Legislature(2011 - 2012)HOUSE FINANCE 519

03/23/2011 08:00 AM FINANCE


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08:07:43 AM Start
08:08:16 AM HB110
10:06:09 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
Industry Testimony
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 23, 2011                                                                                            
                         8:07 a.m.                                                                                              
                                                                                                                                
                                                                                                                                
8:07:43 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the  House Finance Committee meeting                                                                    
to order at 8:07 a.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Co-Chair                                                                                        
Representative Anna Fairclough, Vice-Chair                                                                                      
Representative Mia Costello                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Reggie Joule                                                                                                     
Representative Mark Neuman                                                                                                      
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None.                                                                                                                           
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative  Mike  Hawker;  Senator Cathy  Giessel;  Bart                                                                    
Armfield,   Vice   President,   Operations,   Brooks   Range                                                                    
Petroleum    Corporation;   Marilyn    Crockett,   Executive                                                                    
Director,  Alaska Oil  and Gas  Association; Ralph  Portell,                                                                    
Tax Manager, BP Exploration Alaska.                                                                                             
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Ken  Thompson,  Managing  Director, Alaska  Venture  Capital                                                                    
Group (AVCG);  Claire Fitzpatrick, Chief  Financial Officer,                                                                    
BP Alaska.                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 110    PRODUCTION TAX ON OIL AND GAS                                                                                         
                                                                                                                                
          HB 110 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
                                                                                                                                
HOUSE BILL NO. 110                                                                                                            
                                                                                                                                
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
8:08:16 AM                                                                                                                    
                                                                                                                                
BART  ARMFIELD,  VICE  PRESIDENT, OPERATIONS,  BROOKS  RANGE                                                                    
PETROLEUM   CORPORATION   (BRPC),   offered   a   PowerPoint                                                                    
presentation, "Brooks  Range Petroleum  Corporation, 10-Year                                                                  
History and Project Milestones" (copy on file).                                                                               
                                                                                                                                
Mr.  Armfield  informed  the  committee  that  Brooks  Range                                                                    
Petroleum  Corporation  (BRPC)  had been  working  from  the                                                                    
North  Slope  since 2001.  The  corporation  had three  core                                                                    
areas  spread  across  the   North  Slope,  stretching  from                                                                    
Nuiqsut, to  Beechey Point, to  south of Point  Thomson. The                                                                    
BRPC gross  North Slope acreage  totaled 240,000  acres. The                                                                    
corporation  had  accumulated  the  positions  strategically                                                                    
with specific  operational ideas  and expectations  for each                                                                    
unit.  The  Beechey  Point  unit,  located  in  the  central                                                                    
portion  of   the  slope,  was  considered   the  near-term,                                                                    
development phase  of the BRPC master  plan. The corporation                                                                    
had  been active  in the  area  long enough  for results  to                                                                    
progress  to   the  point  of  nearing   actual  development                                                                    
sanctioning, pending  an engineering report due  in the near                                                                    
future.  The  corporation  had drilled,  and  was  near  the                                                                    
bottom of  a well at  the southeast corner of  the Miluveach                                                                    
Unit,  near  Nuiqsut.  He  stated that  this  was  the  only                                                                    
exploration well  that had been  drilled on the  North Slope                                                                    
in in the  current year.  The acreage position  in the east,                                                                    
south  of Point  Thomson, was  considered more  strategic in                                                                    
for long term planning.                                                                                                         
                                                                                                                                
8:14:29 AM                                                                                                                    
                                                                                                                                
Mr. Armfield directed attention to  a timeline at the bottom                                                                    
of  Slide 1.  He  relayed that  the  Alaska Venture  Capital                                                                    
Group (AVCG) was formed in 2000.  The AVCG is comprised of a                                                                    
consortium of  lower 48 mid-continent oil  and gas companies                                                                    
and  is the  parent  company  of BRPC.  The  group used  the                                                                    
period  of  2001  through  2006  to  acquire  acreage,  hire                                                                    
technical staff  and solidify the business  program. In 2007                                                                    
the first well  was drilled at the Beechey  Point Unit. Now,                                                                    
in 2011,  the corporation  was drilling  another exploration                                                                    
well  and  was on  the  edge  of sanctioning  a  development                                                                    
program.                                                                                                                        
                                                                                                                                
Representative   Gara  asked   what   the  sanctioning   and                                                                    
development program  meant in relation to  the corporation's                                                                    
commitment  to produce  in the  area.  Mr. Armfield  replied                                                                    
that  a   third-party  engineering  report   concerning  the                                                                    
reserves  that were  discovered in  past activities.  If the                                                                    
reserve numbers came back indicating  that there were enough                                                                    
barrels to  progress a development program,  the corporation                                                                    
would take  the report  to the  working interest  owners and                                                                    
request that  the development  be sanctioned  and progressed                                                                    
forward.  He  stated  that the  corporation  had  plans  for                                                                    
production in 2013.                                                                                                             
                                                                                                                                
Mr. Armfield continued with Slide 2 of the presentation.                                                                        
                                                                                                                               
        o WIO's represented by BRPC are committed to Alaska                                                                     
          and currently have a $ 154 MM investment that                                                                         
          needs to perform                                                                                                      
        o Current business plan approved by our investors                                                                       
          has a timeline which reflects first oil and                                                                           
          revenues from production in mid 2013                                                                                  
        o Each year we delay, has an adverse effect on the                                                                      
          investments ROI and IRR                                                                                               
        o Current economic models used by BRPC, marginally                                                                      
          support an acceptable IRR on smaller targeted                                                                         
          accumulations with an assumption that reserve                                                                         
          base would expand to include other prospect                                                                           
          potential in the project area                                                                                         
       o An increase in tax rate and a reduction in                                                                             
          capital credits would have a negative reaction                                                                        
          when applied to current models most certainly                                                                         
          moving the project to an un-economic portfolio                                                                        
          position and would shorten our active                                                                                 
          participation on Alaska's North Slope                                                                                 
        o Increased capital credits, lowering of the base                                                                       
          rate and progressivity when applied to our model                                                                      
          would assure an attractive IRR, and would foster                                                                      
          a more aggressive prospect portfolio and in turn,                                                                     
          provide encouragement to our WIO's for added                                                                          
          funding for our NS projects.                                                                                          
        o Elevate the interest level of other players with                                                                      
          a watchful eye on Alaska                                                                                              
                                                                                                                                
                                                                                                                                
Mr.  Armfield  reiterated  that BRPC  was  the  only  entity                                                                    
drilling  an  exploration  well  in  the  current  year.  He                                                                    
offered that BRPC had been  forced into the solitary driller                                                                    
position  because  it had  $154  million  invested, and  the                                                                    
working interests owners of the  corporation needed to see a                                                                    
return  in the  investment.  The current  business plan  had                                                                    
approved  development and  production by  2013. He  stressed                                                                    
that the  internal pressure to  make the  investment perform                                                                    
were  as significant  as the  external  pressure. Each  year                                                                    
that the project  was delayed cut into the  internal rate of                                                                    
return  and  the  return   on  investment.  The  corporation                                                                    
maintained  the goal  of becoming  a  producing entity.  The                                                                    
models currently  used were  geared toward  finding smaller,                                                                    
viable projects  to get  established and  then add  to those                                                                    
projects over time.                                                                                                             
                                                                                                                                
8:19:56 AM                                                                                                                    
                                                                                                                                
Mr. Armfield  testified that an  increase in the  base rate,                                                                    
progressivity  or  the  status   quo  would  affect  revenue                                                                    
streams into the future.                                                                                                        
                                                                                                                                
Co-Chair  Stoltze  asked what  kind  of  affect an  increase                                                                    
would have.  Mr. Armfield replied  that it  would negatively                                                                    
affect the  return on investment. Naturally,  an increase in                                                                    
capital  credits,   and  a  decrease   in  base   rates  and                                                                    
progressivity, would have a positive effect on investment.                                                                      
                                                                                                                                
