Legislature(2005 - 2006)CAPITOL 124

02/27/2006 12:30 PM RESOURCES


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12:48:23 PM Start
12:48:44 PM HB488
03:38:35 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
+= HB 488 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                       February 27, 2006                                                                                        
                           12:48 p.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Jay Ramras, Co-Chair                                                                                             
Representative Ralph Samuels, Co-Chair                                                                                          
Representative Carl Gatto                                                                                                       
Representative Gabrielle LeDoux                                                                                                 
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
Representative Harry Crawford                                                                                                   
Representative Mary Kapsner                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                              
Representative Jim Elkins                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 488                                                                                                              
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 488                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (H)       RES, FIN                                                                                               
02/22/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/22/06       (H)       Heard & Held                                                                                           
02/22/06       (H)       MINUTE(RES)                                                                                            
02/23/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/23/06       (H)       Heard & Held                                                                                           
02/23/06       (H)       MINUTE(RES)                                                                                            
02/24/06       (H)       RES AT 12:30 AM HOUSE FINANCE 519                                                                      
02/24/06       (H)       Heard & Held                                                                                           
02/24/06       (H)       MINUTE(RES)                                                                                            
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (H)       Joint with Senate Resources                                                                            
02/27/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRIAN WENZEL, Vice President                                                                                                    
for Finance and Administration                                                                                                  
ConocoPhillips Alaska, Inc. (Conoco)                                                                                            
Anchorage, Alaska                                                                                                               
                                                                                                                                
MS. MARIANNE S. KAH                                                                                                             
Chief Economist                                                                                                                 
ConocoPhillips Alaska, Inc.                                                                                                     
Planning, Strategy and Corporate Affairs                                                                                        
Anchorage, Alaska                                                                                                               
                                                                                                                                
MR. DARREN JONES, Vice President                                                                                                
for Commercial Assets                                                                                                           
ConocoPhillips Alaska, Inc.                                                                                                     
Anchorage, Alaska                                                                                                               
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CO-CHAIR  RALPH  CO-CHAIR  SAMUELS  called  the  House  Resources                                                             
Standing Committee meeting to order  at 12:48PM.  Representatives                                                             
Ramras, Samuels, Seaton, Olson,  Crawford and Seaton were present                                                               
at  the  call  to  order.   Representatives  Kapsner  and  LeDoux                                                               
arrived  as  the  meeting  was   in  progress.    Representatives                                                               
Berkowitz, Kerttula, Gardner, and Guttenberg were also present.                                                                 
                                                                                                                                
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
                                                                                                                                
CO-CHAIR SAMUELS announced that the  only order of business would                                                               
be HOUSE BILL  NO. 488, "An Act repealing the  oil production tax                                                               
and gas production tax and providing  for a production tax on the                                                               
net value  of oil and  gas; relating  to the relationship  of the                                                               
production  tax  to  other  taxes;  relating  to  the  dates  tax                                                               
payments  and surcharges  are  due under  AS  43.55; relating  to                                                               
interest  on  overpayments  under   AS  43.55;  relating  to  the                                                               
treatment  of  oil  and  gas   production  tax  in  a  producer's                                                               
settlement with  the royalty owner;  relating to flared  gas, and                                                               
to oil  and gas  used in  the operation of  a lease  or property,                                                               
under AS  43.55; relating to the  prevailing value of oil  or gas                                                               
under AS  43.55; providing  for tax credits  against the  tax due                                                               
under AS 43.55 for certain  expenditures, losses, and surcharges;                                                               
relating to statements or other  information required to be filed                                                               
with or furnished  to the Department of Revenue,  and relating to                                                               
the penalty for failure to  file certain reports, under AS 43.55;                                                               
relating to the  powers of the Department of Revenue,  and to the                                                               
disclosure  of certain  information required  to be  furnished to                                                               
the Department of  Revenue, under AS 43.55;  relating to criminal                                                               
penalties for  violating conditions  governing access to  and use                                                               
of  confidential   information  relating  to  the   oil  and  gas                                                               
production tax;  relating to  the deposit  of money  collected by                                                               
the  Department  of  Revenue  under AS  43.55;  relating  to  the                                                               
calculation of the gross value at  the point of production of oil                                                               
or  gas;  relating to  the  determination  of  the net  value  of                                                               
taxable oil and  gas for purposes of a production  tax on the net                                                               
value  of oil  and gas;  relating  to the  definitions of  'gas,'                                                               
'oil,' and certain  other terms for purposes of  AS 43.55; making                                                               
conforming amendments; and providing for an effective date."                                                                    
                                                                                                                                
