Legislature(2007 - 2008)HOUSE FINANCE 519

10/22/2007 09:00 AM House OIL & GAS


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09:06:22 AM Start
09:07:35 AM HB2001
05:11:06 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB2001 OIL & GAS TAX AMENDMENTS TELECONFERENCED
Heard & Held
Tentative agenda: Presentation by
Stakeholders
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                        October 22, 2007                                                                                        
                           9:06 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Kurt Olson, Chair                                                                                                
Representative Nancy Dahlstrom                                                                                                  
Representative Mark Neuman                                                                                                      
Representative Jay Ramras                                                                                                       
Representative Ralph Samuels                                                                                                    
Representative Mike Doogan                                                                                                      
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Bob Buch                                                                                                         
Representative Mike Chenault                                                                                                    
Representative John Coghill                                                                                                     
Representative Harry Crawford                                                                                                   
Representative Andrea Doll                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Anna Fairclough                                                                                                  
Representative Les Gara                                                                                                         
Representative Carl Gatto                                                                                                       
Representative David Guttenberg                                                                                                 
Representative Lindsey Holmes                                                                                                   
Representative Wes Keller                                                                                                       
Representative Mike Kelly                                                                                                       
Representative Bob Roses                                                                                                        
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Senator Con Bunde                                                                                                               
Senator Joe Thomas                                                                                                              
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 2001                                                                                                             
"An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation  surcharges  on oil;  relating  to  the issuance  of                                                               
advisory  bulletins and  the  disclosure  of certain  information                                                               
relating to the  production tax and the  sharing between agencies                                                               
of certain information relating to  the production tax and to oil                                                               
and gas or  gas only leases; amending the State  Personnel Act to                                                               
place in  the exempt service  certain state oil and  gas auditors                                                               
and their immediate supervisors; establishing  an oil and gas tax                                                               
credit  fund and  authorizing payment  from that  fund; providing                                                               
for retroactive  application of certain statutory  and regulatory                                                               
provisions  relating to  the production  tax on  oil and  gas and                                                               
conservation  surcharges on  oil;  making conforming  amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 2001                                                                                                                 
SHORT TITLE: OIL & GAS TAX AMENDMENTS                                                                                           
SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
10/18/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
10/18/07       (H)       O&G, RES, FIN                                                                                          
10/19/07       (H)       O&G AT 1:30 PM HOUSE FINANCE 519                                                                       
10/19/07       (H)       Heard & Held                                                                                           
10/19/07       (H)       MINUTE(O&G)                                                                                            
10/20/07       (H)       O&G AT 12:00 AM HOUSE FINANCE 519                                                                      
10/20/07       (H)       Heard & Held                                                                                           
10/20/07       (H)       MINUTE(O&G)                                                                                            
10/21/07       (H)       O&G AT 1:00 PM HOUSE FINANCE 519                                                                       
10/21/07       (H)       Heard & Held                                                                                           
10/21/07       (H)       MINUTE(O&G)                                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
CLAIRE FITZPATRICK, Commercial Senior Vice President                                                                            
BP Exploration (Alaska) Inc. (BP)                                                                                               
(No address provided)                                                                                                           
POSITION  STATEMENT:   Provided  comments during  the hearing  on                                                             
HB 2001.                                                                                                                        
                                                                                                                                
MIKE UTSLER, Senior Vice President - Prudhoe Bay                                                                                
BP Exploration (Alaska) Inc. (BP)                                                                                               
(No address provided)                                                                                                           
POSITION  STATEMENT:   Provided  comments during  the hearing  on                                                             
HB 2001.                                                                                                                        
                                                                                                                                
KEVIN MITCHELL, Vice President                                                                                                  
Finance & Administration                                                                                                        
ConocoPhillips Alaska, Inc.                                                                                                     
(No address provided)                                                                                                           
POSITION  STATEMENT:   Provided  comments during  the hearing  on                                                             
HB 2001.                                                                                                                        
                                                                                                                                
JIM TAYLOR, Vice President                                                                                                      
Commercial Assets                                                                                                               
ConocoPhillips Alaska, Inc.                                                                                                     
(No address provided)                                                                                                           
POSITION  STATEMENT:   Provided  comments during  the hearing  on                                                             
HB 2001.                                                                                                                        
                                                                                                                                
KEN THOMPSON, Managing Director                                                                                                 
Alaska Venture Capital Group (AVCG) LLC                                                                                         
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   Provided  comments during  the hearing  on                                                             
HB 2001.                                                                                                                        
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR KURT  OLSON called the  House Special Committee on  Oil and                                                             
Gas  meeting to  order at  9:06:22 AM.   Present  at the  call to                                                             
order  were Representatives  Dahlstrom,  Doogan, Samuels,  Olson,                                                               
Ramras,  and  Kawasaki.   Representative  Neuman  arrived as  the                                                               
meeting   was   in   progress.      Also   in   attendance   were                                                               
Representatives Buch, Chenault,  Coghill, Crawford, Doll, Edgmon,                                                               
Fairclough,  Gara,  Gatto,  Guttenberg,  Holmes,  Keller,  Kelly,                                                               
Roses, Seaton, and Wilson, and Senators Bunde and Thomas.                                                                       
                                                                                                                                
HB 2001 - OIL & GAS TAX AMENDMENTS                                                                                            
                                                                                                                                
9:07:35 AM                                                                                                                    
                                                                                                                                
CHAIR OLSON  announced that the  only order of business  would be                                                               
HOUSE BILL  NO. 2001, "An Act  relating to the production  tax on                                                               
oil and  gas and to  conservation surcharges on oil;  relating to                                                               
the issuance of advisory bulletins  and the disclosure of certain                                                               
information  relating  to  the production  tax  and  the  sharing                                                               
between  agencies   of  certain   information  relating   to  the                                                               
production tax  and to oil and  gas or gas only  leases; amending                                                               
the State  Personnel Act to  place in the exempt  service certain                                                               
state  oil  and gas  auditors  and  their immediate  supervisors;                                                               
establishing  an oil  and  gas tax  credit  fund and  authorizing                                                               
payment from that fund; providing  for retroactive application of                                                               
certain  statutory  and  regulatory provisions  relating  to  the                                                               
production  tax on  oil and  gas and  conservation surcharges  on                                                               
oil;  making   conforming  amendments;   and  providing   for  an                                                               
effective date."                                                                                                                
                                                                                                                                
9:07:42 AM                                                                                                                    
                                                                                                                                
CLAIRE   FITZPATRICK,  Commercial   Senior  Vice   President,  BP                                                               
Exploration   (Alaska)   Inc.   (BP),   began   BP's   PowerPoint                                                               
presentation  by  stating  that  the  debate  is  about  Alaska's                                                               
economic  future.   She stressed  that the  common objective  for                                                               
both  BP and  the  State of  Alaska  is to  stem  the decline  in                                                               
production.   Her presentation,  she advised,  would be  from the                                                               
perspective of Alaska's resources,  climate, costs, and geography                                                               
-  in terms  of the  800  miles of  pipe  and the  2000 miles  of                                                               
shipping to West Coast refineries  - because, she opined, that is                                                               
the perspective  legislators should  use in determining  what the                                                               
state's fiscal policy should be.                                                                                                
                                                                                                                                
MS. FITZPATRICK  relayed that BP  supports the net  tax structure                                                               
under  the current  petroleum production  tax (PPT)  statute, but                                                               
continues to think  that the [tax] rate is too  high.  Based upon                                                               
conversations  with  colleagues  who   were  present  during  the                                                               
original  discussions of  the  PPT  legislation, Ms.  Fitzpatrick                                                               
offered  her  belief  that  the  policy behind  the  PPT  was  to                                                               
encourage  investment  in  terms  of  getting  barrels  into  the                                                               
pipeline.    She  then  requested  that  BP  be  allowed  another                                                               
opportunity  for  testimony  should  subsequent  witnesses  offer                                                               
differing economic viewpoints than BP's.                                                                                        
                                                                                                                                
MS.  FITZPATRICK  stressed that  the  proposed  changes will  not                                                               
result in  BP stopping further  investment or leaving  the state.                                                               
She said  BP has done  good business in  Alaska for 48  years and                                                               
wants to  do more; therefore,  the discussion is about  scale and                                                               
pace, not about there being no more investment.                                                                                 
                                                                                                                                
9:11:31 AM                                                                                                                    
                                                                                                                                
MS.  FITZPATRICK noted  that along  with the  PPT, royalty  rates                                                               
also  have  a significant  impact  on  the state's  revenue  and,                                                               
therefore,  production  will  impact both  royalty  payments  and                                                               
production tax.   Delivering production will  require billions of                                                               
dollars in investment, and that  level of investment will need to                                                               
be higher  than it has  been in the  last 20 years,  she advised.                                                               
Price has  been a huge  benefit in  recent years; however,  BP is                                                               
not sure that  basing fiscal policy purely on price  is the right                                                               
approach.                                                                                                                       
                                                                                                                                
MS. FITZPATRICK emphasized that  fiscal stability is an important                                                               
consideration  when making  investment decisions.   Having  three                                                               
tax   changes  in   three  years   does  not   increase  Alaska's                                                               
attractiveness.  The proposed bill  will actually deteriorate the                                                               
economics   of  these   investment  decisions,   and  this,   she                                                               
maintained,  is  recognized by  both  BP  and the  Department  of                                                               
Revenue (DOR).   She said that  the sustained high oil  prices of                                                               
recent years makes  prospects more attractive now  than they were                                                               
in the  past, and while BP  knows the resource is  there, the key                                                               
issue is how  to get it out of the  ground economically, and that                                                               
is  what   enters  into  BP's  investment   decisions.    Without                                                               
substantial  reinvestment in  existing resources,  she explained,                                                               
it becomes  harder to invest  in new  resources.  So,  the debate                                                               
for  BP  centers on  investment  because  the profiles  currently                                                               
being looked  at are not  yet "banked,"  she said.   For Alaska's                                                               
economic future, now is not the  right time to change the state's                                                               
fiscal policy.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  DOOGAN  requested  a   definition  for  the  word                                                               
"strategy"  as   used  in  the   third  bullet   point  regarding                                                               
investment decisions on slide 2.                                                                                                
                                                                                                                                
MS. FITZPATRICK explained  that as a global company,  BP looks at                                                               
strategic perspectives at the group  level in terms of the global                                                               
risk that it  is willing to take in a  particular geographic area                                                               
of  the  world.    The  company also  looks  at  its  competitive                                                               
position and at where there is  the greatest prospect in terms of                                                               
the resource  base.  On a  group level, there are  more strategic                                                               
decisions [to be made], often  revolving around new country entry                                                               
or new  location entry,  and that is  different than  economic or                                                               
project  specificity,  so  there  are elements  of  both  in  any                                                               
investment decision.                                                                                                            
                                                                                                                                
9:14:41 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  DAHLSTROM  asked   whether  Ms.  Fitzpatrick  was                                                               
referencing the state's revenue department  or BP's when she said                                                               
it was recognized  that the bill could  deteriorate the economics                                                               
of investment decisions.                                                                                                        
                                                                                                                                
MS. FITZPATRICK  replied that  she is referring  to the  State of                                                               
Alaska's  DOR,  and  that  it  made  that  statement  during  its                                                               
[public] presentation on the bill.                                                                                              
                                                                                                                                
REPRESENTATIVE DOOGAN asked  whether "deteriorates the economics"                                                               
means that the projects would "make less money later."                                                                          
                                                                                                                                
MS.  FITZPATRICK  responded  that  it  depends  on  the  specific                                                               
project and its  relative position to any other  project, as well                                                               
as the  very nature  of the  project.   It does  not specifically                                                               
make  projects  less  economic later  because  that  depends  [on                                                               
numerous factors],  but in overall  terms it will make  them less                                                               
economic.   She acknowledged that  this means it could  result in                                                               
less money at any point along the line.                                                                                         
                                                                                                                                
9:16:41 AM                                                                                                                    
                                                                                                                                
MS.  FITZPATRICK,  referring  to  BP's  PowerPoint  presentation,                                                               
pointed out  that production  declined about  6 percent  per year                                                               
between  1992 and  2000.   However,  she noted,  the decline  was                                                               
reduced to 1.5 percent per year  between 2001 and 2004 because of                                                               
BP's increased  investment in the  late 1990s.  The  decline then                                                               
returned to about 6 percent per year from 2004 to 2007.                                                                         
                                                                                                                                
MS.  FITZPATRICK, responding  to a  question from  Representative                                                               
Samuels, confirmed  that the  investment in  the late  1990s came                                                               
from  Alpine  and  Northstar, and  that  the  production  decline                                                               
flattened out when  these two units came on-stream.   Once Alpine                                                               
and Northstar  reached their plateau  and started  declining, she                                                               
continued, production  returned to its historical  annual rate of                                                               
decline of  approximately 6  percent.  In  response to  a further                                                               
question from  Representative Samuels, she directed  attention to                                                               
the graph  on slide 3 depicting  the plateau as lasting  Three to                                                               
four years before production again began declining.                                                                             
                                                                                                                                
REPRESENTATIVE SAMUELS  asked whether  a two  to three  year peak                                                               
before the start of a decline is the norm for most reservoirs.                                                                  
                                                                                                                                
MS. FITZPATRICK  replied that a  peak, plateau, and  then decline                                                               
are normal.                                                                                                                     
                                                                                                                                
9:18:41 AM                                                                                                                    
                                                                                                                                
MIKE UTSLER, Senior Vice President  - Prudhoe Bay, BP Exploration                                                               
(Alaska) Inc.  (BP), concurred that  such is normal for  a field.                                                               
And while it  depends on the size and scale  of the reservoir, he                                                               
said, a field will produce for as  short as 9-12 months to for as                                                               
long as 7-8  years before beginning to decline,  and that decline                                                               
then becomes a  function of how the reservoir is  managed and how                                                               
its performance continues to be developed and optimized.                                                                        
                                                                                                                                
REPRESENTATIVE  SAMUELS asked  how many  barrels a  day Northstar                                                               
produced at its peak.                                                                                                           
                                                                                                                                
MR.  UTSLER  offered to  get  back  to  the committee  with  that                                                               
information.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  NEUMAN noted  that  recent  information from  the                                                               
administration shows  a doubling  of operating and  capital costs                                                               
on the  North Slope  over the past  year.  He  asked if  that was                                                               
typical of  what happens  at BP,  and whether it  was all  due to                                                               
cost increases  or whether  an increase  in capital  investment -                                                               
and  thus  the creation  of  more  jobs  and having  more  people                                                               
working - was the cause.                                                                                                        
                                                                                                                                
MS.  FITZPATRICK explained  that  the doubling  of operating  and                                                               
capital costs  on the North Slope  over the past year  was due to                                                               
both increased activity and increased  costs.  Activity increased                                                               
between  2005  and  2007,  she   said,  with  the  number  of  BP                                                               
contractors increasing from about 5,000  to about 7,000, and with                                                               
the  number of  BP  employees in  Alaska  increasing about  40-50                                                               
percent.   High  worldwide demand  increased the  costs of  steel                                                               
rigs and  skilled labor for  the original activity,  however some                                                               
of the  increased costs were  specific to  Alaska.  Part  of BP's                                                               
long-term plan  for addressing high  labor costs,  she continued,                                                               
includes  hiring  younger,  less   experienced  talent  and  then                                                               
providing on-the-job training.                                                                                                  
                                                                                                                                
MS.  FITZPATRICK  then  reiterated   that  the  management  of  a                                                               
reservoir  after it  moves off  its production  plateau and  goes                                                               
into decline is key to stemming that decline.                                                                                   
                                                                                                                                
9:22:31 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS asked whether a  15 percent decline rate -                                                               
if nothing is done - is typical for reservoirs around the world.                                                                
                                                                                                                                
MR.  UTSLER  responded that  around  the  world, typical  natural                                                               
decline  rates are  16-18 percent  for a  water-flooded reservoir                                                               
environment.   And while it  depends on the  field, it is  not an                                                               
unrealistic  assumption to  use a  16-18 percent  natural decline                                                               
rate  for most  reservoirs that  are under  "secondary recovery,"                                                               
which is  the term  for operations  that are  under water-flooded                                                               
pressure support.                                                                                                               
                                                                                                                                
MS. FITZPATRICK added that the  reason for the difference between                                                               
the 15  percent natural field  production decline  and [Alaska's]                                                               
current 6  percent decline  is investment.   In 2006,  BP drilled                                                               
about 100 new wells, and about  another 100 wells will be drilled                                                               
in  2007.    Thus,  between  new wells  and  "well  work"  -  the                                                               
maintenance necessary for  keeping wells running at  their best -                                                               
BP added about 70,000 barrels in 2006.                                                                                          
                                                                                                                                
REPRESENTATIVE NEUMAN  inquired whether any of  the incentives in                                                               
PPT were factors in BP's decision to make new investments.                                                                      
                                                                                                                                
MS.  FITZPATRICK replied  that  that decision  was  based on  the                                                               
fiscal policy in  place at the time.  Currently,  she said, BP is                                                               
looking  at the  next  50  years and  at  building a  sustainable                                                               
business plan of  activity, and [the state's]  fiscal policy will                                                               
impact  that.    She  submitted  that it  is  impossible  to  say                                                               
whether,  if BP  had  drilled  110 wells  rather  than 100,  BP's                                                               
fiscal policy would  have been different since she  does not have                                                               
a retroactive viewpoint.                                                                                                        
                                                                                                                                
9:25:47 AM                                                                                                                    
                                                                                                                                
MS. FITZPATRICK  continued her discussion  of new wells  and well                                                               
work by  noting that 70,000  barrels is equivalent  to developing                                                               
the  fourth largest  producing field  in Alaska,  and that  going                                                               
forward, BP is  set to do it  again.  Over the last  10 years, BP                                                               
has invested  about $4 billion  in the  drilling of 800  wells in                                                               
Prudhoe Bay  and is also investing  in facilities to pick  up the                                                               
newer, heavier crude  oil.  Thus there has been  lots of activity                                                               
to  get the  decline  down to  6 percent,  and  because the  best                                                               
prospects  in any  field are  drilled first,  BP must  spend more                                                               
money  and drill  more wells  just to  keep that  current decline                                                               
rate.  The current level of  spending on the North Slope will not                                                               
sustain a 6 percent rate of decline  - it needs to be higher, she                                                               
opined,  and even  higher still  in order  to reduce  the decline                                                               
rate further.                                                                                                                   
                                                                                                                                
MS. FITZPATRICK,  in response to  a question  from Representative                                                               
Neuman, confirmed her statement that  BP drilled 800 wells in the                                                               
last 10 years.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  NEUMAN  questioned  the discrepancy  between  800                                                               
wells and  a map  he received the  previous evening  showing that                                                               
only 7 exploration wells had been drilled.                                                                                      
                                                                                                                                
MS.  FITZPATRICK explained  that  there is  a difference  between                                                               
drilling  exploration wells  in order  to locate  new discoveries                                                               
and drilling wells in existing reservoir areas.                                                                                 
                                                                                                                                
MR.  UTSLER   further  explained   that  undeveloped   areas  are                                                               
identified  as  exploration opportunities.    In  areas that  are                                                               
already  developed, productivity  is  optimized  by drilling  new                                                               
wells  and "re-completing"  existing wells.   The  aforementioned                                                               
800 wells  have largely  been in  the existing,  producing legacy                                                               
fields.                                                                                                                         
                                                                                                                                
REPRESENTATIVE NEUMAN inquired as to  how many well drilling rigs                                                               
are  currently in  Prudhoe Bay,  in  total between  BP and  other                                                               
companies.                                                                                                                      
                                                                                                                                
MS. FITZPATRICK  responded that BP  currently has around  10 rigs                                                               
in  the fields  on  the North  Slope in  which  it has  interest,                                                               
including Kuparuk.                                                                                                              
                                                                                                                                
MR. UTSLER  further responded that  at any given time,  there are                                                               
about 21  rigs that  are designed and  equipped for  operation on                                                               
the  North Slope,  and about  5  of those  rigs are  specifically                                                               
geared for winter-only exploration.   About 16 rigs are available                                                               
at any  given time to  operate in existing fields,  he continued,                                                               
10 of which  are operated by BP.                                                                                                
                                                                                                                                
9:29:34 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE NEUMAN asked whether BP  will be bringing any more                                                               
drilling rigs to Prudhoe Bay.                                                                                                   
                                                                                                                                