Mr.  Armfield  acknowledged that  because  BRPC  was a  very                                                                    
small  entity,   the  corporation's  performance   would  be                                                                    
heavily  scrutinized. He  believed that  if a  small company                                                                    
could come into Alaska and  turn a profit, any sized company                                                                    
could. He said  that HB 110 would be helpful  in getting new                                                                    
entities  interested  in  working in  Alaska.  Mr.  Armfield                                                                    
stated that the  decline of oil production in  the state was                                                                    
cause for  concern. He revealed  that a common  goal between                                                                    
the state and the industry was  to slow or level the decline                                                                    
of oil production  and throughput in Alaska.  He believed HB                                                                    
110 would set  the stage to find a positive  solution to the                                                                    
problem of decline.                                                                                                             
                                                                                                                                
Mr.  Armfield  cited  the  top  three  elements  that  would                                                                    
operate once BRPC  made return on its  investment, as listed                                                                    
on Slide 3:                                                                                                                     
                                                                                                                               
     · Revise the progressivity surcharge to the "bracketed                                                                     
      tax structure" with calculations made annually                                                                            
        instead of monthly                                                                                                      
     · Cap the total tax at 50 percent when oil prices top                                                                      
        $92.50/bbl                                                                                                              
     · For development of new fields outside existing                                                                           
      production units, the base tax rate will be 15                                                                            
        percent instead of 25 percent and cap the total tax                                                                     
        at 40 percent                                                                                                           
                                                                                                                                
                                                                                                                                
8:23:48 AM                                                                                                                    
                                                                                                                                
Vice-chair   Fairclough   queried  difference   between   an                                                                    
"explorer" and a  "producer." She asked why  a company would                                                                    
explore under the current tax  regime. Mr. Armfield answered                                                                    
that as explorers BRPC had  a business plan that indicated a                                                                    
revenue producing stream by 2013.  The corporation needed to                                                                    
get a  return on the  already invested $154 million  as soon                                                                    
as possible.  He understood  that it  would behoove  BRPC to                                                                    
wait  until  the  changes  from  HB110  took  affect  before                                                                    
drilling.   However,  the   corporation  was   not  in   yet                                                                    
production and could not afford to wait another year.                                                                           
                                                                                                                                
Vice-chair Fairclough suggested  that companies operating in                                                                    
the  state  understood  the  tax   regime  when  they  began                                                                    
exploration.  She  wondered if  an  argument  could be  made                                                                    
around   why   companies    would   willingly   enter   into                                                                    
exploration,   knowing  the   tax  regime   was  less   than                                                                    
advantageous.                                                                                                                   
                                                                                                                                
Mr.   Armfield  reiterated   that   BRPC   was  an   unusual                                                                    
corporation.  The corporation  had  working interest  owners                                                                    
that had been told a  revenue stream would be established by                                                                    
2013. He  admitted that the  current tax regime did  have an                                                                    
adverse effect on BRPC, but being  in a position to become a                                                                    
revenue  producer was  more important  than waiting  another                                                                    
year.                                                                                                                           
                                                                                                                                
8:28:01 AM                                                                                                                    
                                                                                                                                
Representative  Wilson asked  if BRPC  had examined  the tax                                                                    
regime  upon  deciding  to  come  to  Alaska  in  2000.  Mr.                                                                    
Armfield replied  that when AVCG  made the decision  to come                                                                    
to Alaska,  oil was $9  per barrel. He reiterated  that AVCG                                                                    
was  a group  of investors  made up  of small,  independent,                                                                    
second  and  third  generation,  family-owned  oil  and  gas                                                                    
companies.  With oil  at $9  per barrel,  available projects                                                                    
would have generated  a very small cash  flow. Group members                                                                    
had agreed that  there would not be enough  profit to pursue                                                                    
smaller  accumulations. The  thinking  was  that more  money                                                                    
could  be  made  in  Alaska   because  of  the  much  larger                                                                    
reserves. The price  of oil remained $9 per  barrel, but the                                                                    
hope was that the cost of  doing business in Alaska would be                                                                    
lower. Currently,  with oil  at $105  per barrel,  the small                                                                    
accumulations from  2000 are producing some  return. Some of                                                                    
the  members of  AVCG had  turned their  activity elsewhere,                                                                    
but retained small holdings in the state.                                                                                       
                                                                                                                                
8:32:37 AM                                                                                                                    
                                                                                                                                
Representative  Wilson asked  whether AVCG  would have  made                                                                    
the  decision  to  come  to   Alaska  if  Alaska  Clear  and                                                                    
Equitable  Share  (ACES) had  been  in  place in  2000.  Mr.                                                                    
Armfield thought  that it would  have been less  likely that                                                                    
the  group would  have made  the  same decision  to come  to                                                                    
Alaska if ACES had been in place at the time.                                                                                   
                                                                                                                                
Representative  Costello wondered  about the  nature of  the                                                                    
conversations concerning  Alaska that BRPC had  when seeking                                                                    
partnerships  with  other  producers. Mr.  Armfield  replied                                                                    
that  the  group had  been  in  partnership with  a  company                                                                    
called  Bow Valley,  which was  acquired by  Dana Petroleum.                                                                    
When Dana Petroleum reviewed the  20 percent position it had                                                                    
acquired in  Alaska, it  elected not  to participate  in the                                                                    
state. Dana  Petroleum requested that  BRPC buy them  out of                                                                    
their share,  which took AVCG  to a position of  50 percent.                                                                    
The  group  has continued  to  work  to lower  its  position                                                                    
percentage, but has had trouble acquiring new partners.                                                                         
                                                                                                                                
Representative  Doogan  asked  if  the  group  had  acquired                                                                    
pipeline space to deliver any oil it may produce.                                                                               
                                                                                                                                
8:36:55 AM                                                                                                                    
                                                                                                                                
Mr. Armfield  replied that the Trans-Alaska  Pipeline System                                                                    
(TAPS) was  a common carrier.  If the group could  get their                                                                    
product to  TAPS there  would be  no problem.  The objective                                                                    
was to  tie into  common carriers and  transport the  oil to                                                                    
TAPS.  The group  did not  anticipate any  problems to  that                                                                    
end.                                                                                                                            
                                                                                                                                
Representative Gara  understood that the project  at Beechey                                                                    
Point  would  move  forward  upon   the  completion  of  the                                                                    
engineering  report that  showed  the anticipated  reserves,                                                                    
even if ACES remained the  same. Mr. Armfield responded that                                                                    
the Beechey  Point project had  begun 10 years ago,  and the                                                                    
economics that the group had  in place showed that a certain                                                                    
level of  reserves would ensure  the project  moved forward.                                                                    
If  the   reserves  came  in  less   than  anticipated,  and                                                                    
depending on  the impact of  HB 110, a recalculation  may be                                                                    
in order  and a  new presentation would  be made  to working                                                                    
interest  owners. He  reminded the  committee that  AVCG had                                                                    
other  ventures  that  needed to  produce  revenue,  instead                                                                    
there was $154  million producing zero return.  He felt that                                                                    
some form of return was better than none.                                                                                       
                                                                                                                                
Representative  Gara  understood   that  if  the  engineer's                                                                    
reports showed  the reserves that  were expected,  the group                                                                    
planned to  move ahead with  the project. Mr.  Armfield said                                                                    
that  the group  would  present the  report  to the  working                                                                    
interest owners.  The decision  would ultimately be  made by                                                                    
the partners.                                                                                                                   
                                                                                                                                
8:40:11 AM                                                                                                                    
                                                                                                                                
Representative  Gara understood  that it  was difficult  for                                                                    
smaller producers  to produce a  modest sized  field without                                                                    
their own  processing facility. He  queried the plans  for a                                                                    
processing facility  at Beechey Point. Mr.  Armfield relayed                                                                    
that  the   group  planned  to  build   its  own  processing                                                                    
facilities.  Small,  portable,  component modules  would  be                                                                    
applied  to  the project.  The  facilities  would expand  or                                                                    
contract  depending  on  the throughput.  As  other  project                                                                    
areas  progressed,  facilities  could be  relocated  to  new                                                                    
project areas.                                                                                                                  
                                                                                                                                