                                                                                                                                
12:48:44 PM                                                                                                                   
                                                                                                                                
BRIAN  WENZEL, Vice  President  for  Finance and  Administration,                                                               
ConocoPhillips Alaska, Inc. (Conoco),  said Conoco is the leading                                                               
oil  producer in  Alaska and  has invested  over $5.8  billion in                                                               
capital in the  last 10 years and $6.8 billion  in expense and it                                                               
pays $1.6 billion to the state  every year.  He spoke of Conoco's                                                               
employees  who  see themselves  as  playing  a role  in  building                                                               
Alaska's  future.   He  said  the  company generates  direct  and                                                               
indirect employment.   He said  there needs to be  mutual respect                                                               
between the state and the company  so they are better off than if                                                               
they pursued their short-term interests.                                                                                        
                                                                                                                                
MR. WENZEL said  the governor's bill is balanced in  favor of the                                                               
state with an aggressive level of  state take.  He spoke of other                                                               
taxes to  the state as  well as  surcharges and fees  paid during                                                               
the permitting  process.  That is,  of course, on top  of federal                                                               
corporate  taxes, he  noted.   He spoke  of layer  upon layer  of                                                               
payments to the  government; investment will be  impacted and job                                                               
growth will be  affected.  He said he sees  that the state cannot                                                               
adopt tax  policy that only  seeks to maximize the  robustness of                                                               
the  participants  in  the  economy.    The  government  provides                                                               
essential  services to  the  citizens, and  must  turn to  taxing                                                               
powers to  pay for them,  he added.   He said  Conoco reluctantly                                                               
supports the passage of the  bill when the government is enjoying                                                               
a  budget  surplus.   The  tax  rate  is  too high  to  guarantee                                                               
increased investment over the long  term, he stated.  It punishes                                                               
companies that have  made investments in Alaska  and have created                                                               
jobs,  royalties and  property taxes.   He  said he  would oppose                                                               
this bill  except it  allows parties to  come together  under the                                                               
Stranded Gas  Act to  move the  gas pipeline  to the  next phase.                                                               
Advancing the gas pipeline is a key priority for Conoco.                                                                        
                                                                                                                                
12:55:06 PM                                                                                                                   
                                                                                                                                
MR.  WENZEL said  since 1989  Conoco  has been  involved with  14                                                               
satellite [oil fields], which are  marginal developments that the                                                               
state is targeting  with HB 488.  They were  able to be developed                                                               
in the  favorable treatment  under the  ELF system.   It  made an                                                               
additional 1.9  billion barrels  from the  North Slope,  he said,                                                               
which  is  equivalent to  a  Kuparuk-size  field.   He  said  the                                                               
company has  drilled 40  other appraisal wells  in the  last five                                                               
years.                                                                                                                          
                                                                                                                                
MR. WENZEL spoke of a graph shown  to the committee.  He said the                                                               
ELF increased barrels  in the pipeline and the state  was able to                                                               
collect taxes on  those developments, and the  Alaska economy was                                                               
able to grow.  "There is no  such thing as a perfect tax system."                                                               
He said  the governor's  tax is  a wise policy,  but HB  488 will                                                               
cost  the  industry   $1  billion  at  today's   prices.    "This                                                               
unprecedented  increase  will  more   than  double  the  existing                                                               
severance tax  payments," he said.   He showed a graph  under the                                                               
proposed  profits-based Petroleum  Production  Tax (PPT)  system.                                                               
He said  the future  of oil production  is dependent  on existing                                                               
fields.    He  said  HB 488  adversely  impacts  production  from                                                               
existing fields, and  the transition plan is necessary.   The new                                                               
PPT will impact Alaska's global  competitiveness.  The purpose of                                                               
the Stranded Gas Act was to  encourage the development of the gas                                                               
pipeline by  establishing fiscal  terms for  certainty.   Oil and                                                               
gas exist  together, which means  the fiscal certainty  under the                                                               
Stranded Gas Act  could be inadequate if it only  applied to gas,                                                               
he opined.   The administration was unwilling  to consider fiscal                                                               
certainty on oil  under the terms of current statute,  but it was                                                               
willing to propose  this legislation that could become  part of a                                                               
fair  and durable  fiscal  regime  for both  oil  and  gas.   The                                                               
administration made  it clear that  the new  tax had to  stand on                                                               
its own in the absence of a  pipeline deal.  He said Conoco would                                                               
not support the  bill if it didn't think that  it would result in                                                               
an agreement to move forward on the gasline.                                                                                    
                                                                                                                                