MR.  UTSLER  stated that  BP  is  studying opportunities  in  the                                                               
Liberty Field.  In order to  drill that operation, he said, BP is                                                               
looking  at building  the largest  land rig  in the  world.   And                                                               
along  with  others  in  the  industry, BP  is  also  looking  at                                                               
bringing new rigs  to the North Slope to replace  the aging fleet                                                               
and to increase capacity.                                                                                                       
                                                                                                                                
REPRESENTATIVE SAMUELS asked which areas BP held interest in.                                                                   
                                                                                                                                
MS.  FITZPATRICK  listed  those   areas  as  being  Prudhoe  Bay,                                                               
Kuparuk, Endicott, Milne Point, Northstar, Badami, and Liberty.                                                                 
                                                                                                                                
REPRESENTATIVE  SAMUELS   asked  what   BP's  total   Alaska  oil                                                               
percentage is  for each of  those fields, adding that  he assumes                                                               
that the vast majority comes from Prudhoe Bay and Kuparuk.                                                                      
                                                                                                                                
MS.  FITZPATRICK agreed  that the  vast majority  does come  from                                                               
Prudhoe Bay  and Kuparuk,  and said she  would provide  the exact                                                               
percentages to the committee soon.                                                                                              
                                                                                                                                
REPRESENTATIVE SAMUELS also  requested nonproprietary information                                                               
regarding the  percentage of  BP's spending  figures for  each of                                                               
the fields, adding that he would  like to know if costs correlate                                                               
with income.                                                                                                                    
                                                                                                                                
MS. FITZPATRICK said she would  provide that information once she                                                               
verifies that it is not proprietary.                                                                                            
                                                                                                                                
9:32:15 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DOOGAN  asked for  further explanation of  slide 3                                                               
of BP's presentation.                                                                                                           
                                                                                                                                
MS.  FITZPATRICK explained  that  the numbers  in  orange on  the                                                               
right side  of the  chart pertain to  investment; the  numbers in                                                               
green on  the left side of  the chart pertain to  production; and                                                               
the  bars depicted  on  the  bottom of  the  chart indicate  that                                                               
historically investment  rates were  around $1 billion,  and that                                                               
in recent years the rate has risen above $1.5 billion.                                                                          
                                                                                                                                
MR. UTSLER clarified that the  numbers in green represent barrels                                                               
of production per day and  the numbers in orange represent annual                                                               
investment in billions of dollars.                                                                                              
                                                                                                                                
REPRESENTATIVE DOOGAN  asked what BP's  profits were last  year -                                                               
the time during which BP drilled 100 wells.                                                                                     
                                                                                                                                
MS. FITZPATRICK said  that BP recorded a profit  of $2.15 billion                                                               
for last year.                                                                                                                  
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  what BP's  posture would  be should                                                               
production decline  to the point  where the State of  Alaska does                                                               
not have enough royalty oil available  to sell to the Flint Hills                                                               
Resources Alaska ("Flint  Hills") refinery.  He  then offered his                                                               
understanding that there are two  crossover points.  The first is                                                               
when the  state does not have  enough royalty oil to  fulfill its                                                               
commitment to Flint Hills, which  would then require the state to                                                               
look to producers  for augmenting the state's share.   The second                                                               
is  the notion  of  "batching"  oil two  to  three  times a  week                                                               
because there  is not  enough oil to  flow down  the Trans-Alaska                                                               
Pipeline System (TAPS) seven days  a week.  Given that production                                                               
is declining, at what point  does it become uneconomic to operate                                                               
the  TAPS, he  asked.   Further, he  asked, what  happens to  the                                                               
tariff  cost  per  barrel  of oil  when  production  declines  to                                                               
500,000 barrels  per day, a  volume at  which the TAPS  can still                                                               
operate but is a stress point  for the state insofar as its [one-                                                               
eighth] share.                                                                                                                  
                                                                                                                                
MS. FITZPATRICK, with regard to  the tariff question, stated that                                                               
many  of  the costs  associated  with  transportation are  fixed;                                                               
thus,  the  fewer  barrels  going  in,  the  higher  the  tariff.                                                               
Getting  barrels  into  the  pipeline  is  important,  she  said,                                                               
regardless  of whether  they are  from state  or federal  leases,                                                               
because doing  so lowers the unit  costs which in turn  is better                                                               
for  everyone.   With  regard  to what  would  happen should  the                                                               
state's royalty  share not  meet its  commitment to  Flint Hills,                                                               
she said  that [BP's posture]  would depend on  the circumstances                                                               
at the time  since BP has no  set policy in this regard.   As for                                                               
what happens  at various stress points,  she said that that  is a                                                               
question for Alyeska Pipeline  Service Company ("Alyeska"), which                                                               
has been  working to have  flexibility as flow rates  decline and                                                               
is looking  at what is happening  at the various points  in terms                                                               
of investment.                                                                                                                  
                                                                                                                                
MR. UTSLER  further explained that with  regard to Representative                                                               
Ramras's first  question, the majority  of Alaska crude  oil goes                                                               
to  the   West  Coast  refinery   market,  three   refineries  in                                                               
particular.  Those  refineries are currently set  up and designed                                                               
to take a particular blend of  crude oil, and Alaskan crude plays                                                               
an  important part  for  them.   On  a  short  term basis,  those                                                               
refineries have the capacity to  utilize the global market should                                                               
there  be a  disruption  or  variation in  the  Alaska crude  oil                                                               
supply.                                                                                                                         
                                                                                                                                
9:39:14 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS  offered  his   opinion  that  Alyeska  is                                                               
becoming  relevant to  this discussion  because  an unstable  tax                                                               
regime  could diminish  production, thereby  moving Alyeska  to a                                                               
stress point  that would affect  core jobs  in the Interior.   He                                                               
relayed that  at a recent  conference in Fairbanks,  U.S. Senator                                                               
Ted Stevens  advised the  state to think  about getting  the next                                                               
barrel of oil, not the number  of dollars being received in taxes                                                               
from the  current barrel of  oil.   He requested BP's  opinion on                                                               
what Alaska  should do  to best foster  an environment  that will                                                               
lead to that next barrel of oil.                                                                                                
                                                                                                                                
MS. FITZPATRICK  remarked that in  order to get the  barrels into                                                               
the  TAPS,   investment  is  required;   thus  any   changes  the                                                               
legislature makes should be considered  in the context of whether                                                               
a  particular  change  will  increase or  decrease  the  risk  of                                                               
meeting  the objective  of getting  more barrels  into the  pipe.                                                               
Again, the key is investment.                                                                                                   
                                                                                                                                
REPRESENTATIVE RAMRAS  asked what  BP's sentiment is  when making                                                               
decisions for long-term development plans.                                                                                      
                                                                                                                                
9:44:03 AM                                                                                                                    
                                                                                                                                
MR.  UTSLER  remarked that  because  BP  is operating  above  the                                                               
Arctic   Circle  in   very   harsh   conditions,  investment   in                                                               
exploration  and development  -  and  specifically investment  in                                                               
those  technologies   that  will   enhance  the   application  of                                                               
technologies related  to finding the  oil and gas resources  - is                                                               
an  imperative for  both  BP  and the  state,  both  in the  non-                                                               
explored areas of Alaska and in  the existing fields.  He went on                                                               
to say:                                                                                                                         
                                                                                                                                
     Secondly, then,  you have the  challenges of,  "Now you                                                                    
     must drill to test and  develop those resources."  And,                                                                    
     again, [there are] the challenges  of how we, together,                                                                    
     assure that  we create  an environment  that encourages                                                                    
     the most  efficient and effective development  of those                                                                    
     resources.                                                                                                                 
                                                                                                                                
MR.  UTSLER   said  that  from   an  operating   standpoint,  the                                                               
aforementioned arctic conditions result in some of the highest-                                                                 
cost barrels  in the world  to develop  and produce.   Again, the                                                               
question  becomes  what can  BP  and  the  state do  together  to                                                               
enhance  operability and  increase efficiency  in developing  the                                                               
barrels.    Furthermore,  operations   in  the  North  Slope  are                                                               
significantly   disadvantaged  because   of  the   transportation                                                               
infrastructure  that industry  requires  in order  to get  goods,                                                               
services, and materials  to the North Slope.  With  regard to the                                                               
question of BP's sentiment, he said:                                                                                            
                                                                                                                                
     First and foremost  we start with the  barrels in terms                                                                    
     of  where  the  barrels   are,  and  our  abilities  to                                                                    
     understand  the  size  and magnitude  of  the  resource                                                                    
     that's in  the ground.   We  then look  at what  is the                                                                    
     risk and the uncertainty of  those barrels, in terms of                                                                    
     our confidence that they can  be developed, in order to                                                                    
     be able  to produce  to the market  place.   The second                                                                    
     [thing] we  then look at  is ... what's  the technology                                                                    
     required to  actually develop those  barrels -  how and                                                                    
     what do we need to  do once we've determined that there                                                                    
     is a  100 million barrels,  200 million barrels,  or 10                                                                    
     million  barrels -  how  hard  is it  to  get those  10                                                                    
     million  barrels, and  what confidence  do  we have  in                                                                    
     terms of the  ability to develop and bring  them to the                                                                    
     market place.                                                                                                              
                                                                                                                                
     And then thirdly  we look at what is the  life of [the]                                                                    
     asset,  what  is  going  to be  required  in  terms  of                                                                    
     facilities,  how long  must  those facilities  operate,                                                                    
     what's the cost structure  to operate those facilities,                                                                    
     is it a 10-year field  development, is it a 20-year, is                                                                    
     it a [50-year,  or an] ... 80-year.  And  each of those                                                                    
     decisions bring with it certain  risks and view of what                                                                    
     is  the full  life  of that  asset's  or that  barrel's                                                                    
     development cost,  so that  we don't  look at  just the                                                                    
     front-end cost, but  we have to look at  the full field                                                                    
     life,  and we  have  to  be able  to  evaluate, in  the                                                                    
     development of that barrel over  the life of that field                                                                    
     for however  long it is,  with confidence, what  is the                                                                    
     cost  structure,  the   recovery,  and  the  subsequent                                                                    
     environment in  which we  operate.   And ...  [we then]                                                                    
     compare  those, on  a global  basis, from  market, from                                                                    
     basin to basin to basin where hydrocarbons exist.                                                                          
                                                                                                                                
9:47:57 AM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS  posited that the  DOR will argue  that one                                                               
of those  variables is  the tax rate,  whereas what  members have                                                               
heard, he relayed, is that the  tax rate is "pretty far down your                                                               
pecking order" and that it  won't affect BP's investment decision                                                               
- that  the other  variables previously  specified are  much more                                                               
dominant in  BP's determination of  whether to invest.   He asked                                                               
about investment climate, and whether  an incremental increase in                                                               
taxes, after the large policy shift  of a year ago, will have any                                                               
impact on  BP's sentiment  regarding whether to  go forth  with a                                                               
particular project.                                                                                                             
                                                                                                                                
MS. FITZPATRICK  said that all  of BP's investment  decisions, at                                                               
the economic  level, are made  on an  after-tax basis.   So, does                                                               
fiscal  policy  come  into BP's  decision  making?    Absolutely,                                                               
regardless  of whether  the  project is  in  Alaska or  someplace                                                               
else.  In terms of barriers,  she remarked, there is not a fiscal                                                               
term that  will enable BP to  develop 50 million barrels  per day                                                               
(mbd)  of heavy  oil  tomorrow; rather,  BP  must first  overcome                                                               
technological challenges.  However, knowing  that there is a good                                                               
fiscal policy in place  makes it a lot easier for  BP to say that                                                               
it is  prepared to make the  investment to actually work  out how                                                               
to  apply  that  technology,   in  this  particular  environment,                                                               
knowing that  once BP  has mastered the  technology, it  can then                                                               
work  on  getting  the  economics  right  to  then  progress  the                                                               
project.  That decision is impacted by fiscal terms.                                                                            
                                                                                                                                
9:51:34 AM                                                                                                                    
                                                                                                                                
MS.  FITZPATRICK, in  response to  a  question by  Representative                                                               
Doogan, relayed  that there is  an articulation of  BP's strategy                                                               
at the group  level that is in the public  domain, and offered to                                                               
provide members  with that information  later.  In response  to a                                                               
further question,  she said that  the state has  information that                                                               
BP is  required to share with  the state, and that  there is also                                                               
some very  detailed information available publicly  - though some                                                               
[is  only available  through] subscription  services  - on  every                                                               
single  one  of  Alaska's  fields,  including  information  about                                                               
capital, tariffs,  and production  profiles.   She said  that she                                                               
would be  happy to provide  further information regarding  how BP                                                               
views Alaska's resources.                                                                                                       
                                                                                                                                
REPRESENTATIVE  DOOGAN asked  whether there  is also  information                                                               
available publicly  that will help member's  determine whether BP                                                               
has the technology to drill a particular well.                                                                                  
                                                                                                                                
MS. FITZPATRICK said she hopes  that later testimony will provide                                                               
that information.                                                                                                               
                                                                                                                                
REPRESENTATIVE DOOGAN  asked whether he  will, at some  point, be                                                               
capable of predicting the effect  of any particular change in the                                                               
state's fiscal policy.                                                                                                          
                                                                                                                                
MS. FITZPATRICK  pointed out  that there  is always  a way  to do                                                               
something via mathematical models, but  such models will still be                                                               
wrong because they are based on  assumptions and the world is not                                                               
static.  "When we make  our investment decisions, we're assessing                                                               
risk,  and  ... I've  never  seen  a  project that  has  actually                                                               
delivered  exactly what  we thought  it  was going  to; some  are                                                               
better, some are worse, and  we're evaluating those risks to make                                                               
that decision," she  added.  For better or for  worse, members of                                                               
the legislature are in the same position.                                                                                       
                                                                                                                                
REPRESENTATIVE  DOOGAN surmised  that  the  term "risk"  includes                                                               
economic risk but not exclusively.                                                                                              
                                                                                                                                
MS. FITZPATRICK explained that for  BP, the term "risk" refers to                                                               
resource  risk, technology  risk, economic  risk, cost  risk, and                                                               
fiscal  risk  - a  wide  variety  of risks.    In  response to  a                                                               
question,  she  said that  although  there  should be  sufficient                                                               
information made  available to  help guide  members, it  would be                                                               
impossible  for  someone other  than  the  company to  know  what                                                               
decision  it  would  be  making   under  any  particular  set  of                                                               
circumstances  because  there are  many  other  factors that  the                                                               
company takes into consideration when making such decisions.                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS  surmised  that  the  risk  tolerance  of                                                               
various companies is  not information that would  be available to                                                               
the public.                                                                                                                     
                                                                                                                                
MS. FITZPATRICK acknowledged that each  company will have its own                                                               
risk tolerance, which  will vary depending on  where a particular                                                               
project is  as well  as other  variables.   For example,  a small                                                               
exploration company  can take a lot  more risk for its  size than                                                               
one might think  but it's basing its decisions on  what it thinks                                                               
the rewards  are.  And  the larger a  company is, the  more risk,                                                               
financially, it  can take because  it can actually cope  with it,                                                               
whereas  if a  smaller company  drills a  $100 million  dry hole,                                                               
that  could  have  a  fairly devastating  impact  on  that  small                                                               
company.                                                                                                                        
                                                                                                                                
9:58:03 AM                                                                                                                    
                                                                                                                                
MS. FITZPATRICK, referring to slide  4, said that production is a                                                               
key point  - more barrels  means more  money for the  state; that                                                               
the point of  slide 4 is that investment leads  to barrels, which                                                               
in  turn   leads  to  increased   revenues;  and  that   slide  4                                                               
illustrates a range of outcomes.   For example, if the goal is to                                                               
stem decline  down to  3 percent  - as opposed  to the  current 6                                                               
percent  rate of  decline -  it will  require substantially  more                                                               
investment  than there  has  been  to date.    In  response to  a                                                               
question, she explained  that according to the chart  on slide 4,                                                               
the industry  investment is "point  forward," with the  3 percent                                                               
decline rate going out to about the year 2050.  She added:                                                                      
                                                                                                                                
     We've made an assumption, here,  on the revenues of the                                                                    
     current  tax  structure.    We've  assumed  60  percent                                                                    
     dollars,  [and]   we've  used  the  state's   ...  cost                                                                    
     forecast.    It's  merely  to sort  of  point  out  two                                                                    
     things.  One  is, the lower the  decline, [although] it                                                                    
     requires more investment, ... it  does in fact generate                                                                    
     a lot  more revenue,  both from PPT  but also  from the                                                                    
     other revenues  primarily driven  by royalty.   There's                                                                    
     actually  a range  of royalty  rates.   The average  of                                                                    
     12.5 that's  used actually belies  the range  that runs                                                                    
     from 11  to 27, depending  on the field concerned.   So                                                                    
     that can  actually have quite  a substantial  impact if                                                                    
     it's more barrels in the pipe.                                                                                             
                                                                                                                                
REPRESENTATIVE  HOLMES  asked in  what  year  is the  15  percent                                                               
decline that's indicated on slide 4.                                                                                            
                                                                                                                                
MS. FITZPATRICK  reiterated, "That's point forward,"  and offered                                                               
to get more specific details to the committee.                                                                                  
                                                                                                                                
10:01:36 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE RAMRAS, referring to  the term "opportunity cost,"                                                               
asked who  BP competes against  for limited capital  dollars, and                                                               
how  that position  is arrived  at.   He  said he  wants to  know                                                               
whether  changing  the tax  policy  in  Alaska will  affect  BP's                                                               
investment behavior,  and how BP  will "go up against"  its units                                                               
in other countries for capital.                                                                                                 
                                                                                                                                
MS.  FITZPATRICK offered  that BP's  Alaska unit  first looks  at                                                               
what  its set  of opportunities  are and  what the  opportunities                                                               
are,  even   within  Alaska,  that   BP  thinks  are   the  right                                                               
opportunities related to short-term  issues - getting production,                                                               
getting barrels in the pipe - and to mid- and long-term issues.                                                                 
                                                                                                                                
REPRESENTATIVE  RAMRAS  surmised   that  investing  in  operating                                                               
expenses is what generates profits.                                                                                             
                                                                                                                                
MS.  FITZPATRICK   relayed  that  BP   looks  at  the   range  of                                                               
opportunities, and  at what activities  the company  can actually                                                               
execute with the equipment and  personnel it has, though if there                                                               
is a  project that can't  be started  right away but  the company                                                               
wants to be able  to do so in the near  future, the company makes                                                               
plans  that  will  enable  it   to  start  that  project  at  the                                                               
appropriate time.   Once a group within BP decides  it would like                                                               
to go  forward with  a project, it  then presents  that "activity                                                               
set" and accompanying "financials" to  the head office in London,                                                               
which in  turn looks  at the  parameters of  the project  and its                                                               
potential  short- mid-  and  long-term benefits  to  all of  BP's                                                               
groups and  at what is  actually possible.   At the  group level,                                                               
the company  then looks at all  of its branches in  various parts                                                               
of the world  and considers the proposed project in  terms of its                                                               
robustness and stability.  She  said that each individual project                                                               
is assessed  on its  own merits  but within  the context  of BP's                                                               
strategic and financial  frameworks.  The more stable  she can be                                                               
in Alaska, she  remarked, the better her chance of  saying to the                                                               
board that  any incremental capital  at the group level  ought to                                                               
be spent in Alaska; thus stability is quite important.                                                                          
                                                                                                                                
10:12:45 AM                                                                                                                   
                                                                                                                                
MR.  UTSLER  added that  BP's  first  challenge  is to  grow  the                                                               
business  via  replacing  the  barrels  it's  produced  with  new                                                               
barrels - "we  need to find more barrels than  we've produced the                                                               
previous years."   Therefore  the upstream  decision is  based on                                                               
the availability  of oil in  the world; the company's  ability to                                                               
discover,  develop,  produce,  and   market  that  oil;  and  the                                                               
subsequent return on the oil that the company does sell.                                                                        
                                                                                                                                
CHAIR OLSON  said he hopes that  "maintenance has a voice  and is                                                               
asking [for] more money."                                                                                                       
                                                                                                                                
MR.  UTSLER  said  "Absolutely."   He  attempted  to  assure  the                                                               
committee that  BP first starts  with complying with the  law and                                                               
with  understanding  exactly  what  its  operational  costs  are,                                                               
particularly  those  specific to  the  activity  set required  to                                                               
continue meeting  the law  and industry  standards.   The company                                                               
must then  make decisions regarding  what it is willing  to spend                                                               
based on how  long the life expectancy of a  particular field is.                                                               
He  offered that  over the  last five  years, BP  has spent  four                                                               
times  the amount  on maintenance  operations than  it spent  the                                                               
previous five years,  and spent three times the  amount on repair                                                               
operations  in the  last four  years than  it spent  the previous                                                               
four years.                                                                                                                     
                                                                                                                                