Mr. Armfield  concluded with Slide  4, "HB  110, Opportunity                                                                  
to Change the  Current Trend", a line  graph, which depicted                                                                  
the decline  in forecasted oil  production over the  next 38                                                                    
years.  He  argued  that  HB  110 had  a  strong  chance  of                                                                    
positively impacting the throughput  decline. He thought the                                                                    
activity levels  generated from the  changes outlined  in HB                                                                    
110 would change  the decline curve, create  jobs and expand                                                                    
the vendor base. The change  in the high cost of exploration                                                                    
and development timelines could  create more business on the                                                                    
North Slope.                                                                                                                    
                                                                                                                                
Co-Chair  Thomas asked  if HB  110  were to  pass, when  the                                                                    
state  could  expect  to  see  exploratory  wells  begin  to                                                                    
produce  oil.  Mr. Armfield  stated  that  according to  the                                                                    
current timeline results could be  expected in three to five                                                                    
years.                                                                                                                          
                                                                                                                                
8:44:08 AM                                                                                                                    
                                                                                                                                
KEN  THOMPSON,  MANAGING  DIRECTOR, ALASKA  VENTURE  CAPITAL                                                                    
GROUP (AVCG) testified  that AVCG was the  parent company of                                                                    
BRPC.  He presented  the  Power  Point presentation,  "House                                                                  
Bill 110  House Finance  Committee Testimony by  AVCG, LLC."                                                                  
He cited Slide 2, "Agenda":                                                                                                     
                                                                                                                                
    Purpose: Present ideas to re-incentivize investment                                                                         
     and increase the competitiveness of Alaska relative to                                                                     
     other oil basins with one common State & Industry Goal                                                         
     in mind: LEVEL ALASKA'S OIL PRODUCTION                                                                             
                                                                                                                                
Mr. Thompson relayed that if  the state and the industry had                                                                    
the goal  of dividing  "fixed-pie" revenues,  conflict would                                                                    
be  ever  present.  He  believed that  changes  in  the  tax                                                                    
structure would lead to growth  in the industry resulting in                                                                    
increased revenue for the state.  Another giant field on the                                                                    
North  Slope  was  not necessary;  several  small  companies                                                                    
producing modest  amounts would  level production.  He hoped                                                                    
that the  state could  move from the  position of  losing $2                                                                    
million, to a position of  having no decline. He shared that                                                                    
the  company  approached  working  with the  state  from  an                                                                    
investor  standpoint.  The  company   hoped  to  raise  more                                                                    
capital  for   exploration  and  production.   Mr.  Thompson                                                                    
informed  the   committee  that   he  was  calling   in  via                                                                    
teleconference  because he  was  currently in  the Lower  48                                                                    
soliciting additional partners to  share the risk with AVCG.                                                                    
He thought that HB 110  would help the company in attracting                                                                    
new partners to  the state. He stressed that  some fields in                                                                    
the North Slope  were declining, and offered  that the state                                                                    
and industry  together could focus  on the next  frontier of                                                                    
development in  an effort  to level  the decline.  He stated                                                                    
that   oil   source   rocks,   low-permeability   sand   and                                                                    
exploration with  smaller fields  could level  production in                                                                    
the next several years.                                                                                                         
                                                                                                                                
                                                                                                                                
8:48:24 AM                                                                                                                    
                                                                                                                                
Mr.  Thompson  stated  that AVCG  was  growth  company.  The                                                                    
company currently  had no production,  but he  stressed that                                                                    
the  only  way  forward  for  the  company  was  upward.  He                                                                    
reiterated  his hope  that the  company would  play a  major                                                                    
role in leveling oil production in the state.                                                                                   
                                                                                                                                
Mr.   Thompson  cited   Slide  3,   "AVCG  &   BRPC:  Entity                                                                  
Comparison."  He told  the committee  that his  job as  lead                                                                    
director was  to attract new  investors. He said  that there                                                                    
were 15,000  attendees at the  North American  Prospect Expo                                                                    
in 2009. Twelve  companies approached the AVCG  booth at the                                                                    
expo  and  all  twelve  queried  Alaska's  tax  regime.  The                                                                    
company  was down  to one  potential investor.  He said  the                                                                    
investors  lead  negotiator  requested information  on  what                                                                    
Alaska planned  to do to change  the tax regime in  order to                                                                    
incentivize major new investment.                                                                                               
                                                                                                                                
8:52:03 AM                                                                                                                    
                                                                                                                                
Mr. Thompson  cited Slide 4, "AVCG  JV Leasehold Portfolio."                                                                    
He  reiterated that  the company  had approximately  240,000                                                                    
acres  in the  North Slope  and a  well was  currently being                                                                    
drilled west of  the Kuparuk River Unit. He  added that AVCG                                                                    
owned 50 percent of the  overall acres. Houston, Texas based                                                                    
Ramshorn  Investments, Inc.  owned 25  percent and  TG World                                                                    
Energy Corporation, out of Calgary owned 25 percent.                                                                            
                                                                                                                                
Mr.  Thompson   continued  to   Slide  5,   "Attracting  New                                                                    
Investors In  the Face of  Global Competition  for Capital."                                                                    
He  stated  that 12  companies  had  initially expressed  an                                                                    
interest in  investing in  the Alaska  project, 11  of which                                                                    
had eventually  revoked support. He repeated  that companies                                                                    
were  not likely  to  invest in  the state  due  to the  tax                                                                    
regime.                                                                                                                         
                                                                                                                                
Mr. Thompson shared  that AVCG had been  optimistic when Bow                                                                    
Valley  was  bought out  by  Dana  Petroleum. However,  Dana                                                                    
Petroleum had elected not to  participate on the North Slope                                                                    
because of  better tax treatment  and higher returns  in the                                                                    
North Sea. He reiterated  Mr. Armfield's statement that AVCG                                                                    
was currently  searching for  a partner  to shoulder  the 50                                                                    
percent interest.                                                                                                               
                                                                                                                                
Mr.  Thompson  explained  that  substantial  tax  incentives                                                                    
enacted in 2009  encouraged the development in  the UK North                                                                    
Sea. In  the North Sea  new fields  were exempt from  the 20                                                                    
percent  surcharge until  the first  $13 billion  in profits                                                                    
was  made. The  tax changes  the UK  made in  2009 increased                                                                    
first quarter  drilling for 2010  by 29 percent;  the second                                                                    
133 percent.  New production  was anticipated.  The company,                                                                    
Noble  Energy, declined  to join  in the  Alaska investment,                                                                    
opting instead  to invest in  Israel. The  prospectivity and                                                                    
tax  structure in  Israel were  more appealing  than Alaska.                                                                    
The government  take was less  in Israel and  producers were                                                                    
recovering 200 percent of their investment.                                                                                     
                                                                                                                                
Mr. Thompson  continued. He  stated 138  wells per  month in                                                                    
North  Dakota and  would soon  surpass Alaska  in daily  oil                                                                    
production.  The suspension  of  severance  tax for  initial                                                                    
development  and expedited  state  permitting had  attracted                                                                    
investors.                                                                                                                      
                                                                                                                                
8:56:24 AM                                                                                                                    
                                                                                                                                
Mr. Thompson  continued to Slide  6, "Frasier: Alaska  is 68                                                                  
of  133  in  terms  of overall  attractiveness."  The  slide                                                                    
indicated   that  Alaska   was   average   in  its   overall                                                                    
attractiveness;  falling behind  Alberta,  but  in front  of                                                                    
Iran.                                                                                                                           
                                                                                                                                
Mr. Thompson  Slide 8, "AVCG's Recommendations  to Assist in                                                                  
Achieving the Common Goal of No Decline":                                                                                     
                                                                                                                                