1:01:06 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said the administration's  proposed tax is balanced to                                                               
facilitate  future investment,  including  a gas  pipeline.   The                                                               
producers will  pay substantially  more in  taxes than  under the                                                               
current regime, he  noted.  He showed a slide  of oil production.                                                               
The heavy oil  resource will play a more significant  role in the                                                               
North Slope, but technology limitations  will restrict heavy oil.                                                               
"It  could  be  many  years   before  the  resource  reaches  its                                                               
potential."                                                                                                                     
                                                                                                                                
1:03:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  asked the view  of Conoco  regarding incentives                                                               
for heavy oil.   He mentioned the royalty  reduction program, and                                                               
predicted  an   allocation  nightmare  for  the   state  and  the                                                               
industry,  including  litigation.   He  said  that instead  of  a                                                               
separate tax system for  different geographical locations, "would                                                               
it  be beneficial  to  instead address  the  problem through  the                                                               
royalty reduction...If you  think you need more  money to develop                                                               
the heavy  oil, and the costs  are high, the profit  is less, and                                                               
there's  just not  going to  be enough  even potential  profit to                                                               
move  forward with  heavy oil...instead  of having  the nightmare                                                               
scenario  of  cost  allocation  arguments,  is  to  instead  move                                                               
forward with  a royalty reduction  argument, where you  still can                                                               
push  more money  into your  column."   He asked  the benefit  of                                                               
having two tax structures.                                                                                                      
                                                                                                                                
1:04:30 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said Conoco is  willing to work with either mechanism,                                                               
but he assumes  it would be more palatable for  the state to look                                                               
at  a differentially  lower tax  rate  or higher  tax credit  for                                                               
heavy oil production.   He said he understands  the challenges of                                                               
allocation  expenses.    "In  terms  of  doing  it  with  royalty                                                               
reduction,  we have  not had  a  lot of  success getting  royalty                                                               
reductions  in  the past,  but  if  that  is the  preferred  path                                                               
forward from the state, I think we can easily work with that."                                                                  
                                                                                                                                
MR.  DARREN   JONES,  Vice   President  for   Commercial  Assets,                                                               
ConocoPhillips  Alaska,   Inc.,  said  the  issue   with  royalty                                                               
reduction  is  that  it  can't  be  depended  on  because  it  is                                                               
negotiated, unless  the law is  changed.   In the new  system, if                                                               
it's not  paying royalty,  then it  will be  subject to  the PPT,                                                               
"and if  we're already getting  credits for PPT  investments, and                                                               
all that  means is the  new oil would  get taxed at  20 percent."                                                               
He  said  the  company  would   have  to  think  more  about  the                                                               
ramifications of royalty reduction.                                                                                             
                                                                                                                                
REPRESENTATIVE  SEATON said  if all  costs are  subtracted before                                                               
taxing, what is the problem  of developing higher-cost heavy oil.                                                               
The PPT  would act the same,  he noted, and all  the higher costs                                                               
would be subtracted.                                                                                                            
                                                                                                                                
MR. WENZEL  said he agrees that  all the costs would  be captured                                                               
under  the PPT,  but because  of  the technology  leaps that  are                                                               
necessary to extract heavy oil,  it requires more motivation than                                                               
simply the current tax system.                                                                                                  
                                                                                                                                
MR. JONES said light oil fields  tend to have pretty high initial                                                               
rates with  decline over  time, and "the  heavy oil  fields, like                                                               
West Sak  that we are  developing now, we're drilling  more wells                                                               
to build it up more slowly over  time, so there is sort of a rate                                                               
of return impact issue of the heavy  oil.  It takes longer to get                                                               
the production  up."  He noted  that the wellhead value  of heavy                                                               
oil is significantly less.                                                                                                      
                                                                                                                                