MS.  FITZPATRICK  relayed  that   there  is  no  competition  for                                                               
required maintenance capital.                                                                                                   
                                                                                                                                
MR. UTSLER  remarked that the [North  Slope field] is one  of the                                                               
first  arctic developments  in the  world; is  the largest  field                                                               
discovered in  North America 35  years ago; is still  the largest                                                               
producing  field in  North America;  that  although its  original                                                               
lifespan expectation was 20 years,  that lifespan is now expected                                                               
to be 80-plus  years; that "it is a massive  structure"; and that                                                               
the  scale and  significance of  its hydrocarbon  accumulation is                                                               
staggering on a global-scale basis.   This size, however, creates                                                               
huge challenges.   Greater Prudhoe  Bay itself is over  60 square                                                               
miles  in  size;  BP  has  over  11  major  producing  facilities                                                               
necessary to  handle the  oil, gas, and  water produced  from the                                                               
field's  reservoirs;  and BP  has  developed  over 42  well  pads                                                               
allowing the  company to drill  through 1,500 feet  of permafrost                                                               
and into reservoirs that range  from 3,000 feet below the earth's                                                               
surface to 9,000 feet below the earth's surface.                                                                                
                                                                                                                                
MR. UTSLER mentioned  that approximately 1,200 of  the wells that                                                               
BP has  drilled in this  field either are currently  producing or                                                               
are being  used to inject  water or  gas [into the  reservoir] in                                                               
order to  optimize resource recovery.   He indicated that  one of                                                               
the  things that  needs to  be  understood is  that although  the                                                               
total oil production  is declining on the North  Slope, the total                                                               
fluid production is  actually increasing.  Every  day the company                                                               
has to  handle more water  being produced with every  barrel, and                                                               
that  water has  no revenue  value but  does have  disposal cost.                                                               
This  increased fluid  production carries  with it  greater risk,                                                               
greater cost, and greater complexity  in terms of how the company                                                               
optimizes the  next barrel  of oil it  produces from  this field.                                                               
He went on to say:                                                                                                              
                                                                                                                                
     Every day  we produce somewhere between  6 Bcf [billion                                                                    
     cubic feet] in the summer to  almost 9 Bcf of gas a day                                                                    
     from  the  reservoirs.    We  have  to  take  that  gas                                                                    
     production  and  re-inject  it back  into  the  ground.                                                                    
     That does  two things for  us.  It provides  pressure -                                                                    
     support  - to  the reservoir  to enable  us to  get yet                                                                    
     another barrel  out of  the ground  tomorrow.   It also                                                                    
     provides an avenue of support  by which we can actually                                                                    
     produce  those   barrels  more  efficiently   from  the                                                                    
     reservoir.  ... At  9  Bcf, that's  40  percent of  the                                                                    
     Lower 48's  household gas consumption on  a daily basis                                                                    
     that we  are managing every  day and putting  back into                                                                    
     the ground.                                                                                                                
                                                                                                                                
     Millions  and millions  of horsepower  are required  to                                                                    
     re-inject   that  gas   across  the   field  into   the                                                                    
     reservoir,  again, with  no revenue  benefit ...  other                                                                    
     than  the  impact  that  it has  on  our  abilities  to                                                                    
     produce.   So  [it's] a  significant set  of challenges                                                                    
     for us.   As we've  continued to produce the  oil, over                                                                    
     this 30-year  period, the physical ability  to recover,                                                                    
     every day,  more oil from  that reservoir  becomes more                                                                    
     challenged - it's harder -  and therefore we're looking                                                                    
     constantly  for new  ways and  new  technologies to  be                                                                    
     able to  enhance the  scrubbing of  the reservoir  in a                                                                    
     way that allows us to  get every possible barrel of oil                                                                    
     out that we can recover from this known resource.                                                                          
                                                                                                                                
REPRESENTATIVE  SAMUELS asked  what BP  uses diesel  for and  how                                                               
much diesel BP uses in its day-to-day operations.                                                                               
                                                                                                                                
10:25:04 AM                                                                                                                   
                                                                                                                                
MR. UTSLER explained  that BP is looking to build  - jointly with                                                               
ConocoPhillips  -  an ultra  low  sulfur  diesel (ULSD)  refining                                                               
plant in the Kuparuk field.   This plant will allow the companies                                                               
to comply with  federal law regarding the use of  ULSD by January                                                               
1,  2010.   The  state,  via legislation,  has  demanded that  BP                                                               
instead  achieve this  goal by  January  1, 2009.   Currently  in                                                               
greater  Prudhoe  Bay, BP  uses  approximately  3,000 gallons  of                                                               
diesel per  day in the company's  over 750 vehicles -  though the                                                               
amount varies greatly depending on  the season - and in operating                                                               
its emergency  generators and backup equipment.   Furthermore, BP                                                               
uses  diesel  for  a  variety  of  other  reasons  such  as  well                                                               
stimulation.   In  response  to questions,  he  relayed that  the                                                               
diesel that  BP currently uses  either comes from Flint  Hills or                                                               
is produced  on site at  BP's "crude oil topping  facility"; that                                                               
he  couldn't speak  to  how  much diesel  the  other Prudhoe  Bay                                                               
producers are  using; and that the  aforementioned refining plant                                                               
will only meet industry demands on the North Slope.                                                                             
                                                                                                                                
MS. FITZPATRICK added that if  the refining plant produces beyond                                                               
what  the companies  needs, BP  could provide  a supply  to North                                                               
Slope villages,  though doing  so would not  be its  primary aim.                                                               
Should BP and ConocoPhillips not be  able to meet the state's new                                                               
timeline,  it will  result in  a significant  increase in  supply                                                               
trucks  on the  road, and  this in  turn will  have an  impact on                                                               
environmental and safety perspectives.                                                                                          
                                                                                                                                
MR. UTSLER, in response to  comments and a question, acknowledged                                                               
that once Alaska has a  gas pipeline, oil production will decline                                                               
considerably,  though BP  is working  to  address the  "optimized                                                               
off-take of gas" since gas is  an important part of the mechanism                                                               
by  which   BP  extracts  and   recover  hydrocarbons   from  the                                                               
reservoir;  the consequences  of  gas production  in Alaska  will                                                               
have to be  carefully managed with regard to the  volume of "off-                                                               
take" and  with regard to  how to  at least partially  offset the                                                               
loss of that energy in the reservoir.                                                                                           
                                                                                                                                
REPRESENTATIVE NEUMAN  surmised that the  change from oil  to gas                                                               
will have an impact on the state's income.                                                                                      
                                                                                                                                
MS. FITZPATRICK,  in response  to a  question, offered  that when                                                               
the gas pipeline  becomes operational, there will be  a change in                                                               
the mix  of resources that are  recovered, and that the  issue of                                                               
how to maximize the molecules - whether  they be oil or gas - for                                                               
the state's benefit will need to be addressed.                                                                                  
                                                                                                                                
REPRESENTATIVE DOOGAN  asked whether the  aforementioned proposed                                                               
ultra low-sulfur  diesel refining plant will  meet industry needs                                                               
on the North Slope.                                                                                                             
                                                                                                                                
MR. UTSLER  reiterated that  it will,  adding that  the challenge                                                               
will be to move that diesel product to where it's needed.                                                                       
                                                                                                                                
10:35:36 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SAMUELS  said that  one  problem  with the  state                                                               
giving BP a  credit for the proposed refining plant  is that that                                                               
same credit  won't be extended  to the other companies  that have                                                               
an interest in the plant.                                                                                                       
                                                                                                                                
MR.  UTSLER   remarked  that  the   North  Slope  is   a  complex                                                               
environment in which to produce oil  and gas, and is getting more                                                               
complex  every day  in terms  of technology  needs and  operating                                                               
costs.  Referring to BP's  PowerPoint presentation, he then spoke                                                               
of the volume of oil that's  been produced to date from the North                                                               
Slope and  greater Prudhoe  Bay, and  noted that  this production                                                               
has  come   with  tremendous  challenges  both   technically  and                                                               
opportunistically.    He  relayed  that   $19  billion  has  been                                                               
invested to  develop [BP's holding]  in greater Prudhoe  Bay, and                                                               
although more  money is being  invested each year  to essentially                                                               
produce  fewer  barrels,  that  investment  continues  to  be  an                                                               
important  part of  the  company's ability  to  progress.   After                                                               
starting  with  "natural  production," he  offered,  the  company                                                               
quickly realized  that it needed  to utilize  additional pressure                                                               
support in order to optimize  recovery, and since that time other                                                               
technologies  have  been utilized  as  well.    Both BP  and  its                                                               
working  interest  owners  have  been  focusing  on  "exploration                                                               
within the known,"  because even a mere 1  percent improvement in                                                               
recovery  from  greater  Prudhoe  Bay is  equal  to  250  million                                                               
barrels.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  DOOGAN   asked  what   is  meant  by   the  term,                                                               
"development investment" as it relates  to the aforementioned $19                                                               
billion.                                                                                                                        
                                                                                                                                
MR.  UTSLER said  that the  figure  of $19  billion reflects  the                                                               
total  capital  invested  since  the  beginning  of  the  field's                                                               
development,  and includes  money spent  on building  facilities,                                                               
drilling wells, and delivery on  a year-in-year-out basis, adding                                                               
that this year alone, BP will  have spent upwards of $700 million                                                               
in "capital spend" and almost  $900 million in "operating spend."                                                               
He again mentioned that developing  the resources has become more                                                               
difficult each year, particularly in  the environment in which it                                                               
is located,  and so ongoing  investment is necessary in  order to                                                               
achieve  the  type  of  long-term success  that  will  result  in                                                               
another 50 years'  of life for the  field.  He then  spoke of the                                                               
various   support   facilities   located   in   the   area,   and                                                               
characterized the facility  250 miles north of  the Arctic Circle                                                               
as the largest gas processing plant facility in the world.                                                                      
                                                                                                                                
REPRESENTATIVE NEUMAN  asked whether  BP has plans  for upgrading                                                               
or expanding that plant.                                                                                                        
                                                                                                                                
10:44:32 AM                                                                                                                   
                                                                                                                                
MR. UTSLER said yes, BP  does have such plans, particularly given                                                               
that  in the  future, the  North  Slope will  change its  primary                                                               
focus to gas production with  associated liquids.  Gas production                                                               
- especially if it  is meant to continue for the  next 50 years -                                                               
will  require both  the existing  infrastructure as  well as  the                                                               
TAPS,  because without  an  oil  pipeline, there  can  be no  gas                                                               
production since the  oil and the gas and the  water are produced                                                               
together.   Furthermore,  if the  gas  is not  developed at  some                                                               
point,  then  large  value  in   terms  of  hydrocarbon  resource                                                               
potential will  be left  in the  ground.   The facilities  of the                                                               
future will not be the same  as existing facilities, and folks at                                                               
BP are currently researching that issue  further so as to be able                                                               
to  optimize   the  North  Slope  infrastructure;   some  of  the                                                               
questions being considered are, what  types of facilities will be                                                               
needed, what levels of reinvestment  will be required, and how to                                                               
go about leveraging the significant potentials of heavy oil.                                                                    
                                                                                                                                
REPRESENTATIVE NEUMAN surmised that  transition to a gas pipeline                                                               
will require investment in new facilities.                                                                                      
                                                                                                                                
MR. UTSLER offered  that some existing facilities  could still be                                                               
used,  though some  of the  facilities will  have to  be changed.                                                               
One of BP's  rationales for replacing the oil  transit lines with                                                               
an  entirely new  system of  piping is  to allow  the company  to                                                               
deliver a 50-year  future in a much more  efficient and effective                                                               
way.      Referring  to   another   slide   in  BP's   PowerPoint                                                               
presentation,  he offered  that  currently there  have been  over                                                               
2,500 wells  drilled in greater Prudhoe  Bay - 1,200 of  them are                                                               
currently active  - and described  what the slide  showed, adding                                                               
that BP  is currently  drilling an  average of  100 wells  a year                                                               
across  the North  Slope.   Significant  continued investment  is                                                               
planned, he  reiterated, adding that  infill drilling is  part of                                                               
new development.                                                                                                                
                                                                                                                                
MR. UTSLER,  in response to  questions, said that BP  has several                                                               
hundred gas wells  that are being used to re-inject  gas into the                                                               
reservoir cap, and has several  hundred wells that are identified                                                               
from the "gas-cap standpoint."                                                                                                  
                                                                                                                                
CHAIR OLSON  surmised that  there is gas  readily available  if a                                                               
company had the means to develop it.                                                                                            
                                                                                                                                
10:53:12 AM                                                                                                                   
                                                                                                                                
MR. UTSLER  concurred, but  pointed out that  as gas  is produced                                                               
and is taken  out of the top of the  reservoir, oil migrates into                                                               
that void space and  is lost if gas is taken  out too quickly and                                                               
unless steps  are taken  to manage  the pressure  differential in                                                               
such a  way so  as to  try to  keep the  oil where  it was,  so a                                                               
balance   between  oil   recovery  and   gas  recovery   must  be                                                               
maintained.  In response to a  question, he said that BP has been                                                               
working  closely  with  the  Alaska   Oil  and  Gas  Conservation                                                               
Commission  (AOGCC)  in  a very  cooperative  manner  to  jointly                                                               
understand the reservoir and the  characteristics of the off-take                                                               
levels.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  SAMUELS  asked how  much  it  costs to  drill  an                                                               
infill well.                                                                                                                    
                                                                                                                                
MR. UTSLER  said that  it costs  an average of  $4 million  to $5                                                               
million to drill  a well in greater Prudhoe Bay.   In response to                                                               
another question,  he indicated  that reservoir by  reservoir and                                                               
field by field,  the cost of drilling a well  varies depending on                                                               
where in Alaska that well is drilled.                                                                                           
                                                                                                                                
MS.  FITZPATRICK,  in  response  to a  question,  said  that  the                                                               
aggregation  of  the  satellite  fields  that  took  place  under                                                               
economic  limit factor  (ELF) system  meant that  those satellite                                                               
fields  were  treated as  a  single  taxing  unit as  opposed  to                                                               
"differential"  ones.   At  the  time  that the  ELF  aggregation                                                               
occurred,  she recalled,  the forecast  was that  doing so  would                                                               
generate an  extra $150  million in revenue  for the  state; this                                                               
aggregation made  a significant difference in  the development of                                                               
the  satellite fields.   In  response to  further questions,  she                                                               
said  that when  investment  decisions were  being  made at  that                                                               
time, because  the satellites  were different,  it was  felt that                                                               
"we could make a differential  decision where it was optimum from                                                               
an  economic  perspective" and  that  the  tax consequences  were                                                               
[acceptable]  when   deciding  whether  to  drill   an  otherwise                                                               
uneconomic well.                                                                                                                
                                                                                                                                
MR.  UTSLER referred  BP's PowerPoint  presentation, and  said it                                                               
illustrates  the   nature  of  the   impact  to   BP's  long-term                                                               
recoverable  resources from  greater Prudhoe  Bay.   He indicated                                                               
that members  were looking at  "the bottom hole pressure"  of the                                                               
reservoirs that  BP is operating  against, adding that  as water,                                                               
oil, and gas were produced  from those reservoirs, pressure began                                                               
to  decline; with  that decline  comes a  loss of  energy in  the                                                               
reservoir and this potentially results  in less recovery over the                                                               
long-term.  In looking at how  to slow that energy loss, BP began                                                               
putting  water into  the reservoir,  but this  incurred a  lot of                                                               
necessary  operating  costs,  particularly since  precision  with                                                               
regard  to  where  to  re-inject  the water  was  required.    He                                                               
indicated that  the slide  members were  looking at  compared the                                                               
decline profile before water flooding  commenced with the decline                                                               
profile  after water  flooding was  commenced, and  characterized                                                               
this increase  in recovery as  a significant contributor  to BP's                                                               
having moved from 9 billions  barrels of recovery to 11.5 billion                                                               
barrels.   This technology  will be  "an important  support" over                                                               
the next 50  years to the next 2-3 billion  barrels of additional                                                               
light oils that BP expects to recover.                                                                                          
                                                                                                                                
MR. UTSLER mentioned  that currently BP is having  to handle 1.2-                                                               
plus million barrels of water -  some of it treated seawater - in                                                               
greater Prudhoe Bay  everyday, though BP's goal  is to eventually                                                               
increase  its water  injection, collectively,  to over  2 million                                                               
barrels a day.  This water,  however, must then be separated from                                                               
the oil  so that it can  again be re-injected into  certain other                                                               
wells  to enhance  their recovery.   Also,  from a  technological                                                               
standpoint, BP has  been researching how to add water  to the gas                                                               
cap,  thus  compressing the  gas  in  the reservoir  and  thereby                                                               
maximizing  the sweep  of oil  in  the reservoir.   If  flattened                                                               
pressure can  be maintained, there  will be an increase  in long-                                                               
term ultimate recovery, but it  will result in the company having                                                               
to  handle  more  and  more  water and  paying  the  extra  costs                                                               
associated with doing so.                                                                                                       
                                                                                                                                
11:05:17 AM                                                                                                                   
                                                                                                                                
MR. UTSLER, in response to a  request, explained that BP needs to                                                               
achieve a  balance between injection  wells and  producing wells,                                                               
adding  that injection  wells  are "capital  to  drill" but  then                                                               
"operating cost to operate" because  they don't produce a revenue                                                               
stream.   He  indicated  that  of the  $700  million invested  in                                                               
drilling, 50  percent is capital  investment for  water injection                                                               
wells that  have no rate  of return other than  helping long-term                                                               
oil recovery rates.                                                                                                             
                                                                                                                                
MS. FITZPATRICK, in  response to a question, offered  that all of                                                               
the aforementioned  expenses are  upstream and are  thus impacted                                                               
by the PPT statutes or HB 2001's proposed changes.  She added:                                                                  
                                                                                                                                
     The  treatment of  whether it's  capital or  operating,                                                                    
     then  you get  the differential  treatments within  the                                                                    
     tax  structure, recognizing  that this  is all  talking                                                                    
     about Prudhoe Bay,  and we then get to the  issue of at                                                                    
     what  point  does  the  floor kick  in  versus  the  25                                                                    
     percent  net.   And  I  know  that the  administration,                                                                    
     yesterday, said that they believe  that was around $40.                                                                    
     We've not  finished doing our analysis,  we wish longer                                                                    
     time  to understand  what was  presented over  the last                                                                    
     two days,  but our current  view at the moment  is that                                                                    
     it would  kick in at  a rate substantially  higher than                                                                    
     $40,   driven  off   different  views   on  production,                                                                    
     capital, et cetera.  So these will be impacted.                                                                            
                                                                                                                                
MR. UTSLER, in  response to a question, indicated  that the chart                                                               
members are  looking at illustrates the  original greater Prudhoe                                                               
Bay  field  with  seawater  injection.   Again,  it  reflects  an                                                               
increase in the seawater being used to augment oil recovery.                                                                    
                                                                                                                                
REPRESENTATIVE COGHILL asked what the ratio of water injection                                                                  
wells is to production wells.                                                                                                   
                                                                                                                                
11:11:29 AM                                                                                                                   
                                                                                                                                
MR. UTSLER said he would be able provide those details later,                                                                   
but mentioned that BP is producing oil in many different ways.                                                                  
Referring to the chart, he said:                                                                                                
                                                                                                                                
     In the  portion just below  the gas cap, in  this area,                                                                    
     approximately, of  the field,  we actually  use gravity                                                                    
     to  help  us  produce,  and so  it's  called,  "gravity                                                                    
     drainage."  And it's  actually oil producing wells that                                                                    
     are using gravity  effects of the steep dip  ... of the                                                                    
     reservoir to  actually drain oil  to the well  bore set                                                                    
     low  in the  structure  and help  us  recover oil  from                                                                    
     that.  We're actually not  using water to move the oil,                                                                    
     but  we're  using  water,  then,   in  the  next  band,                                                                    
     basically along these areas.                                                                                               
                                                                                                                                