        · Revise the progressivity surcharge to the                                                                             
          "bracketed tax structure" with calculations made                                                                      
          annually instead of monthly                                                                                           
                                                                                                                                
        · Cap the total tax at 50 percent when oil prices                                                                       
          top $92.50/bbl                                                                                                        
                                                                                                                                
        · For development of new fields outside existing                                                                        
          production units, the base tax rate will be 15                                                                        
          percent instead of 25 percent and cap the total                                                                       
          tax at 40 percent                                                                                                     
                                                                                                                                
        A bracketed structure with reduced base rate and cap                                                                    
        and a reduced  base tax rate  for new fields  with a                                                                    
        lower cap would  attract more investor  partners for                                                                    
        AVCG et al to  increase small field  development and                                                                    
        establishment  of  the  North  Slope's  first  "open                                                                    
        access" facility sharing processing facilities.                                                                         
                                                                                                                                
        · Accelerate the  payment for exploration  and other                                                                    
          qualified capital investments to  one year vs. two                                                                    
          years                                                                                                                 
                                                                                                                                
        The acceleration  of credit  recovery payments  to a                                                                    
        one year cycle would allow for AVCG and its partners                                                                    
        to consider  drilling 3  exploration wells  per year                                                                    
        instead of  an average  of 2  per year…a  chance for                                                                    
        more discoveries sooner                                                                                                 
                                                                                                                                
        · Increase the  tax credits for  "qualified capital"                                                                    
          investments  from the  current  20  percent to  40                                                                    
          percent                                                                                                               
                                                                                                                                
        An increase  in  qualified  capital  credits  to  40                                                                    
        percent would  provide  immediate  impact to  BRPC's                                                                    
        project investment base and would extend our ability                                                                    
        to  encourage   additional  and   continued  capital                                                                    
        investment  from   our   current   WIO's   therefore                                                                    
        providing   more   opportunities    for   successful                                                                    
        discoveries and future development projects                                                                             
                                                                                                                                
        · Extend  indefinitely   the  "Small   Producer  Tax                                                                    
          Credit" of  $12MM a year  from expiring on  May 1,                                                                    
          2016 (or  certainly extend another 5  years to May                                                                    
          1, 2021 then re-assess at that  time).  This is an                                                                    
          item not  currently in current bills  but would be                                                                    
          helpful in  attracting new  long-range development                                                                    
          capital for BRPC and others like our company.                                                                         
                                                                                                                                
        Currently, we have  a sanctioning proposal  in front                                                                    
        of our WIO's that projects first oil and revenues in                                                                    
        2013.  With the  Small Producers Credit  expiring in                                                                    
        May 2016, the  development would be  limited to  a 3                                                                    
        year  use  of  this  credit.  We  would  propose  an                                                                    
        extension through  2021 to  allow our  first project                                                                    
        the full credit to attract new investors.                                                                               
                                                                                                                                
Mr. Thompson addressed Slide 9,  which was a line graph that                                                                    
illustrated  the outcomes  of  both  maintaining the  status                                                                    
quo, and the  positive adjustments due to the  passage of HB                                                                    
110.   He  asserted   that  the   AVCG  would   continue  an                                                                    
exploration program  in the state regardless  of the passage                                                                    
of HB  110. He relayed that  there were 16 new  prospects in                                                                    
the  Southern  Miluveach  Unit  and  that  the  tax  changes                                                                    
outlined  in  HB 110  would  attract  capital investors.  He                                                                    
strongly believed  in the "Next Frontiers"  Development plan                                                                    
depicted on Slide 9, which listed:                                                                                              
                                                                                                                                
        · Smaller    field    exploration   with    regional                                                                    
          processing                                                                                                            
        · Lower-permeability sands with new tech                                                                                
        · Oil source rock shales                                                                                                
        · Viscous oil, NS shore, NS gas                                                                                         
                                                                                                                                
9:00:44 AM                                                                                                                    
                                                                                                                                
Mr. Thompson  insisted that the plan  would increase revenue                                                                    
for the state  and end decline in  production. He reiterated                                                                    
his full support for HB 110.                                                                                                    
                                                                                                                                
Representative Gara  asked if the AVCG  would appreciate the                                                                    
state  considering delaying  taxation  until production  was                                                                    
online,  as  was  done  by   some  of  the  foreign  regimes                                                                    
mentioned  in the  presentation. Mr.  Thompson replied  that                                                                    
getting  all involved  parties  aligned  behind an  entirely                                                                    
different tax system would be  difficult and time consuming.                                                                    
He  thought that  the most  effective solution  would be  to                                                                    
examine  the current  system and  modify it  to attract  new                                                                    
capital investors.  He stated that  he had worked  with over                                                                    
20 countries that  had a system in place where  the tax rate                                                                    
was low  until the  company recouped  its capital,  and then                                                                    
the  tax rate  would  be  increased. He  said  that the  tax                                                                    
credits that Alaska currently had  in place had been helpful                                                                    
to the  industry.  The money  saved by the credits  had been                                                                    
used for further seismic and  drilling activity. None of the                                                                    
savings had been distributed to AVCG members.                                                                                   
                                                                                                                                
9:04:34 AM                                                                                                                    
                                                                                                                                
Representative  Gara  wondered if  an  increase  in the  tax                                                                    
credits  would be  sufficient to  increase exploration,  and                                                                    
had lack of access to  existing processing facilities on the                                                                    
North  Slope  made it  difficult  for  smaller companies  to                                                                    
produce.  He  asked  if  a credit  toward  the  building  of                                                                    
processing  facilities be  worth consideration  Mr. Thompson                                                                    
responded that faster payment of  the exploration tax credit                                                                    
would be helpful.  Currently the credits were  paid out over                                                                    
two years, 50 percent per year.  He said that AVCG would use                                                                    
the  money  to further  drilling  in  the state,  and  could                                                                    
consider drilling  a third  well during  a routine  year. He                                                                    
stressed  that  AVCG  was   currently  Alaska's  number  one                                                                    
exploration  company. He  said  that the  company wanted  to                                                                    
build its  own processing facilities and  possibly rent them                                                                    
out to other  developers. He concluded that  tax credits for                                                                    
shared processing facilities would be helpful.                                                                                  
                                                                                                                                
Vice-chair   Fairclough   pointed   to  Slide   6   of   the                                                                    
presentation. She  noted that Alaska  fell in the  middle of                                                                    
the  overall attractiveness  scale  and  queried the  reason                                                                    
that  AVCG  was  advocating  for  tax  regime  changes.  Mr.                                                                    
Thompson replied that Alaska could  maintain the status quo,                                                                    
and  the state  and the  industry could  remain in  conflict                                                                    
over  who should  benefit most  from the  funds made  off of                                                                    
mediocre  production  activity,  or changes  could  be  made                                                                    
which  would greatly  increase  capital  spending and  level                                                                    
Alaska's production.   He  offered that it  was a  matter of                                                                    
maintaining the status quo or making a positive adjustment.                                                                     
                                                                                                                                
9:09:47 AM                                                                                                                    
                                                                                                                                
Vice-chair   Fairclough   understood   that   the   Alaska's                                                                    
investment  attractiveness had  more factors  than just  the                                                                    
taxation  issue.  Mr.  Thompson  responded  that  the  first                                                                    
factor  that investors  examined  was prospectivity.  Second                                                                    
was the tax regime. Many  companies had stopped exploring on                                                                    
the in  the central North  Slope area because  the prospects                                                                    
had fallen. He  did not think that any amount  of tax change                                                                    
would increase  exploration in that particular  area, except                                                                    
for  small  companies  like  AVCG.   He  believed  that  the                                                                    
unassessed  areas  of  the  North  Slope  contained  massive                                                                    
amounts  of  oil  in low  permeability  reservoirs  and  oil                                                                    
source   rock    shales.   He   concluded    that   Alaska's                                                                    
prospectivity was  attractive, but  maintained that  the tax                                                                    
regime was unattractive to capital investors.                                                                                   
                                                                                                                                