MS. MARIANNE  KAH, Chief Economist, ConocoPhillips  Alaska, Inc.,                                                               
said in  a high  price environment, "you  would think  that heavy                                                               
oil becomes  more economic, but  what we've seen  happen, because                                                               
we produce  a lot of heavy  oil in Venezuela and  Canada, is that                                                               
the differential  of heavy oil  to WTI [West  Texas Intermediate]                                                               
widens.  So, I  remember at the end of last  year we actually had                                                               
to write  off all of  our [indecipherable] reserves, even  at the                                                               
high  price environment  because there  was like  a $17  a barrel                                                               
discount to  WTI, making it  appear to  be uneconomic.   When, of                                                               
course, it  came right back on  our books the year  later when we                                                               
started producing it.   So there's a problem, even  in a high oil                                                               
price environment  because of the  discounting.  And  that occurs                                                               
because  there  isn't  enough   upgrading  refinery  capacity  to                                                               
process that  crude, even  after you  get it  out of  the ground.                                                               
And it  take years for  that market to get  back in balance.   So                                                               
every time the  oil price goes up, you see  the discount of heavy                                                               
sour crude to WTI widens.  Today  it is about $16 a barrel."  She                                                               
added that  it will be  a much bigger  discount in Alaska.   That                                                               
has to be taken into account, she said.                                                                                         
                                                                                                                                
1:08:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON asked  if  a widening  difference at  high                                                               
prices  is because  more  heavy oil  is  produced without  enough                                                               
facilities.                                                                                                                     
                                                                                                                                
MS. KAH  said that is one  thing, the other is  that Saudi Arabia                                                               
is replacing  crude that is  lost on  the market and  their crude                                                               
that is shut in tends to be heavy  sour crude.  She said there is                                                               
also strong demand,  so the light product has a  higher value and                                                               
heavy oil  goes down in  price.  It is  cyclical, she said.   The                                                               
world's  crude is  going to  get more  heavy and  more sour,  and                                                               
sulfur regulations are getting more  stringent.  "So over time, I                                                               
would  expect to  see a  gradual widening-not  from where  we are                                                               
today, after it  gets back to normal-I'd expect to  see a gradual                                                               
widening over time just because there's  going to be more of this                                                               
in the global crude slate."                                                                                                     
                                                                                                                                
1:09:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ noted  that Mr.  Wenzel said  that past                                                               
investments have  led to an  additional $5 billion of  revenue to                                                               
the state,  and he asked  how much of  that came from  Conoco and                                                               
what profits did the company show for its Alaska investments.                                                                   
                                                                                                                                
MR. WENZEL said he doesn't think  he has profits for that period,                                                               
but Conoco's profits were $2.5 billion in 2005.                                                                                 
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked if that was in Alaska.                                                                           
                                                                                                                                
MR. WENZEL said yes.                                                                                                            
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked about the timeframe  where Alaska                                                               
received an additional $5 billion.                                                                                              
                                                                                                                                
MR. WENZEL  said he believes that  has been in the  past 10 years                                                               
that Conoco  has spent $5.8  billion in capital and  $6.8 billion                                                               
in expenses.                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked how much  of that came from Conoco                                                               
investments.                                                                                                                    
                                                                                                                                
MR. WENZEL said it is all from Conoco.                                                                                          
                                                                                                                                
1:11:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO addressed  the  heavy oil  that Mr.  Wenzel                                                               
showed on  a graph and asked  if it refers to  heavy oil reserves                                                               
or oil that "you  can get to."  He noted that  there is heavy oil                                                               
at Prudhoe Bay that is impossible to access.                                                                                    
                                                                                                                                
MR. WENZEL  said the blue bar  is the heavy oil  that is possible                                                               
to develop with today's technology.                                                                                             
                                                                                                                                
1:12:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked for the  [profits for the last ten                                                               
years].                                                                                                                         
                                                                                                                                