     And that's why you can  see these blue; along this area                                                                    
     of the  reservoir, below gravity drainage,  we actually                                                                    
     are using a water flood  pattern where we use injection                                                                    
     wells with a center  producer, and we're pushing water,                                                                    
     on all sides,  towards that [center] producer.   And so                                                                    
     we  use water  flooding on  the lower  portions of  the                                                                    
     reservoir,  gravity drainage  in  the  center, gas  re-                                                                    
     injection in the crest, and  water "injectivity" on the                                                                    
     base to try to keep  that oil moving but also contained                                                                    
     within  the  boundaries  of  not  wanting  to  see  oil                                                                    
       migrate into the gas cap where we would then lose                                                                        
     resources ultimately recoverable.                                                                                          
                                                                                                                                
REPRESENTATIVE COGHILL observed that members  will need to have a                                                               
concept  of  the capital  and  operating  expenses necessary  for                                                               
enhanced production.                                                                                                            
                                                                                                                                
11:13:00 AM                                                                                                                   
                                                                                                                                
MR.  UTSLER  offered that  BP  uses  several technologies  in  an                                                               
effort to increase oil recovery  by the aforementioned 1 percent.                                                               
One  of  those new  technologies  developed  by the  industry  is                                                               
called "Bright  Water" and it  has proven to be  very encouraging                                                               
in  its early  stages  of  application.   Because  water that  is                                                               
injected tends  eventually to  travel only on  the path  of least                                                               
resistance towards  the producing well, standard  water injection                                                               
technology  ultimately leaves  bypassed oils  - oils  that aren't                                                               
being swept  up by the  water that's  been injected -  and Bright                                                               
Water technology makes use of  a polymer that once injected, sets                                                               
and  hardens  and creates  obstacles  around  which the  injected                                                               
water must  flow, thus  resulting in  the formally  bypassed oils                                                               
being pushed  by the injected  water towards the  producing well.                                                               
This technology is costly, however;  to illustrate, BP spent $1.8                                                               
million in  chemicals alone  on a three-well  pilot program.   In                                                               
response to a  question, he indicated that the  industry has been                                                               
working on  the concept of  this technology for the  past 20-plus                                                               
years, though this particular seemingly  successful method - with                                                               
the specific set of polymers and  compounds that were used in the                                                               
pilot project - has only been applied in the last 3 years.                                                                      
                                                                                                                                
MR. UTSLER  said that while  exploration is an important  part of                                                               
Alaska's future,  70 percent of  all the hydrocarbon  values that                                                               
are expected to  be developed in the North Slope  sit in already-                                                               
found  fields;   again,  the  challenge  for   industry  involves                                                               
focusing on  optimizing the recovery  of that oil.   Referring to                                                               
BP's  PowerPoint  presentation,  he   indicated  that  the  chart                                                               
members were  now looking at illustrates  that if the goal  is to                                                               
sustain  field production  performance, continuing  investment in                                                               
the  technologies to  drill, develop,  infill,  and optimize  the                                                               
reservoirs is  imperative.   For example, 50  percent of  the oil                                                               
today that's  moving through the  TAPS came from wells  that were                                                               
only drilled  during the last  four years.  Referring  to another                                                               
chart, he  said it illustrates  that the investment of  over $250                                                               
million  which occurred  in 2002  produced  a lot  of barrels;  a                                                               
similar amount of  investment in 2003 and in  2004 produced fewer                                                               
barrels of oil.   This decrease is not a  function of a decreased                                                               
ability to operate,  he remarked; rather it is a  function of the                                                               
technical challenges  of finding  oil on a  daily basis  inside a                                                               
very mature field.  Thus  more investment is required if industry                                                               
is going to significantly impact  the production decline referred                                                               
to earlier.                                                                                                                     
                                                                                                                                
MR. UTSLER, in response to  a question, acknowledged that the dip                                                               
in the  number of  barrels that were  produced as  illustrated in                                                               
one  of the  aforementioned charts  reflects the  period of  time                                                               
during  which BP's  pipeline leak  was discovered  and BP  had to                                                               
partially shut down its production  in Prudhoe Bay.  He mentioned                                                               
that dips  also occur, generally  during the summer  months, when                                                               
BP engages  in major repairs  and maintenance of  its facilities.                                                               
In response to a question,  he indicated that that chart reflects                                                               
production from  2002-2007.   There is less  oil to  be developed                                                               
today  than  there  was  yesterday and  it's  getting  harder  to                                                               
develop  that  oil;  industry  must  continue  to  find  ways  to                                                               
encourage investment in existing fields.                                                                                        
                                                                                                                                
11:26:34 AM                                                                                                                   
                                                                                                                                
MR. UTSLER, referring  to another set of charts,  relayed that it                                                               
reflects   that   new   technologies   have   enabled   increased                                                               
development.   For  example, just  20 years  ago the  approach by                                                               
industry  was to  just  drill  single a  vertical  well from  the                                                               
surface down  through the reservoir  and then produce the  oil in                                                               
that  well.    New  technology, though  costly,  now  allows  for                                                               
multiple horizontal drill routes to  be established from only one                                                               
downward  "mother  bore";  technology  such as  this  can  unlock                                                               
previously unrecoverable resources.                                                                                             
                                                                                                                                
REPRESENTATIVE  SAMUELS  asked what  the  cost  is of  horizontal                                                               
drilling  compared  with  the  cost of  vertical  drilling.    He                                                               
observed  that  the charts  appear  to  indicate that  horizontal                                                               
drilling is accurate to within 20-30 feet.                                                                                      
                                                                                                                                
MR.  UTSLER  concurred,  adding that  vertical  drilling  can  be                                                               
controlled  to   within  1-3  feet,   and  that   experience  and                                                               
technology allow BP to have  a relatively accurate picture of the                                                               
reservoir's  makeup.   Two of  the advantages  with a  horizontal                                                               
well,  he  explained,  are  that  the  cross  sectional  area  is                                                               
significantly  enlarged and  the pressure  drop is  significantly                                                               
reduced, both  of which  result in  enhanced oil  recovery (EOR).                                                               
He mentioned that  the cost of drilling  horizontally after first                                                               
having  drilled  a vertical  well  increases  the cost  by  about                                                               
another 60 percent.                                                                                                             
                                                                                                                                
REPRESENTATIVE SAMUELS  surmised that the credits  for drilling a                                                               
well apply to both vertical wells and horizontal wells.                                                                         
                                                                                                                                
MS. FITZPATRICK  concurred, but acknowledged that  there could be                                                               
a legislative change made to that credit.                                                                                       
                                                                                                                                
REPRESENTATIVE RAMRAS asked who  [within the administration] sees                                                               
the  information about  BP's innovations  related to  lengthening                                                               
the life of the oil field.                                                                                                      
                                                                                                                                
11:35:55 AM                                                                                                                   
                                                                                                                                
MR.  UTSLER said  that  from a  Department  of Natural  Resources                                                               
(DNR)  standpoint,  BP updates  its  plans  of development  every                                                               
three years,  and that BP also  works with the AOGCC  with regard                                                               
to the  reservoir and hydrocarbon stewardship.   Furthermore, the                                                               
wells must be  permitted, and so BP has to  provide various state                                                               
agencies with information regarding proposed well designs.                                                                      
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  whether  the DOR  is provided  with                                                               
this information as well.                                                                                                       
                                                                                                                                
MS. FITZPATRICK said  that BP has given presentations  to the DNR                                                               
regarding  certain aspects  of the  industry, and  mentioned that                                                               
most  of the  information requested  by the  DNR has  been either                                                               
financial   data  or   production  data,   both  historical   and                                                               
projected.                                                                                                                      
                                                                                                                                
MR.  UTSLER, in  response to  questions, said  that BP  generally                                                               
attempts to  use its  existing vertical well  bores to  start its                                                               
horizontal drilling  operations, though sometimes new  well bores                                                               
are drilled  specifically with the  intention of then  using them                                                               
for horizontal  drilling operations;  that such  operations don't                                                               
qualify for  exploration credits;  and that both  operating funds                                                               
and  capital funds  are used  for  such wells,  depending on  the                                                               
actual procedure BP engages in.                                                                                                 
                                                                                                                                
REPRESENTATIVE DOOGAN  asked whether  proposed wells  compete for                                                               
approval.                                                                                                                       
                                                                                                                                
MS. FITZPATRICK relayed  that generally wells are looked  at on a                                                               
program basis,  though sometimes, depending on  the actual nature                                                               
of a proposed well, it will be considered separately.                                                                           
                                                                                                                                
MR.  UTSLER added  that the  complexity of  a horizontal  well is                                                               
much  greater than  a vertical  well, so  the decision  regarding                                                               
whether to drill  a vertical well - or a  multi-lateral well - is                                                               
considered  in terms  of the  risk  and reward  of the  potential                                                               
hydrocarbons to  be developed and  how to best develop  them with                                                               
the capital deployed.                                                                                                           
                                                                                                                                
REPRESENTATIVE DOOGAN asked whether  a proposed horizontal well's                                                               
potential return has to be proven before it is approved.                                                                        
                                                                                                                                
11:43:35 AM                                                                                                                   
                                                                                                                                
MR. UTSLER said  yes, adding that one of the  questions that must                                                               
be answered  is whether a  horizontal well will recover  at least                                                               
the  same  amount of  reserves  as  a  vertical  well will.    In                                                               
response to a comment, he  indicated that the operating costs for                                                               
a horizontal well are somewhat higher than for a vertical well.                                                                 
                                                                                                                                
MR.  UTSLER,  in response  to  a  question, indicated  that  when                                                               
operators  develop a  program, each  well  being recommended  for                                                               
drilling must be presented to  the working interest owners in the                                                               
form of an authorization for expenditure.                                                                                       
                                                                                                                                
MS.  FITZPATRICK  added that  if  the  information on  individual                                                               
wells  within  the program  of  wells  changes over  time,  these                                                               
changes  are also  discussed with  the  working interest  owners,                                                               
though  such changes  won't  necessarily have  to  be relayed  to                                                               
company headquarters.                                                                                                           
                                                                                                                                
MR. UTSLER relayed  that when BP develops an Alaskan  plan, it is                                                               
presented  internally to  BP's president  and  the other  working                                                               
interest owners in Alaska; this  plan then faces competition from                                                               
BP's other operations around the world.                                                                                         
                                                                                                                                
REPRESENTATIVE SAMUELS  asked what  happens if the  other working                                                               
interest owners don't agree with the proposed Alaska plan.                                                                      
                                                                                                                                
MR. UTSLER said  a compromise is then sought,  though the working                                                               
interest owners with less interest are given less say.                                                                          
                                                                                                                                
MS.  FITZPATRICK, in  response to  a question,  said that  within                                                               
Alaska, there is a fairly  continuous cycle of business planning,                                                               
though  data is  submitted to  BP's main  office during  specific                                                               
timeframes.                                                                                                                     
                                                                                                                                
MR. UTSLER  relayed that  BP submits its  yearly proposal  to its                                                               
working interest owners in September of each year.                                                                              
                                                                                                                                
MS. FITZPATRICK, in  response to questions, relayed  that BP does                                                               
annual plans, 3-year plans, 5-year  plans, 10-year plans, and 20-                                                               
year plans; and  that BP is currently planning  for calendar year                                                               
2008 and beyond.                                                                                                                
                                                                                                                                
REPRESENTATIVE DOOGAN surmised  that there must have  been a plan                                                               
of  development under  the ELF  after the  satellite fields  were                                                               
aggregated,  and under  the  PPT.   He  asked  whether  BP has  a                                                               
similar prospective  plan under  the proposed Alaska's  Clear and                                                               
Equitable Share (ACES) legislation - HB 2001.                                                                                   
                                                                                                                                
11:56:35 AM                                                                                                                   
                                                                                                                                
MS.  FITZPATRICK  said that  BP  is  not  working  on a  plan  of                                                               
development  or   a  long-term  plan  under   the  proposed  ACES                                                               
legislation; such  plans are only  created based on  current law,                                                               
not  pending legislation.   She  mentioned that  BP's past  plans                                                               
under the ELF and under the  PPT are not comparable and would not                                                               
be  helpful to  look at  because production  profiles have  since                                                               
changed, different technologies have  been engaged, and there are                                                               
now very different cost structures and price environments.                                                                      
                                                                                                                                
MR. UTSLER mentioned that there  is now technology that allows BP                                                               
to  control the  amount of  water  used in  the injection  wells.                                                               
Referring to BP's PowerPoint presentation,  he indicated that the                                                               
slide  members were  now looking  at is  intended to  demonstrate                                                               
that  there  are other  reservoirs  to  be developed  in  greater                                                               
Prudhoe Bay;  that there are  four new reservoirs that  have been                                                               
developed  since the  year  2000;  and that  there  is a  project                                                               
[underway] that  will develop viscous  - or heavier -  oil inside                                                               
the west  flank of  the field.   He relayed  that BP  has already                                                               
spent  over   $80  million  in  the   early  engineering  design,                                                               
development,  and testing  of "these"  reservoirs, which  are now                                                               
producing  viscous and  heavier oils  at a  rate of  about 25,000                                                               
barrels per day.                                                                                                                
                                                                                                                                
MR.  UTSLER  offered  that  BP  is  also  looking  to  propose  a                                                               
development  project that  would represent  nearly $2.1  billion-                                                               
plus  in  expenditures  for   wells,  facilities,  and  necessary                                                               
infrastructure  to  develop  what  could  represent  250  million                                                               
barrels of additional  oil recovery from greater  Prudhoe Bay and                                                               
between 40,000  and 60,000 barrels of  incremental production per                                                               
day.   However,  this will  be very  different from  the existing                                                               
production  stream;  it  will  have  to  be  managed  within  the                                                               
construct of  the existing field development,  and therefore does                                                               
require  specific   infrastructure  such   as  the   gas  partial                                                               
processing plant,  which would need  to be  built as part  of the                                                               
field's development,  and other  equipment specific  to producing                                                               
heavier oil.   This will require the employment  of a significant                                                               
number  of  people  as  these facilities  are  constructed.    He                                                               
indicated  that  this  project will  be  extremely  sensitive  to                                                               
economics because of its investment scale and complex nature.                                                                   
                                                                                                                                
MR.  UTSLER then  remarked that  the  third significant  resource                                                               
development  at Alaska's  disposal on  the North  Slope is  heavy                                                               
oil,  which  lies, largely,  over  Kuparuk,  Milne Point,  and  a                                                               
portion  of  the  western  side  of  greater  Prudhoe  Bay.    He                                                               
mentioned that  the main reservoirs  of greater Prudhoe  Bay have                                                               
approximately  25 billion  barrels of  oil  in place  as well  as                                                               
approximately  50  trillion  cubic  feet   (Tcf)  of  gas.    The                                                               
shallowest oil  - heavy oil -  is estimated to amount  to between                                                               
20  billion and  25 billion  [barrels] in  place.   He emphasized                                                               
that although heavy oil represents  a significant opportunity for                                                               
the state  and participating operators, it  is also significantly                                                               
challenged with regard to technology,  the ability to develop the                                                               
heavy oil,  and the necessity  of having  to have a  robust light                                                               
oil with which to produce the heavy oil.                                                                                        
                                                                                                                                
12:07:21 PM                                                                                                                   
                                                                                                                                
MR.  UTSLER, in  response to  a question,  relayed that  although                                                               
some heavy  oil is currently  being produced on a  limited basis,                                                               
it is  not the  heaviest of  the heavy oils,  which makes  up the                                                               
lion's share of  Alaska's heavy oil and which  is being developed                                                               
only on a trial basis.                                                                                                          
                                                                                                                                
MS. FITZPATRICK, in response to  a question, relayed that BP does                                                               
produce  some  heavy  oil  in   Venezuela,  and  that  there  are                                                               
different types of technology suitable to the task.                                                                             
                                                                                                                                
MR.  UTSLER  explained  that  the   portion  of  BP's  PowerPoint                                                               
presentation  that  members  were  now  viewing  illustrated  the                                                               
challenges  associated  with  producing   heavy  oil,  which,  in                                                               
general,  is physically  difficult  to handle  because  it is  so                                                               
thick and tar-like, particularly  under arctic conditions.  Heavy                                                               
oil is also of lower quality  and hence lower value because it is                                                               
more expensive to refine into product  that the public can use; a                                                               
barrel  of  heavy  oil  can  be discounted  as  much  as  $10-$12                                                               
compared to a barrel of light  oil.  Heavy oil is currently being                                                               
produced in California, Canada, and  other parts of the world via                                                               
the  use of  steam,  which  is an  expensive  process, and,  with                                                               
varying  rates  of  success,  via  the  use  of  other  types  of                                                               
technology.   He mentioned  that in Alaska,  at Milne  Point, the                                                               
test process  being used is  Cold Heavy Oil Production  with Sand                                                               
(CHOPS), and briefly described how  the CHOPS process is supposed                                                               
to  work.   If  this process  is to  prove  successful, it  could                                                               
require the drilling of thousands of  wells.  He offered that for                                                               
Alaska's oil resources,  the more light oil  that's available and                                                               
the longer  that light oil is  available, the more heavy  oil can                                                               
be  produced; the  faster light  oil reserves  decline, the  less                                                               
heavy oil will ever be developed.                                                                                               
                                                                                                                                
12:16:29 PM                                                                                                                   
                                                                                                                                
MR. UTSLER,  in response to  questions, relayed that  in speaking                                                               
about  the heavier  oils  that  have been  produced  thus far  in                                                               
Alaska, he  is referring to  viscous oil, not  specifically heavy                                                               
oil, and that BP is examining  some of the heavy oil technologies                                                               
being employed in the oil sands  in Alberta, Canada.  In response                                                               
to a further question, he offered  that BP is hoping to develop -                                                               
over  the long-term  - a  significant [heavy  oil] resource  base                                                               
that  could  produce  50,000-plus   barrels  per  day,  and  that                                                               
currently only about 2,000 gallons  of diesel a day are produced;                                                               
therefore, if  diesel were  to be  used as  a diluent  to produce                                                               
Alaska's  heavy oil  resource, the  state's capacity  to generate                                                               
diesel must be  massively increased.  In other  words, in Alaska,                                                               
diesel  is not  an  economically viable  diluent mechanism  under                                                               
current technologies.   He remarked that although heavy  oil is a                                                               
huge  resource   for  the  state  and   participating  operators,                                                               
bringing that resource to market  will require massive technology                                                               
and massive investment.                                                                                                         
                                                                                                                                
MR.  UTSLER  offered  that  Alaska  has  a  unique  resource  and                                                               
hydrocarbon basin;  it is  massive in  terms of  opportunity, but                                                               
because   of  its   location,  the   cost  of   developing  those                                                               
hydrocarbons  is  disadvantaged  to  most of  the  global  market                                                               
place.    On   average,  the  costs  of   acquiring  seismic  and                                                               
geotechnical data  are much  higher, it is  more costly  to drill                                                               
and develop the wells, and  the scale of infrastructure necessary                                                               
to  produce  Alaska's  fields  results   in  still  further  cost                                                               
disadvantages.   In  fact,  the  state's own  data,  in its  2007                                                               
spring  forecast,   indicates  that  per  barrel,   the  cost  of                                                               
operations,  transport, and  taxes  averages $16  as compared  to                                                               
only $10 for oil produced elsewhere in the United States.                                                                       
                                                                                                                                
MR. UTSLER, in response to  a question, offered his understanding                                                               
that according to the state's  information, each barrel of Alaska                                                               
oil costs $6.04  to transport, is subject to a  production tax of                                                               
$2.77, and has forward operating costs of about $7.75.                                                                          
                                                                                                                                
REPRESENTATIVE KAWASAKI surmised that  transportation costs are a                                                               
significant component of that $16 average.                                                                                      
                                                                                                                                
MR. UTSLER concurred.                                                                                                           
                                                                                                                                
REPRESENTATIVE KAWASAKI  noted that  despite the higher  costs of                                                               
developing Alaska  oil, BP still  reported a  significant profit.                                                               
He asked how much of that  profit could be attributed to Alaska's                                                               
resource.                                                                                                                       
                                                                                                                                
MS. FITZPATRICK said  she would be able  provide that information                                                               
later  on in  the presentation.    In response  to comments,  she                                                               
indicated that the average $16  per barrel figure provided by the                                                               
DOR  excludes the  capital costs  of producing  that barrel,  and                                                               
that  those figures  might  need to  be  crosschecked with  other                                                               
data.                                                                                                                           
                                                                                                                                
12:28:51 PM                                                                                                                   
                                                                                                                                
MS. FITZPATRICK, on the issue  of profits, relayed that for 2006,                                                               
according to  BP's U.S. Securities and  Exchange Commission (SEC)                                                               
reports,  for its  holdings  in the  U.S.,  including Alaska,  BP                                                               
showed a  profit of $6.2 billion.   She mentioned that  copies of                                                               
another  of  BP's  SEC  reports   are  forthcoming  and  will  be                                                               
distributed to members as soon as they arrive.                                                                                  
                                                                                                                                
