   
stream of the point of production.                                                                                              
Slide 35  uses Prudhoe Bay as  the point of  production under                                                                   
the PPT  with an integrated GTP.   If the two  processes were                                                                   
to become intertwined or integrated,  the point of production                                                                   
would  move into  the central  gas facility,  up-stream.   As                                                                   
currently  written, the  law protects  from situations  where                                                                   
gas treatment plants are eligible for up-stream credits.                                                                        
8:59:29 AM                                                                                                                    
Mr.   Dickinson   discussed    Question   #4,   regarding   a                                                                   
determination of how attractive  an investment pipeline would                                                                   
be.  Previous  testimony by Antony Scott,  Commercial Analyst                                                                   
in the  Department of  Natural Resources,  indicated  that by                                                                   
using the  IRR metric, the project  could have high  rates of                                                                   
return  particularly, when  a third party  line is  involved.                                                                   
That   would  not   include  the   cost   of  the   shippers'                                                                   
transportation  commitments  when comparing  the  independent                                                                   
pipeline  with  a  producer owned  pipeline.    The  question                                                                   
surrounds how that could affect the results.                                                                                    
9:00:14 AM                                                                                                                    
Mr. Dickinson addressed the firm transportation commitment.                                                                     
   • The shipper makes a transportation commitment (FT) to                                                                      
     pay the capital portion of the tariff whether they use                                                                     
     the pipeline or not.                                                                                                       
   • It is that financial commitment that underwrites the                                                                       
        - Required by FERC before approving a project and                                                                       
        - Required by lenders before lending money to a                                                                         
9:02:52 AM                                                                                                                    
Representative  Gara commented  that the  shipper only  cares                                                                   
about  the  costs of  getting  the  gas  out of  the  ground,                                                                   
shipping  it and  knowing what  the  tariff is.   Once  costs                                                                   
equal  the  tariff,  the  shipper's   costs  are  free.    He                                                                   
referenced  previous  comments   made  by  Mr.  Scott.    Mr.                                                                   
Dickinson noted the figures in  doubling the internal rate of                                                                   
return (IRR).   [Addendum Page #7 & #9].                                                                                        
Vice Chair  Stoltze  asked if  it was fair  that no  negative                                                                   
rate  of  return  had been  indicated,  only  profits.    Mr.                                                                   
Dickinson agreed;  however, pointed out that  there have been                                                                   
negative rates  of return  and that a  low rate of  return is                                                                   
enough to "kill" any project.                                                                                                   
Representative Gara  noted that in last year's  proposal, the                                                                   
State was  responsible for selling  the gas.  In  the current                                                                   
proposal,  the producers  will be  selling that  gas and  the                                                                   
risk of  low prices  has taken precedence.   An entity  could                                                                   
make  a  lot  more  money if  they  are  both  producing  and                                                                   
pipeline owners of  the gas, but the profit  margins decline.                                                                   
The profit  margins on  production are  higher and  combining                                                                   
the two  makes more  absolute money.   Mr. Dickinson  pointed                                                                   
out that the attached slides indicate the opposite.                                                                             
Vice Chair Stoltze observed that  Mr. Scott had rolled-in the                                                                   
risk factor into the model.  Mr. Dickinson disagreed.                                                                           
9:09:01 AM                                                                                                                    
Mr. Dickinson  provided an overview of the  following slides,                                                                   
which demonstrate the internal rate of return (IRR):                                                                            
   · Slide 40 - Calculated IRR at various price levels                                                                          
   · Slide 41 - The IRR on a model of an owned project                                                                          
   · Slide 42 - The IRR for a model capital component of                                                                        
   · Slide 43 - The IRR model 3 party line with no FT but                                                                       
     with a tariff                                                                                                              
   · Slide 44 - The IRR model 3 party line with some                                                                            
     additional capital                                                                                                         
   · Slide 45 - The IRR model 3 party line with even more                                                                       
     additional capital                                                                                                         
   · Slide 46 - The IRR model 3 party line with even more                                                                       
     additional capital                                                                                                         
9:16:50 AM                                                                                                                    
Representative Gara understood  that the FT was a significant                                                                   
cost to  the producers.   Last year,  under the proposed  PPT                                                                   
contract, the State  had to cover 12.5% of  the FT commitment                                                                   
- royalty  in-kind.  No  one mentioned  that could be  a very                                                                   
risky cost  to the State and  asked Mr. Dickinson why  it had                                                                   
not been  indicated at  that time.   Mr. Dickinson  responded                                                                   
that had been  a 20% commitment  for the FT.  He  agreed that                                                                   
it had been very risky and that  he was sorry that it had not                                                                   