MR.  WENZEL said  there are  over 20  billion barrels  of oil  in                                                               
place.   There is potential that  can't be extracted today.   The                                                               
technology  will require  huge expenses  and therefore  heavy oil                                                               
should be  given a  differential consideration in  the form  of a                                                               
lower  tax  rate  or  additional  credits.   The  bill  has  been                                                               
designed  to  attract  new players,  and  Conoco  encourages  new                                                               
investments,  which  can  be  beneficial.   He  said  Conoco  has                                                               
already  made  partners  of  several  of  them.    The  terms  of                                                               
attracting new  investors come with  a cost.  The  governor's tax                                                               
increase  mainly  targets  large,  legacy  investments  including                                                               
Prudhoe Bay and Kuparuk, and  will result in perhaps "the highest                                                               
severance tax  burden...anywhere in the  United States.   This is                                                               
an  unprecedented  fiscal  increase,"  he  said.    He  told  the                                                               
committee  Conoco has  stayed in  Alaska during  difficult times,                                                               
including  times of  low  oil  prices.   Such  an increase  could                                                               
undermine investor confidence, he opined.                                                                                       
                                                                                                                                
MR. WENZEL showed  a slide of the effective tax  rate of the core                                                               
versus satellite  fields.   Core assets  represent 65  percent of                                                               
the  North  Slope production  and  they  will experience  a  much                                                               
higher effective tax rate.                                                                                                      
                                                                                                                                
REPRESENTATIVE  SEATON  asked  how  much  of  the  difference  is                                                               
because of the $73 million allowance.                                                                                           
                                                                                                                                
MR. WENZEL said  the $73 million is included in  the graph lines,                                                               
but it's a relatively small impact.                                                                                             
                                                                                                                                
REPRESENTATIVE   SEATON   said,   "So  the   difference   between                                                               
satellites  with  the  new  PPT,  versus  core  assets...the  $73                                                               
million has very little relationship  to the differential between                                                               
those two lines?"                                                                                                               
                                                                                                                                
MR. WENZEL  said that is correct  and it is mainly  driven by the                                                               
higher level of investment relative  to production and revenue on                                                               
those  new  satellites.    "You've got  essentially  all  of  the                                                               
capital to  develop those resources  and the tax credits  come in                                                               
related to that,  bringing down the effective tax  rate.  Whereas                                                               
on the core fields and known  resources, much of that capital has                                                               
already been expended and there's no resulting impact."                                                                         
                                                                                                                                
1:16:12 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS   said  the  $73   million  is   a  competitive                                                               
disadvantage  over companies  that pay  no  taxes.   He asked  if                                                               
Conoco would like to keep the provision in the bill.                                                                            
                                                                                                                                
MR. WENZEL said  it was put in place to  bring small players into                                                               
the state and assist small companies.   It has a larger impact on                                                               
those players; as such it is  much more appropriate to speak with                                                               
the  independents on  that  issue,  he said.    Conoco pays  $1.6                                                               
billion in  tax or royalty  to the state.   He said Conoco  has a                                                               
desire for equal treatment.                                                                                                     
                                                                                                                                
MS. KAH  said without equal  treatment, partners  have misaligned                                                               
interests, which is a problem with developing fields.                                                                           
                                                                                                                                
1:18:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  asked if  the  $73  million allowance  is                                                               
equal treatment or not.                                                                                                         
                                                                                                                                
MR.  WENZEL  encouraged  the   legislature  to  consider  another                                                               
alternative that is applied equally.                                                                                            
                                                                                                                                
1:19:19 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GATTO asked the return on Conoco's investments.                                                                  
                                                                                                                                
MR. WENZEL said he doesn't  have the public return on investments                                                               
and can't disclose the return on particular projects.                                                                           
                                                                                                                                
REPRESENTATIVE  GATTO  asked  for  the  two  most  recent  annual                                                               
filings.                                                                                                                        
                                                                                                                                