MR.  UTSLER,  in  conclusion, offered  that  from  an  operations                                                               
perspective, the legacy fields -  greater Prudhoe Bay and Kuparuk                                                               
-  are critical  resources  for  the state  and  have many,  many                                                               
challenges if industry is to  optimize their remaining lifespans,                                                               
which BP believes to consist of  at least another 50 years.  That                                                               
future,  for greater  Prudhoe Bay,  can only  be "unlocked"  with                                                               
continued strengthening of investment,  a focus on developing new                                                               
technologies,    and    continued   application    of    existing                                                               
technologies.   Over the next 50  years, it will be  critical for                                                               
BP to  redevelop the  infrastructure and  begin focusing  more on                                                               
gas production with associated liquids.                                                                                         
                                                                                                                                
MS. FITZPATRICK offered that although  working on the North Slope                                                               
is becoming  more challenging and  more expensive, that  does not                                                               
mean that  the work  to date  has been easy.   Referring  to BP's                                                               
PowerPoint presentation,  she noted  that the 15  billion barrels                                                               
of oil  that have already been  produced is 20 percent  more than                                                               
was originally  anticipated.  Additionally, the  resources in the                                                               
existing mature  fields represent  only 70  percent of  the North                                                               
Slope's future  resource potential.   She too indicated  that the                                                               
sustained  development  of Alaska's  light  oil  is paramount  in                                                               
developing Alaska's heavy oil.                                                                                                  
                                                                                                                                
MS.  FITZPATRICK,  referring  to  BP's  PowerPoint  presentation,                                                               
relayed that it  is extremely difficult to  break down statistics                                                               
in  terms of  molecules;  that substantially  more investment  is                                                               
required than has occurred to date;  and that at least 50 percent                                                               
of the additional  investment in new developments  is coming from                                                               
heavy oil, with  the remaining 50 percent coming from  the use of                                                               
technology  and  new  discoveries   within  existing  fields  and                                                               
beyond.   With regard to  new developments, she pointed  out that                                                               
they  take  years  in  terms  of  design  and  permitting  before                                                               
actually  achieving  first  production.   She  remarked  that  70                                                               
percent  of production  for  the  next 20  years  will come  from                                                               
Prudhoe  Bay and  Kuparuk; therefore,  a key  point is  to ensure                                                               
that  the   right  investment  activity  takes   place  in  those                                                               
locations.                                                                                                                      
                                                                                                                                
12:38:56 PM                                                                                                                   
                                                                                                                                
MS.  FITZPATRICK,  referring  to  BP's  PowerPoint  presentation,                                                               
relayed  that  what  members were  now  viewing  illustrates  the                                                               
percentage  increases in  costs,  which  have increased  overall,                                                               
adding  that  this "cost  movement  with  price"  is one  of  the                                                               
reasons why  BP supports  a net  tax -  everyone is  aligned with                                                               
what's actually  happening and the  dynamics of the market.   She                                                               
added:                                                                                                                          
                                                                                                                                
     Another  factor just  to be  aware of  ... is  that for                                                                    
     companies  like  us,  we  often  enter  into  long-term                                                                    
     contracts.  So  the timing of when  cost inflation hits                                                                    
     through will  also be dependant  on when  our contracts                                                                    
     happen to  run out.   And they'll then  be renegotiated                                                                    
     based on market prices at that time.                                                                                       
                                                                                                                                
MS. FITZPATRICK  offered that [investment]  activity has  gone up                                                               
significantly on the North Slope  in terms of people working, rig                                                               
counts,  seismic activity,  and various  other activities.   When                                                               
thinking  about  costs  in  the context  of  tax,  she  observed,                                                               
although costs  are often thought of  as being bad, she  tends to                                                               
think of  costs as  being good  in a  broader economic  sense; if                                                               
money is  being spent on the  North Slope, for example,  it means                                                               
that  contractors  are being  engaged  and  they in  turn  employ                                                               
people who are then spending their  wages and in this way helping                                                               
the economy.   She  offered her understanding  that a  2001 study                                                               
indicated  that 1  percent of  employees in  Alaska are  directly                                                               
employed by the oil industry, that  12 percent of the jobs in the                                                               
private sector are attached through  the multiplier effect to the                                                               
oil industry;  and that  20 percent  of salary  and wages  in the                                                               
private sector are linked to the oil industry.                                                                                  
                                                                                                                                
MS. FITZPATRICK, in response to  a question, relayed that some of                                                               
[BP's employee]  growth in recent  years is due  to technological                                                               
advances,  contract costs,  and various  other factors;  in other                                                               
words,  a  change in  the  tax  structure  cannot be  pointed  to                                                               
specifically as  the reason for  this growth.   Furthermore, BP's                                                               
business isn't  annual -  some of  the investment  decisions that                                                               
were made  a couple of years  ago have simply taken  time to take                                                               
effect with regard to employee growth.                                                                                          
                                                                                                                                
REPRESENTATIVE RAMRAS asked how many people BP employs globally.                                                                
                                                                                                                                
MS. FITZPATRICK said 100,000-plus  employees, but noted that that                                                               
figure includes "downstream" employees.                                                                                         
                                                                                                                                
12:44:49 PM                                                                                                                   
                                                                                                                                
MR.  UTSLER indicated  that almost  10 percent  of "upstream"  BP                                                               
employees are located in Alaska.                                                                                                
                                                                                                                                
REPRESENTATIVE RAMRAS  said that that  is also indicative  of the                                                               
human  resource  component  and  its  accompanying  capital  that                                                               
[Alaska's branch of] BP competes for.                                                                                           
                                                                                                                                
MS. FITZPATRICK  concurred.  In  response to  questions regarding                                                               
BP's increased labor costs, she  indicated that for all positions                                                               
at  all  levels,  accessing, recruiting,  and  retaining  skilled                                                               
experienced  people  now  costs  more,  and  offered  to  provide                                                               
specific information  on that point.   On  the issue of  taxes as                                                               
they relate to economics, she said:                                                                                             
                                                                                                                                
     The  question ...  was  asked earlier  ...,  "How do  I                                                                    
     know,  if I  move one  percent or  two percent  of tax,                                                                    
     what's it  going to do."   Sadly, I don't have  a magic                                                                    
     answer. ... It's complex, there's  a lot things that go                                                                    
     into it.   All we can say  is that when we  look at our                                                                    
     economics, on  the very simplest level,  increasing tax                                                                    
     will  decrease the  value  of  my post-tax  investment,                                                                    
     therefore my  economics have [gotten] worse.   What I'm                                                                    
     interested in then is, ...  "Where does that then sit?"                                                                    
     There's a number of projects  which I know were already                                                                    
     marginal but were on the  right side of marginal when I                                                                    
     take into account all of the  risks.  They will all get                                                                    
     looked at  again, [though]  I can't  say, definitively,                                                                    
     where they will be.                                                                                                        
                                                                                                                                
     The other thing  to note is, when we look  at a project                                                                    
     and ...  at first light  ... it doesn't  look economic,                                                                    
     we  don't throw  our hands  up and  say that's  it; the                                                                    
     first thing  that ... [Mr.  Utsler] and his team  do is                                                                    
     ... [consider the question], "What  do we need to do to                                                                    
     make it economic?"   We work very hard at  that.  We're                                                                    
     also aware  that there is  a huge amount  of investment                                                                    
     that  we do,  that we  will continue  to do,  under the                                                                    
     terms of our lease,  to prudently develop the resource.                                                                    
     So this  is around  what's beyond  that.   [Because] 70                                                                    
     percent  of  the resource  is  in  existing fields,  70                                                                    
     percent of  the production for  the next 20  years will                                                                    
     come  from those  fields, that's  the  area that  we're                                                                    
     obviously particularly focused on  - how do we maximize                                                                    
     those investment opportunities.                                                                                            
                                                                                                                                
     Changing the  policy doesn't help; changing  the policy                                                                    
     to meet a  forecast doesn't feel like  good policy, and                                                                    
     it will  impact behaviors, not only  of incumbents, but                                                                    
     also  of people  looking to  enter Alaska.   The  other                                                                    
     thing that we've put up  there [on the presentation] is                                                                    
     not only  the 70  percent of future  investments within                                                                    
     [Prudhoe Bay]  and Kuparuk,  [but] the  floor -  the 10                                                                    
     percent gross  - when that  kicks in, will also  have a                                                                    
     significant impact  on the investment  decisions within                                                                    
     those  legacy  fields  - remembering  they're  covering                                                                    
     heavy oil, viscous oil.                                                                                                    
                                                                                                                                
     Getting the decline  to 6 percent to  start with before                                                                    
     you even start building  on it, ... that infrastructure                                                                    
     needs to  be there, not  only for the  base production,                                                                    
     it needs to be there for  the new stuff, it needs to be                                                                    
     there for  heavy [oil].   There's a whole  activity set                                                                    
     around   that  that's   beyond  just   what's  actually                                                                    
     producing barrels but which is  needed in order to make                                                                    
     the barrels the most  efficient and effective that they                                                                    
     can  be,  for  us  and   for  everyone  else  who  will                                                                    
     hopefully be on the [North Slope] in the future. ...                                                                       
                                                                                                                                
     Hopefully  our  key  points are  fairly  self-apparent.                                                                    
     This  is  about  investment,  to  stem  decline.    The                                                                    
     barrels are getting harder;  technology is needed, more                                                                    
     investment is needed.  Economics  will get worse if tax                                                                    
     increases.  The  question for me should be  not so much                                                                    
     how do  we stem decline per  se but what would  it take                                                                    
     to get a  million barrels in the pipe  from the current                                                                    
     sort of 700.  The last  point I've put up there is, the                                                                    
     current bill  ... does  create uncertainty;  this would                                                                    
     be the  third tax change  in three years which  I don't                                                                    
     need any  consultant to tell  me creates  concerns over                                                                    
     fiscal stability.                                                                                                          
                                                                                                                                
REPRESENTATIVE SAMUELS asked whether BP buys credits.                                                                           
                                                                                                                                
MS.  FITZPATRICK said  it  is  not corporate  policy  to buy  tax                                                               
credits.   In  response  to a  question regarding  transportation                                                               
costs, she  said that when  BP is  looking at its  projects, it's                                                               
looking at them purely from an  upstream perspective.  There is a                                                               
requirement,  under  the  Federal  Energy  Regulatory  Commission                                                               
(FERC) regulations,  to have [firewalls].   So there is a  lot of                                                               
information  regarding BP's  business  and its  interests in  the                                                               
TAPS  that  certain employees  will  know  about but  that  other                                                               
employees won't know  about; for example, there  is a requirement                                                               
that  shippers   and  producers  are   not  privy  to   the  same                                                               
information.                                                                                                                    
                                                                                                                                
12:54:46 PM                                                                                                                   
                                                                                                                                
MS.  FITZPATRICK, in  response  to  another question,  reiterated                                                               
that  of the  resource  base  that is  yet  to  be developed,  70                                                               
percent  is in  the known  fields,  and that  when viewing  where                                                               
production is  coming from  for the next  20 years,  according to                                                               
the DNR's forecast, 70 percent of  that appears to be coming from                                                               
Prudhoe Bay and Kuparuk.                                                                                                        
                                                                                                                                
REPRESENTATIVE  RAMRAS   asked  who  is  ultimately   making  the                                                               
decisions  regarding Alaska.   He  said he  is interested  in how                                                               
minor tax-policy  changes affect  the behavior  of those  who are                                                               
ultimately making  the decision to  go forward with  a particular                                                               
project.                                                                                                                        
                                                                                                                                
MS. FITZPATRICK said  such decisions are made  at various levels.                                                               
For example, with  regard to a proposed project  in Alaska, after                                                               
the  planning  process is  complete  and  the parameters  of  the                                                               
project are given,  the decisions can be made within  Alaska by a                                                               
collective  leadership  team.   So  while  the president  of  the                                                               
company ultimately makes the final  decision, he/she looks to the                                                               
Alaska team to see what  its members collectively think about the                                                               
proposed  project in  terms of  whether it  will be  good for  BP                                                               
Alaska.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  whether BP  finances projects  from                                                               
earnings, and  how does  Alaska compete  for those  earnings that                                                               
could  then  be  re-circulated   into  Alaska's  oil  fields  and                                                               
economy.                                                                                                                        
                                                                                                                                
12:59:55 PM                                                                                                                   
                                                                                                                                
MS. FITZPATRICK  explained that the  BP group sets  its financial                                                               
framework  based on  its strategic  objectives.   This  financial                                                               
framework  will include  how much  [the BP  group] believes  it's                                                               
appropriate to be reinvesting capital  globally across its entire                                                               
business.   It's not  a definitive  number to  the dollar  - it's                                                               
usually a  range.  Within that,  the group then looks  to see how                                                               
it  wants to  allocate  [resources]  in terms  of  global risk  -                                                               
whether with regard  to refining and marketing or  with regard to                                                               
exploration and  production - and  where it wants  its geographic                                                               
risk spread.   For the  Alaska project,  the group is  looking at                                                               
very different  strategic objectives than  it would be for  a new                                                               
project   elsewhere  in   the  world.     With   regard  to   the                                                               
exploration/production  segment,  BP   still  operates  within  a                                                               
financial framework.   She added:   "When we go forward  with our                                                               
annual plans  and our  five-year plans,  it's within  the context                                                               
of,  what [is]  the  exploration/production  division looking  to                                                               
achieve, and how does that fit with the group strategy."                                                                        
                                                                                                                                
MS.  FITZPATRICK said  that  BP  has a  financial  strategy of  a                                                               
certain band of  debt that it will have  as debt-to-equity ratio,                                                               
and that  will move up  and down  depending on what  happens with                                                               
[the company's]  cash-flow generation.   Some of  [the company's]                                                               
cash  is  used  for  repurchasing  shares,  though  the  decision                                                               
regarding how  many shares  are repurchased and  when is  done as                                                               
part of a global and group policy;  it's not done on the basis of                                                               
individual earnings  from any particular  location, it's  done in                                                               
the  aggregate.    Getting  funding for  the  Alaska  project  is                                                               
dependant upon the  [Alaska team's] being able to  put together a                                                               
compelling  business  plan  which illustrates  that  the  project                                                               
would constitute  a good investment  for BP on both  a short-term                                                               
basis and a long-term basis.  She added:                                                                                        
                                                                                                                                
     We have put together what  we believe is a good 50-year                                                                    
     future  strategic view.   And  certainly, as  I've said                                                                    
     earlier, my ability to go  back and defend that will be                                                                    
     impacted by  my ability to  say, "This is what  we said                                                                    
     is going to happen, and this is what will happen."                                                                         
                                                                                                                                
REPRESENTATIVE  DOOGAN asked  how,  if taxes  are increased,  the                                                               
legislature will know whether doing so  was a mistake in terms of                                                               
BP's investment strategy.                                                                                                       
                                                                                                                                
MS. FITZPATRICK  said that such  cannot be known until  after the                                                               
event; for  example, in  five years  time, the  legislature could                                                               
come   to  realize   that  investment   was   not  generated   as                                                               
anticipated.   "We believe it's  too soon  to look at  this," she                                                               
remarked, particularly  given that BP  has not had an  audit yet.                                                               
So although  investment has  increased, the  ultimate goal  is to                                                               
keep investment  going as opposed  to making a change  that could                                                               
cause  things to  go the  other way.   Noting  that BP  does have                                                               
contractual obligations, she indicated that  she is not saying BP                                                               
won't invest, but there will be  issues "at the margin" that will                                                               
have to be considered very carefully.                                                                                           
                                                                                                                                
1:05:04 PM                                                                                                                    
                                                                                                                                
MS.  FITZPATRICK, in  response to  comments,  suggested that  the                                                               
best way  [for members] to evaluate  the situation is to  look at                                                               
what they are trying to achieve  - for example, more investment -                                                               
and  consider  whether the  proposed  changes  will achieve  that                                                               
goal.   Members could  also look at  the production  forecast put                                                               
together by  the DNR, for  example, as  well as at  some external                                                               
factors.    "The  fundamentals  for  me  on  the  economics  are,                                                               
increasing  taxes  will  decrease the  economics;  therefore,  by                                                               
default,  some  of   the  projects  are  going   to  become  more                                                               
marginal," she added.                                                                                                           
                                                                                                                                
REPRESENTATIVE NEUMAN  asked whether  BP has  an estimate  of how                                                               
many barrels of oil will be going  down the TAPS in 10 years, and                                                               
what  conversations is  BP having  with  the administration  with                                                               
regard to oil, gas, and the future of Alaska.                                                                                   
                                                                                                                                
MR. UTSLER offered  that if there is a 6  percent rate of decline                                                               
over  the next  8-10 years,  that would  result in  approximately                                                               
350,000 barrels  [per year] going  through the TAPS;  this amount                                                               
constitutes a  critical threshold  for the  TAPS, thus  risking a                                                               
shutdown.  He surmised, though,  that "the TAPS' ownership" would                                                               
have  been  working  to  address   options  before  any  shutdown                                                               
actually occurred.   He mentioned that  BP is willing to  talk to                                                               
[the administration] about the facts  as BP understands them, and                                                               
has been speaking  with the AOGCC and the DNR  about its plans of                                                               
development.                                                                                                                    
                                                                                                                                
MS.  FITZPATRICK  added  that  BP is  not  currently  having  any                                                               
conversations with  the administration regarding a  gas pipeline,                                                               
and that  BP was very  open and transparent,  at the time  of the                                                               
Alaska Gasline Inducement  Act (AGIA), when it said  it would not                                                               
be able to make a conforming bid.                                                                                               
                                                                                                                                
MR.  UTSLER,  in  response to  comments,  acknowledged  that  if,                                                               
internally,  the decision  is made  to not  advance a  particular                                                               
project - whether it be  because of Alaska's proposed tax changes                                                               
or some other reason - the reasons  for not doing so may not ever                                                               
be made known to the public.                                                                                                    
                                                                                                                                
MS. FITZPATRICK,  in response to  further comments,  offered that                                                               
the only answer that might become  available would be in the form                                                               
of an  economic model,  which would  be known to  be wrong.   She                                                               
added,  "Yes,   you're  absolutely   right,  you'll   never  know                                                               
definitively;  what you  can know  (indisc.) it's  a risk  you're                                                               
taking  and it's  around pace  and scale."   Generally  speaking,                                                               
projects don't just disappear; rather,  they simply get revisited                                                               
if they are not initially gone forward with.                                                                                    
                                                                                                                                
1:14:38 PM                                                                                                                    
                                                                                                                                
MR. UTSLER spoke  of some of the projects  that Alaska's projects                                                               
will be  competing against, adding  that more than twice  as much                                                               
investment is  occurring in the Lower  48 and Alberta -  and more                                                               
than  five  times  as much  in  the  Gulf  of  Mexico -  than  is                                                               
occurring  in Alaska.   There  are many  factors responsible  for                                                               
these  differences  in  investment  amounts, though  one  is  the                                                               
disadvantaged price  of Alaska's  barrels of  oil and  another is                                                               
Alaska's already existing "significantly higher tax structure."                                                                 
                                                                                                                                
MS.  FITZPATRICK  offered that  based  on  upstream numbers,  the                                                               
total capital  spending "on EMP" for  2006 for the U.S.  was $4.5                                                               
billion.                                                                                                                        
                                                                                                                                
REPRESENTATIVE SAMUELS  noted that  the economic  consequences of                                                               
being  wrong  with regard  to  the  proposed tax  increases  will                                                               
affect his  constituents, and yet the  legislature won't actually                                                               
know what  those consequences are,  or whether the  taxes imposed                                                               
are too high or too low.                                                                                                        
                                                                                                                                
CHAIR  OLSON  offered  his  understanding   that  BP  has  global                                                               
development projections going out at least 50 years.                                                                            
                                                                                                                                
MS. FITZPATRICK offered that BP has  a variety of views going out                                                               
over a very  long period of time and they  are [being considered]                                                               
at the  strategic level.   In  response to  a question,  she said                                                               
BP's view on Alaska covers the next 50 years.                                                                                   
                                                                                                                                
The committee took an at-ease from 1:19 p.m. to [2:37] p.m.                                                                     
                                                                                                                                