been identified.   Representative  Gara acknowledged  that he                                                                   
had known  it was risky and  had asked those questions.   Mr.                                                                   
Dickinson responded  that the State  concluded it was  a risk                                                                   
the State could assume.                                                                                                         
9:20:08 AM                                                                                                                    
Mr. Dickinson  continued, Slide  47 addresses the  disclosure                                                                   
of long  term obligations.   The  statement requires  that an                                                                   
enterprise   disclose    commitments   under    unconditional                                                                   
obligations  that  are associated  with  suppliers  financing                                                                   
arrangements.   Such  obligations are  often in  the form  of                                                                   
take-or-pay contracts and throughout.                                                                                           
Slides 48-51 provide examples of disclosure.                                                                                    
9:23:44 AM                                                                                                                    
Mr.  Dickinson   referenced  Slide  53,  using   a  financial                                                                   
statement  from   BP,  listing  the  unconditional   purchase                                                                   
obligations, representing any  agreement to purchase goods or                                                                   
services,  enforceable  and legally  binding  and  specifying                                                                   
significant terms.   The  amounts shown include  arrangements                                                                   
to secure long-term access to  supplies of crude oil, natural                                                                   
gas feed-stocks  and pipeline  systems.  The obligations  are                                                                   
set out for five  year periods of time.  That  information is                                                                   
required for disclosure.                                                                                                        
Slides  55  - 59  explain  why  that information  matters  to                                                                   
companies [listed below] who sell  their investment services:                                                                   
   · Moody' Investors Service                                                                                                   
   · Standard and Poor (S&P)                                                                                                    
9:27:34 AM                                                                                                                    
Mr. Dickinson  summarized by reading from an  article written                                                                   
in  the  1980's  from  the  magazine  "Society  of  Petroleum                                                                   
Engineers",  addressing the  perspective of  people within  a                                                                   
company, making errors in an analysis.                                                                                          
Mr.  Dickinson  pointed  out   that  even  within  the  large                                                                   
companies, there is discussion  regarding "creative financing                                                                   
solutions"; typically  involving a  lease like structure  and                                                                   
not representing  the true  costs to  the company.   Instead,                                                                   
when those  types of  commitments are made,  they need  to be                                                                   
properly valued.   He suggested  that when the high  rates of                                                                   
return are  indicated, it  could be because  costs of  the FT                                                                   
commitment are not properly valuated.                                                                                           
9:29:40 AM                                                                                                                    
Representative  Gara referenced  comments made previously  by                                                                   
Mr.  Scott   regarding  the  profitability  analysis.     Mr.                                                                   
Dickinson  attempted  to demonstrate  how  that  presentation                                                                   
omitted the rates of return.                                                                                                    
Representative Gara  questioned the accuracy of  the proposed                                                                   
number.   Mr.  Dickinson suggested  that  there are  problems                                                                   
with any analysis  recommending avoidance.  He  encouraged FT                                                                   
be incorporated correctly.                                                                                                      
Representative  Gara  stated that  it  will  be a  profitable                                                                   
project  at those  prices and  asked if  Mr. Dickinson  would                                                                   
dispute that.   Mr. Dickinson  acknowledged that it  could be                                                                   
profitable, however, challenged  the idea that it is "wildly"                                                                   
Representative  Thomas  believed that  in  theory, the  State                                                                   
owns over 12 years worth of gas  in Prudhoe Bay and asked why                                                                   
the  State  should  not  own those  rights.    Mr.  Dickinson                                                                   
responded  that  such  questioning  was  "treading  on  legal                                                                   
ground".  The State of Alaska  owns 12.5% of the hydrocarbons                                                                   
produced - when they come out of the ground.                                                                                    
Mr. Dickinson advised  that there are two aspects  and one is                                                                   
putting the  gas back  into the ground,  which helps  the oil                                                                   
flow.   The  State receives  12.5%  of those  benefits.   The                                                                   
State does not  own any percentage until the  gas is actually                                                                 
9:35:08 AM                                                                                                                    
Co-Chair  Chenault  referenced  Slide 42,  inquiring  how  to                                                                   
identify the  10% interest charge  on the FT.   Mr. Dickinson                                                                   
explained  that the  assumption  was using  some  information                                                                   
from the model.   By using any arbitrary number  & placing it                                                                   
into the formula, changes the payment amount.                                                                                   
Representative  Kelly  asked 10%  was the  combined  interest                                                                   
rate and profit.  Mr. Dickinson replied it is.                                                                                  
9:36:37 AM                                                                                                                    
HB 177 was HELD in Committee for further consideration.                                                                         
The meeting was adjourned at 9:36 A.M.                                                                                          

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