9:13:43 AM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
9:17:48 AM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
MARILYN  CROCKETT, EXECUTIVE  DIRECTOR, ALASKA  OIL AND  GAS                                                                    
ASSOCIATION,  (AOGA) remarked  on the  components of  the CS                                                                    
for HB 110 that were of concern to AOGA. She referred to                                                                        
the handout, "Comments of the Alaska Oil and Gas                                                                              
Association on CSHB 110(RES), March 23, 2011."                                                                                  
                                                                                                                                
Ms. Crockett read from the section "Progressivity                                                                               
Rates/Bracketing/Tax Cap":                                                                                                      
                                                                                                                                
     AOGA  supports the  provisions in  CSHB 110(RES)  which                                                                    
     establish  bracketing of  the  progressivity rates  and                                                                    
     caps progressivity  at 25 percent,  for a  maximum rate                                                                    
     of  50  percent for  progressivity  and  the base  rate                                                                    
     combined. Under the  current form of ACES,  at $30, the                                                                    
     taxpayer pays at  the 25 percent base rate.  But as the                                                                    
     taxable Production  Tax Value  (PTV) raises  above $30,                                                                    
     the  progressivity feature  kicks  in,  and instead  of                                                                    
     applying the  higher tax rate  to just  the incremental                                                                    
     dollar, the  current tax system reaches  back and taxes                                                                    
     the entire original  $30 at the higher  rate. Each time                                                                    
     the PTV  per barrel  increases further beyond  $30, all                                                                    
     prior dollars are  taxed at the higher  rate instead of                                                                    
     just  that  further  increase. This  approach  is  what                                                                    
     creates such  high marginal tax  rates, and  creates an                                                                    
     imbalance in the  risk-reward investment environment in                                                                    
     Alaska.  Removing   the  upside   to  the   degree  the                                                                    
     progressivity   feature  does   makes   it  much   more                                                                    
     difficult to compete for  investment dollars with other                                                                    
     areas   that  are   not  as   fiscally  challenged   as                                                                    
     investments  here in  Alaska. CSHB  110(RES) adds  much                                                                    
     needed  stability and  predictability  to  the tax.  As                                                                    
     companies realize  higher prices  and greater  PTV, the                                                                    
     State likewise  continues to  share in  those benefits.                                                                    
     In addition, capping progressivity  and the base tax at                                                                    
     the  50  percent  combined rate  under  CSHB  110(RES),                                                                    
     rather than  the current 75 percent,  also provides the                                                                    
     impetus needed  to motivate companies to  undertake the                                                                    
     high risk projects on which  the future economic health                                                                    
     of Alaska will depend.                                                                                                     
                                                                                                                                
     This  change  creates  a  business  climate  where  the                                                                    
     reward  is commensurate  with the  risk  and keeps  the                                                                    
     needs  of  the  State  and  the  producers  in  a  more                                                                    
     appropriate balance.                                                                                                       
                                                                                                                                
     You  will   be  hearing   from  our   member  companies                                                                    
     regarding  this   risk/reward  and  the  need   for  an                                                                    
     adequate  upside, and  the  challenges  they face  when                                                                    
     presenting  projects to  their  respective Boards.  The                                                                    
     competition for  these dollars is real  and anything to                                                                    
     move Alaska  to a  more competitive position  will make                                                                    
     those arguments more palatable and possible.                                                                               
                                                                                                                                
9:21:17 AM                                                                                                                    
                                                                                                                                
Ms. Crockett read from the section "Annual-v-Monthly":                                                                          
                                                                                                                                
     The revenues  that are used  in the calculation  of the                                                                    
     progressivity    are   actuals,    reflecting   current                                                                    
     production and current prices. They  are subject to the                                                                    
     seasonal swings  in production  or market  pressures of                                                                    
     price. In  calculating the PTV, though,  the deductible                                                                    
     lease  expenditures are  the  actual  expenses for  the                                                                    
     whole  year,  with  1/12  of  the  annual  total  being                                                                    
     allocated to each month during the year.                                                                                   
                                                                                                                                
     We  support  moving  from   a  monthly  calculation  of                                                                    
     progressivity to  an annual calculation  to synchronize                                                                    
     the revenues with the  expenses, avoid the mismatching,                                                                    
     and more accurately reflect  the philosophy behind what                                                                    
     a progressivity feature should look like.                                                                                  
                                                                                                                                
Ms. Crockett read from the section "Tax Credit Incentives                                                                       
Extended To North Slope":                                                                                                       
                                                                                                                              
     CSHB  110(RES) expands  the  existing  40 percent  well                                                                    
     lease expenditure  tax credit currently  available only                                                                    
     to qualifying  expenditures in  "Middle Earth"  and the                                                                    
     Cook Inlet Sedimentary basin.                                                                                              
                                                                                                                                
     The well  lease expenditure concept was  introduced and                                                                    
     enacted  into  law  in  May  2010  in  connection  with                                                                    
     chapter  16,  2010 Session  Laws  of  Alaska (the  Cook                                                                    
     Inlet Recovery Act).                                                                                                       
                                                                                                                                
     A  well lease  expenditure is  the subset  of qualified                                                                    
     capital  expenditures (QCE)  that currently  define the                                                                    
     scope  of capital  spending that  qualifies for  the 20                                                                    
     percent  QCE credit  under  sub-section .023(a).  Thus,                                                                    
     within the QCE  "bucket" are a set of  costs that would                                                                    
     be eligible  for a full  40 percent tax  credit instead                                                                    
     of the usual  20 percent QCE credit.  The definition of                                                                    
     WLE as  intangible drilling and development  cost (IDC)                                                                    
     has several  advantages. First, IDC  is a  concept that                                                                    
     is well-defined in oil and  gas tax law. Second, WLE is                                                                    
     consistent with  language already  existing in  the PPT                                                                    
     ACES  framework. Producers  will not  have to  wait for                                                                    
     the  DOR to  write  regulations that  describe what  is                                                                    
     included and not included in the WLE.                                                                                      
                                                                                                                                
     Lastly, since labor  costs may be included  in IDC, the                                                                    
     40 percent  WLE credit  indirectly supports  hiring and                                                                    
     job  creation.  In  sum, AOGA  strongly  endorses  this                                                                    
     special  category  of  QCE that  is  targeted  for  the                                                                    
     credit uplift  because 1) this category  of expenditure                                                                    
     is  tied directly  to  in-field  drilling; 2)  includes                                                                    
     labor  costs;  and  3)  is  a  convenient  and  readily                                                                    
     accessible accounting designation.                                                                                         
                                                                                                                                
Ms. Crockett continued to the section "Lower Tax Rates For                                                                      
New Field Development":                                                                                                         
                                                                                                                              
     AOGA cautiously  supports this  proposal for  new field                                                                    
     development, which  represents a  significant reduction                                                                    
     in the  implied tax burden. However,  it raises several                                                                    
     questions.  First, as  with  other  provisions in  CSHB                                                                    
     110(RES),  the implied  lag in  the  effective date  is                                                                    
     problematic.                                                                                                             
                                                                                                                              
     The provisions  in sections  6 and  8 of  CSHB 110(RES)                                                                    
     are silent  on the treatment of  lease expenditures for                                                                    
     new  field development.  Since the  proposed change  in                                                                    
     base  tax  and  progressivity  is  driven  by  the  PTV                                                                    
     associated  with new  field development,  some form  of                                                                    
     ring-fencing production, revenue and costs is implied.                                                                     
                                                                                                                                
      AOGA favors  addressing the matter of  cost allocation                                                                    
     in statute rather than through regulation.                                                                                 
                                                                                                                                
     Lastly,  and  most  importantly,  it  is  important  to                                                                    
     incentivize ALL new oil. This  means new oil associated                                                                    
     with  new field  development and  from exploration,  as                                                                    
     well as  new oil  from existing producing  fields using                                                                    
     in-field  drilling,  secondary recovery,  and  tertiary                                                                    
     recovery techniques.                                                                                                       
                                                                                                                                