2:37:29 PM                                                                                                                    
                                                                                                                                
KEVIN  MITCHELL,   Vice  President,  Finance   &  Administration,                                                               
ConocoPhillips   Alaska,   Inc.,   referring  to   a   PowerPoint                                                               
presentation,  first  relayed  that ConocoPhillips  Alaska,  Inc.                                                               
("ConocoPhillips") is  the largest oil producer,  the largest gas                                                               
producer,  and  the  largest holder  of  exploration  acreage  in                                                               
Alaska, adding  that the company is  also a very sizable  tax and                                                               
royalty  payor in  Alaska;  has  a major  position  in all  major                                                               
sectors of  the oil and  gas industry in Alaska  - ConocoPhillips                                                               
is heavily involved in the Prudhoe  Bay area, is an operator with                                                               
a significant  ownership interest  in the Kuparuk  area, operates                                                               
the western  North Slope with  sizable ownership interest  in the                                                               
various satellites  to the  Alpine field, is  in the  Cook Inlet,                                                               
and  is  active  in  exploration;  has  been  in  the  state  for                                                               
approximately  50  years;  and  will  continue  to  maintain  its                                                               
presence  in  the  state  because Alaska  is  very  important  to                                                               
ConocoPhillips.                                                                                                                 
                                                                                                                                
MR.  MITCHELL  offered his  belief  that  ConocoPhillips and  the                                                               
state are both seeking to nurture  the growth of the industry and                                                               
progress its future because, as  history has shown, when industry                                                               
is successful, so too is  the state, and when industry struggles,                                                               
so too does  the state.  He said it  is ConocoPhillips' view that                                                               
it is too early  to change the PPT legislation -  there are a lot                                                               
of unanswered  questions regarding its  performance - and  that a                                                               
review of that  legislation should be held  only after sufficient                                                               
time has  passed and there  is then  adequate data from  which to                                                               
draw some conclusions.   The uncertainty created  by changing tax                                                               
legislation  on  a frequent  basis  cannot  be [overstated],  and                                                               
although investment decisions are not  made entirely on the basis                                                               
of  the tax  structure, this  uncertainty becomes  a risk  factor                                                               
during the  investment evaluation process.   The potential impact                                                               
of the proposed bill on  investment is the most significant point                                                               
to consider, particularly with regard to the legacy fields.                                                                     
                                                                                                                                
MR.   MITCHELL,  referring   to   a  chart   in  his   PowerPoint                                                               
presentation,  indicated  that  it  illustrates  three  different                                                               
revenue  projections  for 2007.    The  first  one, by  the  DOR,                                                               
represents the revenue the state  would have received had the ELF                                                               
still  been  in  place  -  around $.5  billion;  the  second  one                                                               
represents what the  PPT's fiscal note projected  the state would                                                               
receive  - a  little  bit under  $2 billion;  and  the third  one                                                               
represents  the  DOR's  projection   of  revenue  under  the  PPT                                                               
legislation -  a little bit over  $2 billion.  He  explained that                                                               
the  differences between  the actual  revenue received  under the                                                               
PPT legislation and  the projected revenue were  due to increased                                                               
costs as well  as many other variables, and surmised  that in any                                                               
given case,  the actual revenue  will never equal  the forecasted                                                               
revenue,  because such  forecasts are  based on  inputs regarding                                                               
price, production, operating costs,  and capital costs, and these                                                               
inputs generally  end up being  inaccurate.   In the case  of the                                                               
PPT legislation forecast,  for example, it showed  the effects of                                                               
changing prices,  but did  not reflect any  changes to  the other                                                               
aforementioned components.                                                                                                      
                                                                                                                                
2:46:46 PM                                                                                                                    
                                                                                                                                
MR.  MITCHELL relayed  that in  general, ConocoPhillips  supports                                                               
the  additional  transparency  provided   for  in  HB  2001,  and                                                               
understands the need for the DOR and  the DNR to be able to share                                                               
information.   There are  some concerns  with the  bill, however.                                                               
In the context  of exploration, the bill allows the  DOR to share                                                               
all information with  the DNR without exception, and  so there is                                                               
some degree  of confidentiality concern with  regard to non-state                                                               
lands.    The  DOR  has   information  on  all  lands  -  private                                                               
corporation lands and federal lands  - and the DNR is responsible                                                               
for managing state  lands and, to some degree,  is in competition                                                               
with those federal  and private corporation lands;  thus there is                                                               
a potential conflict  of interest with regard to  sharing data to                                                               
the extent outlined in the bill.                                                                                                
                                                                                                                                
MR.  MITCHELL,   with  regard  to   the  process   pertaining  to                                                               
exploration  credits, relayed  that the  DNR  is able  to make  a                                                               
determination of a well's geological  success before granting the                                                               
credit, but  the appropriate data  must be provided prior  to the                                                               
granting of that  credit - and thus prior to  the final auditing.                                                               
So a company  gives up information before it knows  for sure that                                                               
it will be receiving the credit,  and this feels a bit one-sided,                                                               
he  remarked.   Furthermore, the  exploration credit  application                                                               
waives confidentiality  rights, and  hence there is  some concern                                                               
that a company would choose not  to apply for a credit because it                                                               
would   prefer   to   keep  certain   information   confidential;                                                               
therefore, this waiver could be  viewed as an added impediment to                                                               
exploration activity.                                                                                                           
                                                                                                                                
MR.  MITCHELL offered,  therefore, that  HB 2001  does have  some                                                               
provisions  that make  it slightly  less attractive  to explorers                                                               
than the PPT legislation was.                                                                                                   
                                                                                                                                
MR.   MITCHELL   in  response   to   a   question,  offered   his                                                               
understanding  that  HB  2001   contains  language  allowing  the                                                               
administration to  request whatever "other information"  it deems                                                               
necessary to accomplish its goals.   A concern with this language                                                               
is that the bill also contains  a penalty, on the order of $1,000                                                               
per day, for  every day the requested "other  information" is not                                                               
provided.   In response  to another  question, he  indicated that                                                               
the concern centers  on the fact that that  "other information" -                                                               
whether  it be  confidential information  or not  - might  not be                                                               
easily gathered within  the set time limit before  the $1,000 per                                                               
day penalty starts applying.                                                                                                    
                                                                                                                                
MR. MITCHELL, on the issue of forecast data, said:                                                                              
                                                                                                                                
     As an industry, we  typically are very nervous whenever                                                                    
     we  get  into  any  discussions  around  providing  our                                                                    
     projections  and forecasts  anywhere other  than within                                                                    
     our own corporate entities, and  what we would plead is                                                                    
     that  ...  those  requests are  limited  to  that  same                                                                    
     information that is provided to  partners in our unit -                                                                    
     unit operations.   That is  information that  is shared                                                                    
     anyway, and  I don't believe ...  any other participant                                                                    
     in  the industry  here in  Alaska would  have too  much                                                                    
     concern  over sharing  that same  information.   And we                                                                    
     would  like to  see those  specifics contained  [in the                                                                    
     bill]  ..., and  stay  away  from other  corporate-type                                                                    
     projections and information.                                                                                               
                                                                                                                                
2:55:55 PM                                                                                                                    
                                                                                                                                
MR.  MITCHELL, in  response to  comments and  a question,  opined                                                               
that the  bill's language allowing the  administration to request                                                               
"other information" is written very  broadly.  He then noted that                                                               
the  bill also  extends the  statute of  limitations "for  audit"                                                               
from  three years  to  six  years.   If  the  department were  to                                                               
utilize  this proposed  new statute  of limitations  to its  full                                                               
extent, "by 2011,  when that review is scheduled  to be complete,                                                               
they, in  theory, might not be  through one audit in  that time,"                                                               
he offered; this  proposed change could mean that  the results of                                                               
a first  audit might not be  available until 2012.   On the issue                                                               
of cost deductibility, he  said that the PPT was set  up on a net                                                               
profit   approach,  and   this  follows   the  federal   code  in                                                               
determining  what  expenses are  allowable  as  deductions -  the                                                               
terminology  that's  used  is  something   along  the  lines  of,                                                               
"ordinary  and  necessary  expenses"  in  the  operation  of  the                                                               
business.   Adoption  of those  federal standards  has simplified                                                               
the  lives  of the  producers  because  they already  follow  the                                                               
federal code  when preparing their  financial statements  and tax                                                               
returns.                                                                                                                        
                                                                                                                                
MR. MITCHELL  said that  a deviation  from those  standards could                                                               
add another layer of complexity  to what is currently being done,                                                               
and this impacts ConocoPhillips as an  industry and the DOR as it                                                               
goes through  the audit process.   House Bill 2001,  in contrast,                                                               
is proposing that  the regulatory agency - the DOR  - define what                                                               
deductions are allowable; this will  create a lot of uncertainty,                                                               
he opined.   In addition, the bill contains  a provision allowing                                                               
the  DOR to  issue  nonbinding advisory  bulletins regarding  its                                                               
interpretation  of  AS  43.55;  this  takes  away  any  assurance                                                               
regarding how  the information provided  in such a  bulletin will                                                               
be treated by  the auditor.  This has  also engendered discussion                                                               
regarding whether  the producers  would simply claim  the maximum                                                               
amount of expenditures  possible and then battle  out the details                                                               
during the  audit process; however,  while currently there  is no                                                               
penalty  for doing  such, the  interest  accrued on  over-claimed                                                               
expenditures  is a  minimum  of  11 percent  per  year, and  this                                                               
accrued interest and any subsequent  penalties would constitute a                                                               
significant additional  financial burden, particularly  given the                                                               
bill's proposed six-year statute of limitations.                                                                                
                                                                                                                                
3:02:10 PM                                                                                                                    
                                                                                                                                
MR.  MITCHELL referred  to "exclusions  for cost  deductibility,"                                                               
one of which is the  exclusion of maintenance that is unscheduled                                                               
and  that  results  in  an   interruption  of  production.    Any                                                               
exclusion,  he opined,  adds complexity  to the  legislation, and                                                               
this particular  exclusion could  potentially create  an auditing                                                               
nightmare and  does not reflect  the reality of producing  oil on                                                               
the  North  Slope.    This  exclusion  is  for  maintenance  that                                                               
ultimately brings  production back  online, and therefore  is the                                                               
very type  of expenditure that  should be the  most incentivized.                                                               
All the exclusions [from cost  deductions], he surmised, penalize                                                               
the very maintenance and repair  activities that are necessary to                                                               
bring  production  back on  line  as  quickly  as possible.    In                                                               
addition, the  bill contains a retroactive  provision stipulating                                                               
that the  cost of any such  maintenance occurring as far  back as                                                               
April 1, 2006, can not be used as  a deduction; he said he is not                                                               
sure  how practical  or  possible  such a  provision  will be  to                                                               
implement.                                                                                                                      
                                                                                                                                
MR. MITCHELL noted  that there is an  exclusion for dismantlement                                                               
costs.    Dismantlement costs  are  those  expenditures that  are                                                               
necessary  at the  end  of an  asset's life;  they  are meant  to                                                               
return the site  to the condition it  was in prior to  any of the                                                               
[oil and gas] activity having  occurred there.  This a legitimate                                                               
cost, the companies are required  to undertake this activity, and                                                               
this  cost was  listed as  an allowable  deduction under  the PPT                                                               
legislation.   To first allow  such costs  to be deducted  and to                                                               
then preclude  such costs  is another  "item" of  instability, he                                                               
remarked.                                                                                                                       
                                                                                                                                
MR. MITCHELL,  in response  to a  comment and  question, remarked                                                               
that  under  the  PPT legislation,  the  "abandonment  allowance"                                                               
could be accrued on an ongoing  basis from the present to the end                                                               
of  the field's  life,  and that  everything that  ConocoPhillips                                                               
would deduct as  a lease operating cost are those  costs that are                                                               
incurred as  operator of  the Kuparuk area,  and all  those costs                                                               
are shared among the various unit owners.                                                                                       
                                                                                                                                
3:08:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SAMUELS  questioned   whether   the  state,   in                                                               
accessing that  shared cost  information via  one of  the owners,                                                               
then has access  to that information as it pertains  to the other                                                               
owners.                                                                                                                         
                                                                                                                                
MR.  MITCHELL indicated  that it  did.   Referring  again to  his                                                               
PowerPoint presentation, to the  issue of cost deductibility, and                                                               
to  the crude  oil topping  plant at  Kuparuk, he  explained that                                                               
currently there is  a significant amount of diesel  being used on                                                               
the  North Slope,  and noted  that both  Prudhoe Bay  and Kuparuk                                                               
have their own  topping plants and manufacture  their own diesel.                                                               
Both  state   and  the  Environmental  Protection   Agency  (EPA)                                                               
regulations  will require  the  use of  ultra  low sulfur  diesel                                                               
(ULSD),  and ConocoPhillips  has evaluated  various options  that                                                               
would  allow it  to meet  those  requirements.   The company  has                                                               
concluded that  the most effective  way of meeting the  needs for                                                               
ULSD on the  North Slope is to upgrade the  plant at Kuparuk with                                                               
a  Hydrotreater  so  as  to  be  able  to  meet  the  low  sulfur                                                               
specifications.   That  project  [will  cost] approximately  $300                                                               
million,   and,   at   its  construction   peak,   could   employ                                                               
approximately  300  people.   The  alternative  to building  this                                                               
plant  is to  transport/import the  necessary fuel  to the  North                                                               
Slope either from somewhere else in  Alaska or from the Lower 48;                                                               
he surmised  that this  alternative would not  be the  most cost-                                                               
effective option to pursue.                                                                                                     
                                                                                                                                
MR. MITCHELL,  in response  to comments  and a  question, offered                                                               
his  understanding  that if  the  company  were  to use  fuel  it                                                               
manufactured  on site,  it would  not  be allowed  to deduct  the                                                               
purchase price  of the  fuel, but if  the company  purchased fuel                                                               
from another source,  the cost of that purchase  is deductible as                                                               
an expense.  The company's  concern, he indicated, is whether the                                                               
cost  of [building  the Hydrotreater  and] upgrading  the current                                                               
facility so as  to produce ULSD would be  considered an allowable                                                               
expense and  thereby be eligible  for a  credit.  In  response to                                                               
another question,  he said that  if that credit  isn't available,                                                               
then  ConocoPhillips will  simply  resort to  importing fuel  and                                                               
deducting the cost of its purchase.                                                                                             
                                                                                                                                
3:15:14 PM                                                                                                                    
                                                                                                                                
JIM  TAYLOR, Vice  President,  Commercial Assets,  ConocoPhillips                                                               
Alaska,  Inc., added  that  ConocoPhillips  has worked  carefully                                                               
with refiners  so as to  be able meet  the EPA's standards.   The                                                               
proposed  plant is  designed to  meet  industry requirements  and                                                               
those of any existing local market.   If, through the building of                                                               
the Hydrotreater, the company has  the ability to produce what it                                                               
needs locally while also complying  with the spirit of law, which                                                               
is to reduce  emissions, then to not build  the Hydrotreater will                                                               
increase  the   demand  for  the   product  and  the   amount  of                                                               
importation traffic,  thus causing emissions to  increase as well                                                               
as  risk.   Building the  Hydrotreater is  not intended  to allow                                                               
industry to set prices.                                                                                                         
                                                                                                                                
REPRESENTATIVE  SAMUELS  asked  whether  there  are  any  federal                                                               
credits available for that project.                                                                                             
                                                                                                                                
MR. MITCHELL said he is not aware of any.                                                                                       
                                                                                                                                
MR. TAYLOR, in response to  a question, offered his understanding                                                               
that the  future demand for  ULSD will  be about 700  barrels per                                                               
day at Kuparuk,  and about 1,000 barrels per day  at Prudhoe Bay.                                                               
He also offered to provide further details on that point.                                                                       
                                                                                                                                
MR.  MITCHELL added  that those  numbers  translate into  roughly                                                               
100,000 gallons of  ULSD per day.  In response  to a question, he                                                               
offered  that ConocoPhillips's  assumptions  are  that the  local                                                               
market is  competitive without  the tax break,  and that  this is                                                               
slightly preferable from an economic standpoint.                                                                                
                                                                                                                                
CHAIR  OLSON noted  that Tesoro  Alaska  Company ("Tesoro")  just                                                               
completed  a  similar  facility for  approximately  $200  million                                                               
"with no tax break, and they seem to be making money."                                                                          
                                                                                                                                
MR. MITCHELL indicated  that building something in  Kenai is very                                                               
different,  in   terms  of  construction  costs,   from  building                                                               
something on the North Slope.                                                                                                   
                                                                                                                                
CHAIR  OLSON surmised  that ConocoPhillips  is seeking  a similar                                                               
cost advantage by adding to an already existing facility.                                                                       
                                                                                                                                
MR. MITCHELL concurred.  In  response to a question, he indicated                                                               
that if ConocoPhillips  didn't build a Hydrotreater  on the North                                                               
Slope, the ULSD that it would  need would have to originally come                                                               
from the  Tesoro facility and  would then  have to be  trucked in                                                               
from Fairbanks.                                                                                                                 
                                                                                                                                
REPRESENTATIVE DOOGAN  surmised that Tesoro would  have to expand                                                               
its present facility - without  receiving any state tax credits -                                                               
in  order  to meet  future  demands  on  the North  Slope  should                                                               
ConocoPhillips and BP not build the aforementioned Hydrotreater.                                                                
                                                                                                                                
MR. TAYLOR concurred.                                                                                                           
                                                                                                                                
3:23:35 PM                                                                                                                    
                                                                                                                                
MR.  MITCHELL, referring  to his  PowerPoint presentation,  noted                                                               
that the  PPT provided  for transitional  investment expenditures                                                               
(TIE)  credits, which  recognize investments  made under  a prior                                                               
tax  structure, and  are meant  to provide  equity and  stability                                                               
with regard to  the treatment of expenditures.   Removal of these                                                               
TIE credits,  as HB  2001 proposes  to do,  will hurt  those very                                                               
companies  that have  been  actively investing  in  Alaska.   One                                                               
example of  where this change will  have an effect is  the "Fiord                                                               
development," which is an "Alpine  satellite."  He explained that                                                               
on the chart  members are now viewing, "the  blue bars" represent                                                               
capital  investment, and  "the red  line" represents  production.                                                               
Most of the capital investment  in the Fiord development was made                                                               
prior to  the enactment of  the PPT legislation, when  taxes were                                                               
calculated under the ELF, but  when production comes on line, the                                                               
company will be paying tax under the higher PPT rate.                                                                           
                                                                                                                                
MR.  TAYLOR offered  that the  "10 percent  gross floor"  can and                                                               
will impact investors'  views and risk tolerance  for the future,                                                               
will  affect companies'  planning  processes, and  can come  into                                                               
play in both  high- and low-price environments.   Preservation of                                                               
an  investment  climate in  the  legacy  fields is  an  important                                                               
attribute of keeping oil in the  pipeline.  He explained that the                                                               
chart members  are now  viewing uses  information from  the DOR's                                                               
spring revenue forecast,  and said that it  will take significant                                                               
capital to curb a 15 percent rate of decline in production.                                                                     
                                                                                                                                
MR. TAYLOR  pointed out that resource  developers inventory their                                                               
opportunities  on a  regular basis  as  a part  of their  ongoing                                                               
planning process, and  offered that a "company hurdle  rate" is a                                                               
function of the  risk associated with an investment  and can vary                                                               
from company to  company.  This rate is  something investors also                                                               
consider when deciding  what order to make  their investments in.                                                               
A tax change,  particularly if such changes  are made frequently,                                                               
will  cause investors  to take  a  different view  of their  risk                                                               
tolerance, and marginal projects could be delayed.                                                                              
                                                                                                                                
MR.   MITCHELL,  in   response   to  a   question,  offered   his                                                               
understanding  that "Pioneer"  obtained  royalty incentives  from                                                               
the  state that  allowed it  to  move forward  with a  particular                                                               
project.                                                                                                                        
                                                                                                                                
MR. TAYLOR, in response to  comments, acknowledged that different                                                               
investors  have different  risk  tolerances,  and will  therefore                                                               
make different  decisions regarding which projects  to go forward                                                               
with; there  are many factors  that go into a  company's analysis                                                               
of whether to go forward with a project.                                                                                        
                                                                                                                                
3:38:46 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS  asked  whether a  larger  company  needs                                                               
"larger finds."                                                                                                                 
                                                                                                                                
MR. TAYLOR  reiterated that there  are a variety of  factors that                                                               
can motivate an investor to pursue a particular project.                                                                        
                                                                                                                                
MR. MITCHELL clarified that ConocoPhillips  still has an interest                                                               
in smaller, incremental projects.                                                                                               
                                                                                                                                