Ms. Crockett continued to the section "Reducing the                                                                             
Interest Rate on Tax Under and Over Payments and the                                                                            
Statute of Limitations":                                                                                                        
                                                                                                                                
     AOGA supports the  Administration's proposed reductions                                                                    
     to the  statutory interest rate  on tax under  and over                                                                    
     payments and the statute  of limitations for performing                                                                    
     tax audits.                                                                                                                
                                                                                                                                
     Unfortunately,  the provision  reducing  the timing  of                                                                    
     the statute of  limitations in the version  of the bill                                                                    
     before you  now was deleted in  the previous committee.                                                                    
     We encourage you to reinstate it.                                                                                          
                                                                                                                                
     The time  period for which  the Department can  audit a                                                                    
     taxpayer's tax return  is three years from  the date of                                                                    
     the filing of  the tax return for all  taxes except for                                                                    
     the  production tax.  With the  enactment of  ACES, the                                                                    
     statute  of  limitations  for auditing  production  tax                                                                    
     returns   was  increased   to  six   years.  We   never                                                                    
     understood why  that change was needed  when the three-                                                                    
     year  audit  period  has worked  successfully  for  all                                                                    
     other  taxes and  can be  extended and  re-extended any                                                                    
     number  of  times  as appropriate  and  taxpayers  were                                                                    
     generally willing to do so.                                                                                                
                                                                                                                                
     Under  the  current  interest  rate  provisions,  after                                                                    
     three years, interest represents  at least 38¢ for each                                                                    
     dollar of  additional tax claimed. But  after six years                                                                    
     the accrued  interest grows  to at  least 92¢  for each                                                                    
     dollar of  additional tax  claimed. The  longer statute                                                                    
     of limitations,  coupled with the high  interest rates,                                                                    
     mean a  greater likelihood that audit  disputes will be                                                                    
     litigated  instead of  settled,  because the  interest,                                                                    
     which under state law cannot  be compromised or abated,                                                                    
     represents such  a substantial  portion of  the amounts                                                                    
     at issue even at the very beginnings of the disputes.                                                                      
                                                                                                                                
9:25:07 AM                                                                                                                    
                                                                                                                                
Ms. Crockett testified that AOGA supported the legislation.                                                                     
                                                                                                                                
Representative  Edgmon asked  if  assurances  could be  made                                                                    
that  productivity would  increase with  the passage  of the                                                                    
legislation.  Ms. Crockett  answered that  time would  tell;                                                                    
recent  history  had  shown  that  activity  and  investment                                                                    
levels  were down.  She thought  that the  bill presented  a                                                                    
more positive  and attractive fiscal regime  than the system                                                                    
currently in place.                                                                                                             
                                                                                                                                
RALPH  PORTELL, TAX  MANAGER, BRITISH  PETROLEUM EXPLORATION                                                                    
ALASKA, introduced his support staff.                                                                                           
                                                                                                                                
CLAIRE   FITZPATRICK,  CHIEF   FINANCIAL  OFFICER,   BRITISH                                                                    
PETROLEUM (BP) ALASKA,  testified in support of  HB 110. She                                                                    
believed the legislation would address three key issues:                                                                        
                                                                                                                                
     1. Alaska is not competitive. So it is not getting the                                                                     
        level of investment that it could.                                                                                      
                                                                                                                                
     2. The pipeline is 2/3 empty as there isn't the level                                                                      
        of investment required to put more barrels in the                                                                       
        pipe.                                                                                                                   
                                                                                                                                
     3. There would be more jobs if there was more activity.                                                                    
                                                                                                                                
Ms. Fitzpatrick  stated that with  85 percent of  the states                                                                    
unrestricted  funds coming  from  the  oil industry,  Alaska                                                                    
needed  a  healthy  oil  industry  to  ensure  a  long-term,                                                                    
sustainable  future.  She  shared  that she  was  in  London                                                                    
attending  a  series  of meetings  to  advocate  for  Alaska                                                                    
activities. She  opined that she  remained at  a significant                                                                    
disadvantage   relative  to   the   other  locations   being                                                                    
represented  there.   The  other  locations  were   able  to                                                                    
demonstrate  that  their   opportunities  were  providing  a                                                                    
better  risk   reward  balance  than  Alaska   was  able  to                                                                    
demonstrate with the projects and fiscal structure it has.                                                                      
                                                                                                                                
9:29:31 AM                                                                                                                    
                                                                                                                                
Ms. Fitzpatrick  referred to  the Power  Point presentation,                                                                    
"House  Finance  Committee  BP  Alaska  Testimony  -  Claire                                                                    
Fitzpatrick,  CFO  March  23,   2011,  and  cited  Slide  2,                                                                    
"Balanced Fiscal Systems Investments."  She said that in the                                                                    
past the  state had  had a more  balanced fiscal  system and                                                                    
that  at  that time  BP  had  been  in  a position  to  make                                                                    
substantial investments in a number  of properties. Not only                                                                    
did BP  make production  investments, they also  invested in                                                                    
support  opportunities with  upgrades to  pipelines and  the                                                                    
tanker fleet.  Since the  change in  production tax  in 2007                                                                    
investments  in capital  and expense  had  shifted to  where                                                                    
opportunities  demonstrated  the  best risk  reward  return.                                                                    
Because  of the  way the  production tax  worked all  of the                                                                    
upside  earnings  went  to  increased  taxes,  which  leaves                                                                    
little   share   for   investors.  British   Petroleum   was                                                                    
responsible for meeting the  fiduciary expectations of their                                                                    
investors  and  as  a  result less  was  being  invested  in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Ms. Fitzpatrick  continued to Slide  3, "U.S.  Production is                                                                    
growing; Alaska  production isn't,"  which was a  line graph                                                                    
depicting that  production in the  Lower 48 had rose  as oil                                                                    
prices had risen,  and Alaska had continued  to decline. The                                                                    
following graph on Slide 4  illustrated that the trend could                                                                    
also  be  seen  in  terms  of  well  activity  and  drilling                                                                    
footage.                                                                                                                        
                                                                                                                                
9:32:20 AM                                                                                                                    
                                                                                                                                
Ms.  Fitzpatrick  reiterated   the  importance  that  Alaska                                                                    
remained competitive in the industry.                                                                                           
                                                                                                                                
Ms.  Fitzpatrick continued  to  Slide 5,  "Less money  being                                                                  
spent on  new oil since  ACES," which  was a bar  graph that                                                                    
illustrated   BP    operated   fields    production   adding                                                                    
investments, after  adjusting for  inflation. She  felt that                                                                    
Alaska had  a policy  choice to make;  did Alaska  want less                                                                    
oil production, or more oil  production. More oil production                                                                    
would require  more investments, which would  result in more                                                                    
jobs. She  opined that  there was  considerable oil  left on                                                                    
the North Slope, yet the  pipeline was two-thirds empty. She                                                                    
relayed that  Alaska needed to  attract billions  of dollars                                                                    
to drill  and produce enough  to stem decline.  She stressed                                                                    
that Alaska was  far removed from the markets  that used the                                                                    
oil, and  that the cost for  goods were higher in  the state                                                                    
than elsewhere.  She added that  the real challenge  to more                                                                    
production was the state tax system.                                                                                            
                                                                                                                                
Ms.   Fitzpatrick   testified    that   BP   supported   the                                                                    
legislation.  She explained  Slide 6,  "Governor's Bill  (HB                                                                    
110) - A step in the right direction":                                                                                          
                                                                                                                                
     • BP continues to support this bill                                                                                        
         ƒImproves competitiveness and encourages                                                                              
            investment                                                                                                          
                                                                                                                                
     • What we like                                                                                                             
        ƒBracket structure for progressivity                                                                                   
          9Incentivizes investment                                                                                             
          9Rebalances risk reward                                                                                              
                                                                                                                                
       ƒAdditional credits for drilling investments                                                                            
          9Incentivizes production adding investments                                                                          
                                                                                                                                