MR. TAYLOR, referring to a  chart in the PowerPoint presentation,                                                               
offered that  it illustrates  that the  "10 percent  gross floor"                                                               
can  impact investment  in six  specific  marginal projects,  and                                                               
said  that it  could  put at  risk between  $3.5  billion and  $4                                                               
billion in investments.                                                                                                         
                                                                                                                                
MR. MITCHELL,  in response to  comments and questions,  said that                                                               
two things  could trip  the 10  percent floor  - lower  prices or                                                               
higher  costs;  both have  the  effect  of reducing  the  taxable                                                               
margin.                                                                                                                         
                                                                                                                                
MR. TAYLOR, in  response to comments, made references  to a chart                                                               
members  had  looked  at  on   a  different  day,  and  said  his                                                               
conclusion is that none of the  projects listed on that chart are                                                               
economic at $40 per barrel.  He went on to say:                                                                                 
                                                                                                                                
     Costs are higher.  The  reserves are more challenged to                                                                    
     get because  they're not the  conventional, traditional                                                                    
     light oil developments of the  past; they're heavy oil,                                                                    
     they require steam in many  cases, and they're far more                                                                    
     complex  to  recover  [and  they]   require  a  lot  of                                                                    
     directional,  horizontal  wells.  ...  The  [costs]  to                                                                    
     develop  those  projects  are  much  higher.    And  so                                                                    
     anything  that  is  going  to add  more  risk  or  more                                                                    
     taxation  is going  to erode  and  make those  projects                                                                    
     riskier.   So what I  showed you  here in a  color code                                                                    
     was something  that probably more resembles  the $50 to                                                                    
     $60 oil price.   It shows that there  are some projects                                                                    
     that  can be  done.   But there  are projects,  though,                                                                    
     that  should   the  attributes   of  the   bill  that's                                                                    
     currently  being  evaluated  be  passed,  could  render                                                                    
     those uneconomic at this time.                                                                                             
                                                                                                                                
MR. TAYLOR, in response to a  question, said that when capital is                                                               
pulled  out  of  the  system   fairly  rapidly,  production  also                                                               
declines  fairly  rapidly.    He   offered  that  the  PowerPoint                                                               
presentation illustrates that the  largest potential that remains                                                               
on  the North  Slope  under current  projects  exists inside  the                                                               
legacy fields.   Preserving that  investment environment  is very                                                               
important, not  only for investors  but also  for the state.   He                                                               
said that  ConocoPhillips believes that  it is too early  to make                                                               
changes  to  the PPT  legislation,  particularly  given that  the                                                               
uncertainty of  frequent tax changes  does alter  investors' risk                                                               
tolerance.  Increased taxation erodes  after-tax cash flow, which                                                               
in  turn impedes  a company's  ability to  reinvest, and  the "10                                                               
percent legacy floor"  is a disincentive to investment  in both a                                                               
low-price  environment and  in an  opportunistic high  investment                                                               
environment, he concluded.                                                                                                      
                                                                                                                                
MR.   MITCHELL,   in   response   to  a   question,   said   that                                                               
ConocoPhillips does purchase credits.                                                                                           
                                                                                                                                
3:58:16 PM                                                                                                                    
                                                                                                                                
MR.  TAYLOR,  in response  to  a  further question,  offered  his                                                               
belief that there is good  resource potential on the North Slope,                                                               
though  there  are  challenges  with regard  to  the  pursuit  of                                                               
technology, the  addressing of  the heavy  oil reserves,  and the                                                               
continuation  of  a   healthy  price  forecast.     The  rate  of                                                               
production  over the  next 10  years will  depends on  the amount                                                               
that  investors  are willing  to  risk  and  pursue, and  with  a                                                               
healthy investment environment and  a returning of investments in                                                               
the legacy assets, there is a lot of potential.                                                                                 
                                                                                                                                
REPRESENTATIVE  NEUMAN  asked   whether  ConocoPhillips  has  had                                                               
discussions with  the administration regarding the  future of oil                                                               
and gas in Alaska.                                                                                                              
                                                                                                                                
MR. TAYLOR said that ConocoPhillips is very open to such                                                                        
discussions, but is not currently involved in any specific                                                                      
negotiations.                                                                                                                   
                                                                                                                                
The committee took an at-ease from 4:00 p.m. to 4:20 p.m.                                                                       
                                                                                                                                
4:20:18 PM                                                                                                                    
                                                                                                                                
KEN  THOMPSON, Managing  Director, Alaska  Venture Capital  Group                                                               
(AVCG) LLC,  paraphrased from his  written testimony,  which read                                                               
in   part  [original   punctuation  provided   along  with   some                                                               
formatting changes]:                                                                                                            
                                                                                                                                
     I am  the Managing Director for  Alaska Venture Capital                                                                    
     Group,  or AVCG  LLC,  an  independent oil  exploration                                                                    
     company formed with a sole  focus on the North Slope of                                                                    
     Alaska.  AVCG is a  privately held member LLC comprised                                                                    
     of private  equity investors made up  of 15 independent                                                                    
     oil and  gas companies and individuals  from Kansas and                                                                    
     me as an owner/member partner  from Alaska.  AVCG has a                                                                    
     technical and operational  services' subsidiary company                                                                    
     called Brooks  Range Petroleum, with offices  and staff                                                                    
     in Anchorage.   In  Alaska and on  the North  Slope, we                                                                    
     operate under the name Brooks Range Petroleum.                                                                             
                                                                                                                                
     AVCG has lease holdings  and explores currently only in                                                                    
     Alaska...and   nowhere   else.      AVCG/Brooks   Range                                                                    
     Petroleum likes  to think of  our company  as "Alaska's                                                                    
     Independent Oil and Gas Company."                                                                                          
                                                                                                                                
     AVCG LLC has  been very active in the  past seven North                                                                    
     Slope  areawide lease  sales  and  active in  acquiring                                                                    
     acreage   held  by   other  companies   where  we   see                                                                    
     potential.   We  and our  partners currently  hold over                                                                    
     300,000   acres   of   exploration   leases   in   five                                                                    
     exploration  prospect   areas  on   the  Slope.     Our                                                                    
     exploration strategy is to explore  in the central part                                                                    
     of the  North Slope for  fields in the  10-100+ million                                                                    
     barrels range,  fields that  may be  too small  for the                                                                    
     giant producers  but satisfy as  niche fields  that can                                                                    
     be  "company  makers"  for a  small  independent.    We                                                                    
     believe there are hundreds of  millions if not billions                                                                    
     of barrels  of oil left  on the central North  Slope in                                                                    
     smaller  fields of  this  size  for small  independents                                                                    
     like ours  that want to  take this type  of exploration                                                                    
     risk.                                                                                                                      
                                                                                                                                
     Last year, AVCG LLC  announced joint venture agreements                                                                    
     with  two Canadian  independents, TG  World Energy  and                                                                    
     Bow  Valley  Energy,  and with  a  private  exploration                                                                    
     company from Houston,  Ramshorn Exploration.  Together,                                                                    
     as  working interest  co-owners  we  are exploring  the                                                                    
     central part of the North Slope.                                                                                           
                                                                                                                                
     In  the  winter  of  2006, AVCG  participated  with  an                                                                    
     ownership  interest  in  the  Cronus  exploration  well                                                                    
     about  10   miles  southwest  of  the   Kuparuk  Field,                                                                    
     operated by Pioneer  Natural Resources.  Unfortunately,                                                                    
     that well was a dry hole.                                                                                                  
                                                                                                                                
     This  past winter  for the  first time,  our operations                                                                    
     subsidiary,   Brooks  Range   Petroleum  operated   the                                                                    
     drilling  of  two  exploration wells  for  our  working                                                                    
     interest partners in  the Gwydyr Bay area  of the North                                                                    
     Slope, just  northwest of Prudhoe  Bay.  One  well, the                                                                    
     Sak River  #1, was a dry  hole, but we were  excited to                                                                    
     announce earlier this year that  our Northshore #1 well                                                                    
     northwest of the Prudhoe Bay  Field did strike oil.  We                                                                    
     plan to  complete and test  this well this winter.   In                                                                    
     addition, we  ran a 130-square  mile 3D  seismic survey                                                                    
     over  our acreage  and surrounding  area in  the Gwydyr                                                                    
     Bay  area on  the  North  Slope.   In  total this  past                                                                    
     drilling  season,  our  JV   Group  invested  over  $44                                                                    
     million on land, seismic and drilling activities.                                                                          
                                                                                                                                
     This winter our  Joint Venture Group will  be among the                                                                    
     most active of  explorers as we plan to  shoot over 200                                                                    
     square  miles  of  new  seismic  data  on  the  extreme                                                                    
     western and  eastern sides of  the Central  North Slope                                                                    
     and to drill up to four  exploration wells.  We plan to                                                                    
     test the Northshore  #1 well and also drill  one or two                                                                    
     other  exploration  wells  nearby  to  see  if  we  can                                                                    
     discover  a  sufficient  volume of  oil  to  warrant  a                                                                    
     commercial development  at Gywdyr  Bay.  We  will drill                                                                    
     our Tofkat #1  well south of the Alpine  Field and also                                                                    
     drill a  fourth exploration  well on  a prospect  to be                                                                    
     named.    In  total,  our group  will  spend  over  $40                                                                    
     million in  seismic and exploratory drilling  in winter                                                                    
     2008.   If  our Northshore  oil completion  test is  as                                                                    
     suspected and  one of the  wells strikes oil  close by,                                                                    
     we may  proceed with  Northshore development  with more                                                                    
     substantial capital  investment in  the second  half of                                                                    
     2008.                                                                                                                      
                                                                                                                                
     My  comments  today  represent the  perspectives  of  a                                                                    
     small,   independent   exploration  company   that   is                                                                    
     actively  exploring  on the  North  Slope  with a  good                                                                    
     level of activity, generally  on prospects that because                                                                    
     of  smaller   size  no   longer  interests   the  major                                                                    
     companies.   At the end  of next drilling  season, AVCG                                                                    
     since 1999 and  our partners since last  year will have                                                                    
     jointly  invested  over  $100 million  in  Alaska  even                                                                    
     though none  in our  group have generated  any revenues                                                                    
     yet from  Alaska oil, so we  sincerely appreciate being                                                                    
     listened to.   We think  in the  long run we  can bring                                                                    
     substantial, incremental value to  the State of Alaska.                                                                    
     Please wish us good luck.                                                                                                  
                                                                                                                                
     Many of you also know me  as the past President of ARCO                                                                    
     Alaska,  Inc.  from  1994-1998.     I  also  served  as                                                                    
     Executive Vice-President  for ARCO  and head  of global                                                                    
     oil  and  gas   exploration  for  ARCO.     I  do  have                                                                    
     exploration  and  production   experience  in  10  U.S.                                                                    
     states and  in over 20 countries  throughout the world,                                                                    
     so  I'll also  share my  perspective in  how I  see the                                                                    
     ACES  bill in  the  context of  competitiveness in  the                                                                    
     United States and in the world.                                                                                            
                                                                                                                                
     General Comments On ACES Legislation                                                                                     
                                                                                                                                
     At  this point,  I would  like to  address various  key                                                                    
     points in the ACES legislation.                                                                                            
                                                                                                                                
     First, our company  prefers that the PPT  be allowed to                                                                    
     run its  course in  the next few  years, and  that ACES                                                                    
     not be approved  with its current provisions.   I agree                                                                    
     with  Dr.  Pedro  van  Meurs   that  in  the  light  of                                                                    
     declining  oil production  in the  state of  Alaska and                                                                    
     prospectivity  trending  to  smaller field  sizes,  the                                                                    
     State should  not once again  increase its  taxes after                                                                    
     having done  so last year.   I will tell you  that when                                                                    
     recruiting companies to join  in our Alaska ventures in                                                                    
     2005 and 2006, many were  concerned about the threat of                                                                    
     tax  increases in  Alaska.   PPT  proved tax  increases                                                                    
     were not  a threat but  a reality.  Adding  yet another                                                                    
     tax  increase  via  the  ACES   bill  this  year  shows                                                                    
     instability  in Alaska's  tax policy  which results  in                                                                    
     uncertainty and risk when making investment decisions.                                                                     
                                                                                                                                
     I  heard  that   consultant  Daniel  Johnston  differed                                                                    
     strongly from Dr. van Meurs  and urged the oil industry                                                                    
     to  understand  the  "cloud  of  corruption"  over  the                                                                    
     existing Petroleum  Profits Tax, or PPT,  and that this                                                                    
     alone  provides  a  good  reason  to  change  PPT.    I                                                                    
     challenge Daniel  Johnston that  the bushel  should not                                                                    
     be thrown out because of a few bad apples.                                                                                 
                                                                                                                                
     In fact,  last year  during the  PPT debates,  I recall                                                                    
     those who are guilty of  paying bribes and some who are                                                                    
     accused of taking bribes actually  supported a 20% base                                                                    
     tax  rate, not  the 22.5%  base rate  that was  finally                                                                    
     adopted.   In fact, I'd  like to think that  the almost                                                                    
     all  in the  Legislature and  in Industry  were honest,                                                                    
     that they could be  trusted in their deliberations last                                                                    
     year,  and that  the final  answer  of PPT  was a  good                                                                    
     answer and an honorable answer.                                                                                            
                                                                                                                                
     It  is also  very important  to keep  in mind  that the                                                                    
     progressivity  tax  was added  at  high  oil prices  to                                                                    
     drive  the real  tax rate  to even  higher levels  than                                                                    
     22.5%,  with  a range  exceeding  30%  now possible  at                                                                    
     certain prices.   And let's  not forget to tack  on the                                                                    
     royalty,  the corporate  tax, the  ad valorem  property                                                                    
     tax,  and  environmental  and   permitting  fees.    It                                                                    
     appeared  to me  that the  checks and  balances in  the                                                                    
     system  worked  in the  Legislature  last  year, and  I                                                                    
     applaud the honesty  of the legislators who  in the end                                                                    
     made a positive difference.                                                                                                
                                                                                                                                
     But  I   sit  here  feeling   as  if  the   honest  and                                                                    
     trustworthy  investors  in   this  industry  are  being                                                                    
     punished  alongside the  guilty.    I personally  think                                                                    
     this will have negative  consequences for Alaska in the                                                                    
     long  haul in  relationships  and  even in  sustainable                                                                    
     increased value.                                                                                                           
                                                                                                                                
     But I  am politically  astute enough  to know  that the                                                                    
     ACES  train is  moving fast  down the  track, so  I can                                                                    
     stand out of  the way or jump on board  and try to make                                                                    
     the ACES bill better before  we reach derailment in the                                                                    
     long-term  relationships between  this industry  I love                                                                    
     and this State I love.                                                                                                     
                                                                                                                                
     So, I  have some  suggestions of  things not  to change                                                                    
     and things to change in the ACES proposal.                                                                                 
                                                                                                                                
     Five Things Not To Change In ACES                                                                                        
                                                                                                                                
     1) Keep the exploration  and development investment tax                                                                  
     credits.   For  a small  explorer startup  company like                                                                  
     AVCG   LLC,   the   exploration  economics   with   the                                                                    
     exploration   tax  credits   ranging  from   20-40%  as                                                                    
     provided by PPT  and with ACES are  more favorable with                                                                    
     an  improvement in  the investor's  rate  of return  as                                                                    
     compared  with  Alaska's   old  severance  tax  system.                                                                    
     Near-term  cash  flow  because of  the  investment  tax                                                                    
     credits  is   higher  which  improves  the   return  on                                                                    
     investment.   Plus  refund of  cash  to companies  like                                                                    
     AVCG and our working  interest partners via the credits                                                                    
     mean that we can apply  that cash to our capital budget                                                                    
     the  next   year  to  run   adequate  seismic   and  do                                                                    
     additional drilling  that increases the chance  of more                                                                    
     oil production and reserves for us and for the State.                                                                      
                                                                                                                                
     Likewise, the credits for losses  for a startup company                                                                    
     like ours  while we establish  production and  also the                                                                    
     development  investment  credit  can  take  substantial                                                                    
     risk  out of  development  of smaller  fields that  our                                                                    
     company is  focusing on.   May of these  smaller fields                                                                    
     can   add  up   over  time   and  provide   significant                                                                    
     incremental revenue to the State.                                                                                          
                                                                                                                                
     2)  Keep  the  "standard tax  deduction/exemption"  for                                                                  
     smaller  companies.   The "Small  Producer Tax  Credit"                                                                  
     that exempts up to  the first $12,000,000 in production                                                                    
     taxes for  smaller companies can  allow us to  return a                                                                    
     larger share  of our annual  cash flow  for exploration                                                                    
     and  investment  while  we   build  the  company  to  a                                                                    
     critical mass  of reserves and production  necessary to                                                                    
     expand  staffing  and have  a  routine  level of  major                                                                    
     capital spending each year.                                                                                                
                                                                                                                                
     3)  Keep   the  new  ACES  tax   credit  allowance  for                                                                  
     qualified  delineation wells.   A  new proposal  in the                                                                  
     ACES bill that  was not in the PPT law  is the possible                                                                    
     tax credit  allowance for the  investment in up  to two                                                                    
     delineation wells  following a  discovery.   This would                                                                    
     be  very helpful  to  small explorers  as  well as  for                                                                    
     large  companies on  the North  Slope  where often  one                                                                    
     well is not enough to  determine if field size is large                                                                    
     enough to warrant development.                                                                                             
                                                                                                                                
     A  real  case  in  point  is  that  should  we  have  a                                                                    
     discovery this coming winter  at our Tofkat exploration                                                                    
     well on the western side of  the Slope, we will have to                                                                    
     drill one or two delineation  wells to confirm if field                                                                    
     size  is sufficient  to develop  the  resource at  this                                                                    
     remote location.   Often,  due to  the nature  of these                                                                    
     complex stratigraphic  traps where  sands unpredictably                                                                    
     come and  go, the  delineation wells  can be  almost as                                                                    
     risky  as  the  initial  exploration well.    Having  a                                                                    
     credit where the State, in  a real sense, is sharing in                                                                    
     the risk will  - I think - expedite  delineation of new                                                                    
     fields and advance development for revenues.                                                                               
                                                                                                                                
     4) Keep the revised progressivity  tax rate at 0.2% per                                                                  
     dollar increase in  oil price.  The PPT tax  law had an                                                                  
     incremental tax rate of 0.25%  per each dollar increase                                                                    
     in oil price  above a trigger price while  the new ACES                                                                    
     reduces this  incremental tax rate  to 0.2%  per dollar                                                                    
     increase in  oil price  at a trigger  price.   While we                                                                    
     can  debate   all  day  long  the   competitiveness  of                                                                    
     Alaska's   tax  rate   with  other   countries'  fiscal                                                                    
     systems, giving some reduction  in this surcharge keeps                                                                    
     the   government  take   at  more   reasonable  levels.                                                                    
     However,  as I'll  outline below,  I  would change  the                                                                    
     ACES trigger price  back to $40 per barrel  net and not                                                                    
     the  proposed $30  per barrel  net if  Alaska wants  to                                                                    
     better   balance   revenues   with   industry   capital                                                                    
     investment at low prices as I'll more fully discuss.                                                                       
                                                                                                                                
     5) Do  establish the  Oil and Gas  Tax Credit  Fund for                                                                  
     the  purposes of  purchasing certain  tax credits  from                                                                    
     explorers  and producers.   This  ACES provision  would                                                                    
     establish  a procedure  and standard  for appropriation                                                                    
     into this fund  and management of this fund.   Having a                                                                    
     clear  and  transparent  way  for  small  explorers  to                                                                    
     receive  their  credits  at  full  value  is  extremely                                                                    
     important  for  AVCG to  then  be  able to  plow  those                                                                    
     credits back into seismic and  exploration on the North                                                                    
     Slope.                                                                                                                     
                                                                                                                                
MR.  THOMPSON, in  response to  a question,  said that  under the                                                               
current PPT  legislation, an exploration  well, for  example, can                                                               
get a tax  credit of up to  20 percent; however, if  that well is                                                               
more than 25 miles away from an  exiting unit, it could get a tax                                                               
credit as high  as 40 percent.  Those credits  can be refunded by                                                               
the state, or they can be sold  to producers.  For a company like                                                               
AVCG, that is  very important.  Also under PPT,  as well as under                                                               
ACES, there  is a 40  percent tax  credit for "new  seismic" that                                                               
qualifies.  Such credits allow the  state to share in some of the                                                               
exploration  risk, and  allow companies  such as  his to  perhaps                                                               
drill [an]  extra exploration  well per  year, and  this improves                                                               
the chance of exploratory discovery.                                                                                            
                                                                                                                                