        ƒReduction in statute of limitations and punitive                                                                      
           interest rate                                                                                                        
          9Increases certainty, removes unfair provision                                                                       
                                                                                                                                
        ƒAnnual calculation of production tax rather than                                                                      
           monthly                                                                                                              
          9Matches costs with revenues and increases                                                                           
            predictability                                                                                                      
                                                                                                                                
Ms.  Fitzpatrick explained  that tax  reform was  the single                                                                    
most important thing  that the state government  could do to                                                                    
promote  the increase  in oil  production. Tax  reform would                                                                    
draw oil industry investment, which  would slow the decline,                                                                    
put more  oil into  the pipeline and  create many  jobs over                                                                    
many years.  She noted  that tax  credits had  a significant                                                                    
place in  the tax fiscal  structure. The tax  bracketing and                                                                    
the  lower   progressivity  rate   were  crucial   parts  of                                                                    
successful  reform.  She  thought  that the  state  and  the                                                                    
investors had mutual interests and  should be working toward                                                                    
the  common  objective  of  putting   more  barrels  in  the                                                                    
pipeline.                                                                                                                       
                                                                                                                                
9:35:43 AM                                                                                                                    
                                                                                                                                
Ms. Fitzpatrick  discussed Slide 7, "Increased  investment =                                                                    
Alaskan jobs and production":                                                                                                   
                                                                                                                                
   · BP will re-evaluate the entire inventory of                                                                                
     opportunities                                                                                                              
     ƒNote: BP owns 26 percent of Prudhoe Bay -                                                                                
        investments require other working interest owner                                                                        
        approvals                                                                                                               
                                                                                                                                
   · Opportunities that could become competitive if bill is                                                                     
     passed:                                                                                                                    
     ƒIncreased drilling, potentially adding another Rig                                                                       
        in service                                                                                                              
     ƒIncreased wellwork                                                                                                       
     ƒGas Partial Processing /I - PAD                                                                                          
     ƒEvaluate 'at scale' development viscous                                                                                  
        opportunities                                                                                                           
     ƒIncreased R&D spending to develop heavy oil                                                                              
                                                                                                                                
   · The sooner the bill takes effect, the sooner increased                                                                     
     activity can happen                                                                                                        
                                                                                                                                
Ms. Fitzpatrick  reminded the committee  that BP  had warned                                                                    
the  state  that projects  would  be  impacted by  the  2007                                                                    
passage of the higher production  tax and the removal of the                                                                    
price upside.  She emphasized that Alaskans  were working on                                                                    
the projects that had to be  shut down at that time, whether                                                                    
they  were  employed  by  BP  or  Alaskan  based  contractor                                                                    
companies. She  anticipated more drilling after  the passage                                                                    
of HB 110,  which would provide 100 jobs per  drill rig. She                                                                    
stated that BP  had plans for a 50, new  well, I-PAD program                                                                    
and a  new gas processing  plant, which would assist  in the                                                                    
extraction  of the  thicker oil  out of  the more  difficult                                                                    
reservoirs  in   the  western  area  of   Prudhoe  Bay.  She                                                                    
contended that under the current  tax system it did not make                                                                    
economic sense to invest the  over $2 billion those projects                                                                    
would cost.  She compared Alaska  with North  Dakota, noting                                                                    
that  North Dakota  was more  attractive  to investors.  She                                                                    
asserted  that it  was  becoming  increasingly difficult  to                                                                    
lure investors  to Alaska. She  concluded that HB  110 would                                                                    
significantly  improve the  prospect  of retaining  investor                                                                    
funding to move forward with projects currently on hold.                                                                        
                                                                                                                                
9:38:39 AM                                                                                                                    
                                                                                                                                
Representative  Gara  referred  to testimony  given  by  Ms.                                                                    
Fitzpatrick   during  a   past  House   Resources  Committee                                                                    
meeting.  Representative Gardener  had  asked  if the  state                                                                    
could expect  more exploratory  wells if HB  110 were  to be                                                                    
passed. Ms. Fitzpatrick had responded:                                                                                          
                                                                                                                                
     "BP  doesn't  do  what's  referred  to  as  traditional                                                                    
     exploratory  wells.   Within  our  existing   units  we                                                                    
     believe  there are  significant  resources we'd  rather                                                                    
     focus our attention on."                                                                                                   
                                                                                                                                
Representative Gara understood by  the response that with HB                                                                    
110,  BP's  focus  would  be  on  development  wells  within                                                                    
existing   fields  and   not  on   exploration  wells.   Ms.                                                                    
Fitzpatrick  responded that  the  definition of  exploration                                                                    
wells  was  very  technical.  Technically,  the  corporation                                                                    
would be  focusing on development wells,  recompleting wells                                                                    
and well work. She communicated  that it was not BPs current                                                                    
intention  to drill  what was  technically classified  as an                                                                    
exploration well.                                                                                                               
                                                                                                                                
Representative  Gara  related   that  according  to  numbers                                                                    
provided by  the Alaska Oil and  Gas Conservation Commission                                                                    
(AOGCC), the  number of  development wells  rose in  2010 to                                                                    
157,  the highest  number  since 2005.  He  admitted he  had                                                                    
hoped  to hear  that BP's  plan  was to  continue with  more                                                                    
exploration. Ms. Fitzpatrick  repeated that more exploration                                                                    
was not in the corporation's current plan.                                                                                      
                                                                                                                                
Representative  Wilson  referred  to   Slide  5.  She  asked                                                                    
whether the numbers  would rise back to those  seen in 2007,                                                                    
were the  legislation to pass. Ms.  Fitzpatrick replied that                                                                    
the  expectation  was that  BP  would  spend more  money  on                                                                    
production adding activity  if HB 110 passed.  She could not                                                                    
attest  to the  distribution between  wellwork recompletions                                                                    
versus new wells,  but the overall aim would be  to get more                                                                    
production in the pipeline.                                                                                                     
                                                                                                                                
9:42:16 AM                                                                                                                    
                                                                                                                                
Representative   Wilson   wondered   how  many   jobs   were                                                                    
anticipated to be created by BP  with the passage of HB 110.                                                                    
Ms. Fitzpatrick  said that if  an additional rig  were added                                                                    
it would  create approximately  100 jobs.  If HB  110 passed                                                                    
and  was successful  in  bringing  in significant  projects,                                                                    
more jobs would  be created. Some of the  job creation would                                                                    
be within  the corporation, but the  bigger difference would                                                                    
be seen  by Alaskan contract  companies who support  the oil                                                                    
industry.                                                                                                                       
                                                                                                                                
Representative Doogan  wondered what reaction BP  would have                                                                    
if the legislature  reported out a bill with  the same basic                                                                    
provisions as HB 110, but  that stipulated that all payments                                                                    
to industry be made after  the fact. Ms. Fitzpatrick said it                                                                    
would  depend on  how "after  the fact"  was defined,  which                                                                    
would have an  impact on what became economic.  The value of                                                                    
receiving cash  flow now would  differ from cash flow  in 15                                                                    
years.                                                                                                                          
                                                                                                                                
Representative  Doogan  clarified   that  "after  the  fact"                                                                    
referred to oil actually moving through the pipeline.                                                                           
                                                                                                                                
9:45:47 AM                                                                                                                    
                                                                                                                                
Ms. Fitzpatrick said that if  wells were going to be drilled                                                                    
to get  oil into the  pipeline in 12  to 18 months,  the tax                                                                    
benefits associated would be  minimal. However, investing in                                                                    
a project  with two  to three  years of  research concerning                                                                    
the application  of technology, that  would then  be applied                                                                    
to  a  seven-year  construction  period  the  value  of  the                                                                    
project deteriorates  because of the delay  in receiving the                                                                    
tax benefits.                                                                                                                   
                                                                                                                                
Representative Doogan asked whether  BP would support a bill                                                                    
that did not pay out credits  until oil was in the pipeline.                                                                    
Ms. Fitzpatrick related that BP  would be less supportive of                                                                    
the  hypothetical legislation  because  it would  negatively                                                                    
impact the  economics. Theoretically, projects might  not be                                                                    
a competitive as  they could be and could lose  out to other                                                                    
opportunities elsewhere.  She said  that BP would  work with                                                                    
whatever  the legislature  passed in  order to  get as  much                                                                    
investment  as possible,  provided it  made competitive  and                                                                    
economic sense.                                                                                                                 
                                                                                                                                
Representative  Guttenberg noted  that BP  was a  26 percent                                                                    
owner  in  Prudhoe  Bay  and the  dominant  owner  in  TAPS,                                                                    
including the terminal,  which produced substantial revenue.                                                                    
He  wondered if  the low-flow  and liability  of a  shutdown                                                                    
should be a major responsibility  for BP. He asked whether a                                                                    
feeling of  responsibility came  into calculation  during BP                                                                    
business  decisions. Ms.  Fitzpatrick replied  that she  was                                                                    
separated from some of the  decisions and details concerning                                                                    
TAPS  and low-flow.  Her upstream  decisions  were based  on                                                                    
tariff  information  provided  by midstream  companies.  The                                                                    
delivery  system for  the oil  was not  disclosed, only  the                                                                    
cost of  getting the  oil to market  was revealed.  She said                                                                    
that when  she made  upstream decisions  they were  not made                                                                    
form an economic perspective of  TAPS, but by considering if                                                                    
the upstream  project was competitive and  relative to other                                                                    
opportunities. Clearly, on a business  perspective BP had an                                                                    
interest in TAPS  therefore it was in the  best interest for                                                                    
BP  that as  many  barrels as  possible  flowed through  the                                                                    
pipe. She  stated that the  entities had to  remain separate                                                                    
under Federal Energy Regulatory Commission (FERC) rules.                                                                        
                                                                                                                                
9:49:47 AM                                                                                                                    
                                                                                                                                
Representative Guttenberg wondered if  BP took the health of                                                                    
TAPS into consideration when  going forward with development                                                                    
plans.  Ms.  Fitzpatrick replied  that  getting  the oil  to                                                                    
market was  a consideration. Whether  the oil was  going via                                                                    
TAPS, rail cart, or truck  was not an economic consideration                                                                    
for the  corporation. She assumed that  the Alyeska Pipeline                                                                    
Service   Company  would   consider   what  investment   was                                                                    
necessary in order to maintain  an appropriate flow rate for                                                                    
TAPS. The cost  would be built into the  tariff, which would                                                                    
be  considered  by BP.  If  the  upstream activity  were  no                                                                    
longer  viable, then  BP would  conclude  that the  upstream                                                                    
activity was not economic.                                                                                                      
                                                                                                                                
Representative Gara asked how  many exploration wells had BP                                                                    
developed in Alaska. Ms. Fitzpatrick  said she would need to                                                                    
research the question.                                                                                                          
                                                                                                                                
Representative Gara requested the  history of BP exploration                                                                    
wells   spanning  the   last  three   fiscal  regimes.   Ms.                                                                    
Fitzpatrick replied  that she would provide  the information                                                                    
to the committee.                                                                                                               
                                                                                                                                
9:53:38 AM                                                                                                                    
                                                                                                                                
Representative Gara  asked whether  BP had earned  an excess                                                                    
of  $7 billion  over the  last four  years. Ms.  Fitzpatrick                                                                    
said yes. She  imagined that the number of taxes  paid by BP                                                                    
surpassed any earnings over the same period of time.                                                                            
                                                                                                                                
Representative  Gara  wondered  whether paying  out  credits                                                                    
over one year  instead of two, or increasing  the credits to                                                                    
allow  for   the  building   and  expansion   of  processing                                                                    
facilities would make a positive  difference even if the tax                                                                    
rates  remained the  same.   Ms. Fitzpatrick  responded that                                                                    
the changes that would make  the most significant difference                                                                    
in BP's  areas of  investment would be  changes to  the area                                                                    
around bracketing and annual monthly charges.                                                                                   
                                                                                                                                
Representative Hawker  spoke to  three issues  raised during                                                                    
debates  in House  and Senate  Resources Committees,  and in                                                                    
the  committee, concerning  the legislation.  One prevailing                                                                    
opinion was  that Alaska's competitiveness was  a non-issue.                                                                    
He said  that there were  specific claims in  House Resource                                                                    
Committee that competitiveness was  not a factor in industry                                                                    
decision   making.  Secondly,   there  was   consistent  and                                                                    
continuous  concern  that industry  was  failing  to make  a                                                                    
solid  commitment  to  the  state   in  exchange  for  state                                                                    
concessions. Thirdly,  was the premise that  new, additional                                                                    
exploration   credits   would   result  in   increased   oil                                                                    
production. He  asked if competitiveness was  and issue, and                                                                    
if so  what were competitors  offering that was  giving them                                                                    
the  edge  over Alaska.  He  requested  assurances that  the                                                                    
state  could expect  industry to  change  behavior with  the                                                                    
passage  of the  legislation. He  probed whether  additional                                                                    
exploration credits  were the best way  to get significantly                                                                    
more production into TAPS as quickly as possible.                                                                               
                                                                                                                                
9:58:19 AM                                                                                                                    
                                                                                                                                
Ms. Fitzpatrick answered that  competitiveness was an issue.                                                                    
The question  came down to  the amount of return  that would                                                                    
be seen  by BP  shareholders. She  said it  was a  matter of                                                                    
weighing   the   value   of  other   opportunities   against                                                                    
opportunities  in  Alaska.  Specifics that  were  considered                                                                    
were: what were the rock types,  how far from market was the                                                                    
location, and  overall project cost. A  variety of scenarios                                                                    
were considered while looking at  the risk/reward balance of                                                                    
a project.                                                                                                                      
                                                                                                                                
Ms.  Fitzpatrick  she  could not  give  a  definitive  reply                                                                    
assuring  increased   production  if   HB  110   passed  the                                                                    
legislature. She stated  that her hopes that  the bill would                                                                    
pass was informing  the nature of the  conversations she was                                                                    
currently   having  with   possible  investors   in  London,                                                                    
England. She stressed that time was of the essence.                                                                             
                                                                                                                                
Ms.  Fitzpatrick  thought   additional  exploration  credits                                                                    
would prove beneficial. She did  not believe it was the best                                                                    
way  to get  significantly more  volume in  the pipeline  as                                                                    
quickly as possible.  She explained that the  fastest way to                                                                    
get significant volume in the  pipeline quickly was to focus                                                                    
on how to allow for  more competitive investment in existing                                                                    
fields.                                                                                                                         
                                                                                                                                
10:03:28 AM                                                                                                                   
                                                                                                                                
Representative Hawker reiterated  that the legislature hoped                                                                    
for  a firm  commitment from  industry in  the event  that a                                                                    
change was made  to Alaska's tax regime. He  wondered if the                                                                    
HB 110 debates were being followed by industry.                                                                                 
                                                                                                                                
Ms.  Fitzpatrick   replied  HB   110  was   currently  being                                                                    
discussed in London.                                                                                                            
                                                                                                                                
10:06:09 AM                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
The meeting was adjourned at 10:06 AM.                                                                                          

Document Name Date/Time Subjects
HB 110 Brooks Range032311PDF.pdf HFIN 3/23/2011 8:00:00 AM
HB 110
HB110 BPFitzpatrick Bio 0323.doc HFIN 3/23/2011 8:00:00 AM
HB 110
HB110 BP Portell Bio 0323.doc HFIN 3/23/2011 8:00:00 AM
HB 110
HB 110AVCG HFC 032311.pdf HFIN 3/23/2011 8:00:00 AM
HB 110
HB110 BP HFIN032311.pdf HFIN 3/23/2011 8:00:00 AM
HB 110
HB110 AOGA HFIN032211.pdf HFIN 3/23/2011 8:00:00 AM
HB 110