4:38:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE NEUMAN surmised  that Mr. Thompson is  in favor of                                                               
keeping progressivity  at .2 percent  and start at $40,  and keep                                                               
the PPT rate at 22.5 percent.                                                                                                   
                                                                                                                                
MR. THOMPSON  concurred, and opined that  the state's consultants                                                               
didn't show  enough with  regard to  the competitive  position of                                                               
Alaska relative  to other  states and other  countries.   He also                                                               
opined that the  government's percentage may need  to be adjusted                                                               
if the goal is for Alaska  to remain competitive with the Gulf of                                                               
Mexico or a few other states.                                                                                                   
                                                                                                                                
CHAIR OLSON mentioned  that the administration has  been asked to                                                               
provide the committee with the  tax information and tax structure                                                               
of  four of  the  states that  Mr.  Thompson's written  testimony                                                               
refers to.                                                                                                                      
                                                                                                                                
MR.  THOMPSON  said  that  a  DOR update  will  be  helpful,  and                                                               
mentioned  that  most of  the  AVCG's  investors only  invest  in                                                               
projects in the U.S.                                                                                                            
                                                                                                                                
4:40:38 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON  continued paraphrasing from his  written testimony,                                                               
which  read in  part  [original punctuation  provided along  with                                                               
some formatting changes]:                                                                                                       
                                                                                                                                
     Four Things To Change In ACES                                                                                            
                                                                                                                                
     1) Change  the recovery of  tax credits from  two years                                                                  
     as proposed in ACES back  to the recovery of credits in                                                                  
     one year  currently provided  for in the  PPT law.   In                                                                  
     the  PPT law,  a  company could  file  for the  various                                                                    
     credits,  and if  approved,  would  receive those  full                                                                    
     capital credits  not to exceed  credits of  $25 million                                                                    
     per company.   In the new  ACES law, while the  cap has                                                                    
     been removed  which is very  positive, the  credits are                                                                    
     refunded  over  two years  instead  of  over one  year,                                                                    
     e.g., 50%  of qualified credits  can be applied  for in                                                                    
     the first  year once a  well is completed  or abandoned                                                                    
     and 50% in the following year.                                                                                             
                                                                                                                                
     For  a small  company like  ours, this  will definitely                                                                    
     affect our  capital spending  in a  given winter  as we                                                                    
     plow  all  the  credit  refunds back  into  seismic  or                                                                    
     exploration  drilling.   As a  very real  example, AVCG                                                                    
     and  our  working  interest owners  are  projecting  to                                                                    
     spend $41  million in seismic and  exploration drilling                                                                    
     this coming winter and likely  around the same in 2009.                                                                    
     We calculate that we could  receive $16 million cash in                                                                    
     qualified credits  in mid-year  2008.   So essentially,                                                                    
     our  working interest  owners are  planning to  provide                                                                    
     cash  out  of  pocket  of  $25  million  for  the  2009                                                                    
     drilling season; this  is a fixed number  based on cash                                                                    
     availability in  these small companies to  spend toward                                                                    
     the Alaska portfolio.   If the State  refunds only one-                                                                    
     half  of this  credit in  the  first year,  or only  $8                                                                    
     million instead  of $16 million, AVCG  and our partners                                                                    
     will still  provide $25 million  out of our  pockets as                                                                    
     now   planned   and  budgeted...meaning   our   overall                                                                    
     spending in 2009 will be  $33 million, not $41 million,                                                                    
     i.e.  $25 million  from our  available  funds and  only                                                                    
     $8MM from  the State.   This would  mean one  less well                                                                    
     that will  be drilled by  our group  in 2009.   And one                                                                    
     less  chance  for  another  discovery  that  eventually                                                                    
     could  provide   revenues  to  us  all.     With  small                                                                    
     companies,  this   is  just  the  way   our  cash  flow                                                                    
     situation works.   And for  some of our  AVCG investors                                                                    
     like me,  when I say  "out of  pocket," I mean  "out of                                                                    
     pocket."                                                                                                                   
                                                                                                                                
     So,  we hope  the full  credit can  be applied  for and                                                                    
     refunded in  a given  year.  We  hope this  happens for                                                                    
     all  of   industry.    As  an   innovative  compromise,                                                                    
     however, the Legislature may  consider a "Small Company                                                                    
     Refund" provision  that allows for companies  that meet                                                                    
     the  no production  or low  production measures  in the                                                                    
     "Small Company Tax  Credit" provision of the  PPT law -                                                                    
     that remains  in ACES -  to receive tax  credit refunds                                                                    
     that  are   fully  refunded  in  the   first  year  for                                                                    
     qualified costs.   Once a  company grows  in production                                                                    
     beyond   this  "small   company"   measure  with   more                                                                    
     substantial  cash flow,  perhaps  refunds  of 50%  each                                                                    
     year would apply as outlined in ACES.                                                                                      
                                                                                                                                
MR. THOMPSON, in response to a comment, said that refunding                                                                     
credits in the first year would allow a smaller business to                                                                     
reinvest those funds that much sooner.                                                                                          
                                                                                                                                
REPRESENTATIVE RAMRAS  noted, however,  that if the  state spread                                                               
the refunding  of those credits  over two years, the  state would                                                               
then  have that  much  more  money with  which  to provide  state                                                               
services.                                                                                                                       
                                                                                                                                
MR.  THOMPSON  argued  that refunding  credits  over  a  two-year                                                               
period  of time  could defer  the  exploration of,  and thus  the                                                               
development of, resources that could  help fund state services in                                                               
the future.                                                                                                                     
                                                                                                                                
REPRESENTATIVE RAMRAS acknowledged that point.                                                                                  
                                                                                                                                
4:47:36 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON  continued paraphrasing from his  written testimony,                                                               
which  read in  part  [original punctuation  provided along  with                                                               
some formatting changes]:                                                                                                       
                                                                                                                                
     2) Change  the base tax rate  in ACES from 25%  back to                                                                  
     the PPT tax rate of  22.5%, and re-review again in 2011                                                                  
     after some  time has passed  as allowed for  in current                                                                  
     law.   As I  mentioned in my  introduction, I  felt the                                                                  
     22.5% base tax  rate was reasonable.  And  the real tax                                                                    
     rate is much higher  with the tax progressivity factor.                                                                    
     But   what  is   fair,  and   how  exactly   is  "fair"                                                                    
     determined?                                                                                                                
                                                                                                                                
     I  saw  a  copy  of a  presentation  entitled  "Guiding                                                                    
     Principles  For A  New Production  Tax  System" by  the                                                                    
     Department  of  Revenue  urging the  changes  in  ACES,                                                                    
     arguing  that the  average government  take in  various                                                                    
     international countries  averaged 67% for all  types of                                                                    
     fiscal  regimes   internationally,  averaged   74%  for                                                                    
     production  sharing agreements,  but only  55% for  tax                                                                    
     and  royalty  regimes  internationally.   Somehow,  the                                                                    
     Department  of  Revenue  representatives  concluded  an                                                                    
     average of 68%  as provided for in ACES  would be close                                                                    
     to  the  average  of  67%  for  all  types  of  regimes                                                                    
     internationally.                                                                                                           
                                                                                                                                
     First,  the  average  recommended   to  Alaska  is  the                                                                    
     average  of   all  regimes,   i.e.  the   averaging  of                                                                    
     government take  from tax and royalty  regimes with the                                                                    
     government  take  from   production  sharing  agreement                                                                    
     (PSA)  regimes.   In some  countries that  I worked  in                                                                    
     that had  production sharing regimes, the  risk profile                                                                    
     for capital  development was often much  different that                                                                    
     in regimes  that use a  tax and royalty regime  such as                                                                    
     Alaska.   In PSA  countries, it was  not unusual  for a                                                                    
     producer  on  capital  projects  to  have  a  very  low                                                                    
     initial  tax burden  until the  capital investment  was                                                                    
     fully  recovered plus  a negotiated  rate-of-return was                                                                    
     achieved.  Then  and only then was  the government take                                                                    
     increased substantially...thus giving  the average take                                                                    
     for such  countries as 74%.   But the risk  profile was                                                                    
     often much better than Alaska,  i.e. there was up front                                                                    
     recovery of  capital and a preferred  investor rate-of-                                                                    
     return.  That is not the  risk profile of Alaska when a                                                                    
     company first  has production...the ACES high  tax rate                                                                    
     and the added progressivity  tax will start immediately                                                                    
     along  with royalties,  corporate  taxes, property  tax                                                                    
     and other charges rather than  allowing for recovery of                                                                    
     capital and a contractual rate-of-return.                                                                                  
                                                                                                                                
REPRESENTATIVE  NEUMAN asked  how  most countries  in the  world,                                                               
with  safe, but  difficult environments,  compare with  regard to                                                               
the percentage of "government take."                                                                                            
                                                                                                                                
MR.  THOMPSON   offered  his   understanding  that   the  average                                                               
government  take in  countries where  the fiscal  system is  most                                                               
like Alaska's is around 55  percent.  Currently, in Alaska, under                                                               
the  PPT legislation,  the government  take  is approximately  60                                                               
percent.  He reiterated that in  countries with a PSA system, the                                                               
average government  take is  74 percent,  and suggested  that the                                                               
legislature should spend more time looking at other regimes.                                                                    
                                                                                                                                
4:54:33 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON  continued paraphrasing from his  written testimony,                                                               
which  read in  part  [original punctuation  provided along  with                                                               
some formatting changes]:                                                                                                       
                                                                                                                                
     As another  distinction, most of the  individual people                                                                    
     and  company investors  specifically in  AVCG, LLC,  do                                                                    
     not   consider  international   regimes  as   areas  to                                                                    
     consider  as  competition  for our  investment  dollars                                                                    
     with  Alaska.   Rather, the  main competition  for most                                                                    
     AVCG Owners'  cash is in  other states  in the U.S.   I                                                                    
     found it astounding and concerning  that the average of                                                                    
     67%  for all  international  regimes  did not  consider                                                                    
     weight-averaging  in   the  major   American  producing                                                                    
     states.   As examples, the current  government takes in                                                                    
     the  Gulf  of  Mexico  offshore   -  one  of  the  main                                                                    
     competing  areas   for  Alaska  investment   dollars  -                                                                    
     averages 45%.  This is  under consideration by the U.S.                                                                    
     government  for increase,  but  it  is highly  doubtful                                                                    
     with the  boom going on  in deep water  exploration and                                                                    
     development  that the  U.S.  government would  increase                                                                    
     the government take from 45% to 68%.                                                                                       
                                                                                                                                
     In other  producing states that compete  for investment                                                                    
     by our  AVCG investors, the state  and federal combined                                                                    
     government takes  in 2006 were as  follows and averaged                                                                    
     45-57%:                                                                                                                    
                                                                                                                                
     U.S. Gulf of Mexico 45%                                                                                                    
     Colorado 51%                                                                                                               
     Wyoming 52%                                                                                                                
     Kansas 53%                                                                                                                 
     Texas 53%                                                                                                                  
     New Mexico 53%                                                                                                             
     Oklahoma 53%                                                                                                               
     California 53%                                                                                                             
     Louisiana 57%                                                                                                              
                                                                                                                                
     To my  knowledge, these  states do  not have  the added                                                                    
     progressivity  surcharge  tax which  further  separates                                                                    
     Alaska in government take  from these competing states.                                                                    
     I  would argue  that  Alaska should  have a  government                                                                    
     take  of   55%  if   we  were  to   maintain  long-term                                                                    
     competitiveness with these  other states for investment                                                                    
     dollars.   Having said  that, some  of these  states do                                                                    
     not have  the prospectivity of Alaska,  so Alaska could                                                                    
     command  some premium  in take,  but  certainly not  as                                                                    
     high as being proposed in ACES.                                                                                            
                                                                                                                                
REPRESENTATIVE DOOGAN asked whether Alaska's government take                                                                    
includes royalty payments.                                                                                                      
                                                                                                                                
MR. THOMPSON said it does.                                                                                                      
                                                                                                                                
4:58:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DOOGAN surmised that if one were to compare tax                                                                  
rates between Alaska and Texas, one would have to subtract                                                                      
royalty payments.                                                                                                               
                                                                                                                                
MR. THOMPSON concurred, and then continued paraphrasing from his                                                                
written testimony, which read in part [original punctuation                                                                     
provided along with some formatting changes]:                                                                                   
                                                                                                                                
     If  Alaska  set  a  government   take  at  60%  to  the                                                                    
     government   and  40%   to  the   investor,  the   ACES                                                                    
     legislation should be  amended to allow for  a base tax                                                                    
     rate of 22.5%  not 25%, should be amended  to allow for                                                                    
     a  trigger price  of $40  per  barrel and  not $30  per                                                                    
     barrel,  and  the  incremental progressivity  tax  rate                                                                    
     increase should be 0.2% per dollar.                                                                                        
                                                                                                                                
     3) Change the  trigger price to $40 per  barrel net and                                                                  
     not $30  per barrel.  If  the government take is  to be                                                                  
     the fair and equitable 60%  and not the unfair 68%, the                                                                    
     trigger price should  stay the same as in  the PPT law,                                                                    
     i.e. $40  per barrel  net.   If Alaska  is to  share in                                                                    
     high prices with the  progressivity surcharge tax, then                                                                    
     Alaska  should share  in the  pain of  low prices.   To                                                                    
     amend  the  trigger  price lower  when  and  if  prices                                                                    
     collapse will be a false  economy measure for the State                                                                    
     of Alaska.  When prices  fall and a company's cash flow                                                                    
     is  sharply reduced,  capital spending  will  fall.   A                                                                    
     "double whammy"  to be taxed more  with a progressivity                                                                    
     tax  at  lower prices  further  reduces  the amount  of                                                                    
     capital for reinvestment.                                                                                                  
                                                                                                                                
     4)  Consider  some  type  of  "Transitional  Investment                                                                  
     Expenditure (TIE)" tax credit.   This provision allowed                                                                  
     for in PPT was repealed  in ACES.  While this provision                                                                    
     does not greatly benefit our  company, AVCG, because we                                                                    
     did  not have  large  seismic  or exploration  drilling                                                                    
     costs between March 31, 2001,  and April 1, 2006, it is                                                                    
     important to other major investors in Alaska.                                                                              
                                                                                                                                
     As an  example, the  largest explorer and  developer in                                                                    
     Alaska,  ConocoPhillips,  now  with the  ARCO  heritage                                                                    
     assets was hardest hit in  tax exposure with the change                                                                    
     from the  old severance tax law  to the PPT and  now to                                                                    
     ACES.   I simply think  allowing a good steward  who is                                                                    
     the   largest  explorer   in  Alaska   some  transition                                                                    
     allowance to  ease the pain of  greatly increased taxes                                                                    
     is the  right thing  to do and  can only  build better,                                                                    
     more  trusting relationships.    Again, this  provision                                                                    
     does not greatly benefit our company, however.                                                                             
                                                                                                                                
     Concluding Remarks                                                                                                       
                                                                                                                                
     This  concludes  my remarks.    I  tried to  share  the                                                                    
     perspective of an  independent exploration company that                                                                    
     only invests in Alaska.   My ultimate wish would be for                                                                    
     the State  to leave  PPT alone  and re-review  it under                                                                    
     the law  as planned  in 2011 or  perhaps even  in 2010.                                                                    
     But if the  ACES train has left the  station and cannot                                                                    
     be stopped,  I urge you  to at least consider  the five                                                                    
     things our  company would not  change in this  bill and                                                                    
     the four things we would change.                                                                                           
                                                                                                                                
     The above comments  are offered with a  hope that there                                                                    
     can  be an  eventual win-win  solution to  this complex                                                                    
     subject of the State  realizing more revenues at higher                                                                    
     prices  while  attracting exploration  and  development                                                                    
     investors who can also realize  upside at higher prices                                                                    
     for the substantial risk they  have taken in the remote                                                                    
     and harsh environment of the  North Slope.  In the end,                                                                    
     I hope  both sides  get a fair  and equitable  share at                                                                    
     all price levels.                                                                                                          
                                                                                                                                
     And my comments are  offered with the highest sincerity                                                                    
     that  the  State and  Industry  can  someday restore  a                                                                    
     mutual trust at all levels.                                                                                                
                                                                                                                                
REPRESENTATIVE  NEUMAN  asked Mr.  Thompson  how  he feels  about                                                               
sharing seismic data.                                                                                                           
                                                                                                                                
5:04:07 PM                                                                                                                    
                                                                                                                                
MR. THOMPSON  said that  he would love  to acquire  older seismic                                                               
data  more readily  at more  reasonable prices,  but acknowledged                                                               
that some  things ought to  be considered proprietary  for awhile                                                               
because  disclosure of  such information  might hurt  a company's                                                               
competitive position.   He  relayed that he  wishes there  were a                                                               
"more reasonable"  timeframe in which to  share proprietary data,                                                               
whether  it be  5  years or  10 years,  because  that could  help                                                               
exploratory  companies  like his.    He  spoke of  equipment  and                                                               
technology  that [such  companies] use,  and explained  that this                                                               
use  is  possible because  of  "the  seismic  tax credits  of  40                                                               
percent" that the state offers.                                                                                                 
                                                                                                                                
REPRESENTATIVE  NEUMAN noted  that the  legislation contains  the                                                               
phrase   "on  request,   furnish   records,   files,  and   other                                                               
information ...", and asked Mr. Thompson to comment.                                                                            
                                                                                                                                
MR. THOMPSON  opined that  there are certain  types of  data that                                                               
really should be held confidential;  there are some types of data                                                               
on  federal acreage,  for example,  where the  state is  actually                                                               
competing  in lease  sales  and although  it  would certainly  be                                                               
appropriate  for the  DOR to  see that  data to  ensure that  the                                                               
provisions of statute  are being complied with,  making that same                                                               
data available  to the DNR  could affect  competitiveness between                                                               
state and  federal leases.  He  said that the AVCG  is willing to                                                               
provide  the necessary  data,  and that  he  agrees with  earlier                                                               
comments  that on  all types  of data,  there are  definitions of                                                               
certain things that  have been worked out over the  years, and so                                                               
his  hope  is that  the  state  could  adopt all  those  standard                                                               
definitions and accompanying procedures.                                                                                        
                                                                                                                                
MR.  THOMPSON said  he  does have  a  concern regarding  agencies                                                               
being able  to redefine  things, because it  just means  one more                                                               
set of things  to try to calculate.  "I  think what's revealed to                                                               
all investors  in financial  statements and to  the [SEC]  is the                                                               
right and fair  way to go in providing different  types of data,"                                                               
he remarked.   With regard  to the issue of  providing forecasts,                                                               
such  as  cost  forecasts,  he said  he  doesn't  mind  providing                                                               
forecasts,   but  noted   that  Mother   Nature  doesn't   always                                                               
cooperate.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  Mr. Thompson  whether the  bill, if                                                               
passed as currently written, will  improve the investment climate                                                               
in Alaska.                                                                                                                      
                                                                                                                                
5:11:06 PM                                                                                                                    
                                                                                                                                
MR.  THOMPSON said  he  thinks it  will  diminish the  investment                                                               
climate for his  type of company.  For example,  if the AVCG does                                                               
not  get  its  tax  credits  back next  year  for  this  winter's                                                               
activity,  the  company  won't  have  as  much  capital  for  the                                                               
following winter,  and this could  result in one less  well being                                                               
drilled then.   He then  reiterated some of his  written comments                                                               
to illustrate another example.                                                                                                  
                                                                                                                                
MR. THOMPSON,  in response  to another  question, said  he thinks                                                               
that  passage of  the bill  as  currently written  will help  the                                                               
state realize a  lot more income, at least in  the beginning, but                                                               
it could  have a  different effect as  time passes  because there                                                               
will be  a faster decline rate  with regard to production  on the                                                               
North Slope.   He offered  his belief that his  suggested changes                                                               
to the  bill will help the  state and the industry  find a better                                                               
balance,  create  more  capital investment,  lessen  the  decline                                                               
rate, and create  more wealth for all parties.   In response to a                                                               
question, he  added, "I think  the ... decline in  the production                                                               
rates  from ...  all of  Alaska will  be less  under ACES  in the                                                               
three to four or five years than it would be under PPT.                                                                         
                                                                                                                                
[HB 2001 was held over.]                                                                                                        
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Special Committee on Oil and Gas meeting was adjourned at 5:16                                                                  
p.m.                                                                                                                            

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