1:20:06 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said  the huge rate increase in the  bill is supported                                                               
reluctantly by Conoco.   The state is enjoying  a budget surplus.                                                               
The PPT rate  would be 13 percent instead of  20 percent in order                                                               
for Conoco  to pay the  same taxes.   Some suggest that  the rate                                                               
should be  25 percent, but  that would  take money away  from the                                                               
private sector and  is not in the long term  best interest of the                                                               
state.   New  fields are  small and  costs are  high, he  stated.                                                               
Conoco spends a  lot of resources assessing  the upside potential                                                               
and the downside risk.  "When  we invest we fully understand that                                                               
there is  a chance that  we may not  get a return  on investment,                                                               
but  also acknowledge  that results  could exceed  expectations."                                                               
He  said   Conoco  bears  the   greatest  risks  and   should  be                                                               
appropriately rewarded.   He said  tax credits reduce  the risks,                                                               
but high  tax rates significantly  reduces the  upside potential.                                                               
If credits  are too high, the  state will take too  much downside                                                               
risk,  and if  taxes  are  too high,  investors  look for  better                                                               
opportunities  elsewhere.    He  said, "Moving  upwards  from  20                                                               
percent will seriously disrupt this risk-and-reward balance."                                                                   
                                                                                                                                
1:22:59 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  RAMRAS  spoke  of  the  public  testimony  a  few  days                                                               
earlier, and  he said he was  struck by the debate  being focused                                                               
on the  tax rate and tax  credit rate.  Representative  Kelly has                                                               
asked  why the  increments  are in  fives.   His  concern is  the                                                               
severance rate for ELF.   He noted a presentation called "Current                                                               
Production Tax  and Why it is  a Problem," by Dan  Dickenson.  He                                                               
said the  current production tax  is at 15 percent,  and applying                                                               
the ELF  brings it down to  about 7 percent.   Going up to  $60 a                                                               
barrel, the  effective tax  rate is  about 14  percent.   "We are                                                               
increasing the  taxes on the  industry enormously,  because right                                                               
now the effective tax rate is...6  percent."  He said a member of                                                               
the public  assumed that a  20 percent tax  was offset by  the 20                                                               
percent  credit, so  people are  thinking that  there will  be no                                                               
taxes.  "We are  taking the actual tax up for  the benefit of the                                                               
State of Alaska  from its current rate  of 6 to 14."   He said he                                                               
wants to  make it  clear that the  rate is going  up.   He stated                                                               
that  the rebate  of the  credit  is the  issue of  progressivity                                                               
because as the price of oil  goes up, the effective tax rate goes                                                               
up.                                                                                                                             
                                                                                                                                
1:27:39 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS said  the effective tax rate is now  closer to 4                                                               
percent after counting all the incentive programs.                                                                              
                                                                                                                                
MR. WENZEL said it is important  to be very careful when speaking                                                               
about the effective  tax rate and be sure to  understand what the                                                               
denominator is.   He said  he is  showing the effective  tax rate                                                               
relative to revenue.  The ELF  was a revenue-based system, and it                                                               
was a  15 percent tax  multiplied by  an ELF factor  that brought                                                               
the tax  down to  around 7 percent.   He said  the new  system is                                                               
based on  profits instead of  revenue, so  it is important  to be                                                               
careful in comparing the two.                                                                                                   
                                                                                                                                
CO-CHAIR  RAMRAS  expressed  that  tax  credits  are  not  widely                                                               
understood by the public.                                                                                                       
                                                                                                                                
1:29:43 PM                                                                                                                    
                                                                                                                                
MS. KAH said  the tax credit would be subtracted  from costs, but                                                               
the tax  applied to the profit  can't be compared to  the current                                                               
tax system.                                                                                                                     
                                                                                                                                
MR.  WENZEL said  the 20  percent  base tax  rate in  the PPT  is                                                               
applied  against  profits,  and  the 20  percent  tax  credit  is                                                               
applied against  capital and  exploration expenditures,  which is                                                               
probably a  smaller number than  profits at today's prices.   For                                                               
example, in 2005 Conoco had a  profit of $2.5 billion and capital                                                               
expenditures were  about $700 million.   The credits come  from a                                                               
smaller  number  and  do  not  reduce all  of  the  tax  that  is                                                               
calculated.                                                                                                                     
                                                                                                                                
1:31:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS  said it is good  to work with real  numbers.  So                                                               
20 percent tax  on $2.5 million is  $500 million, and if  it is a                                                               
$700 million expense, the 20  percent credit will be $140 million                                                               
to subtract from  those taxes.  He stated that  the effective tax                                                               
would be $360 million, which is  13 or 14 percent.  The committee                                                               
will debate  the combination of  tax and  credit, and he  said he                                                               
will  suggest  higher  exploration credits  because  "exploration                                                               
will drive  the state  more than development."   He  said credits                                                               
are poorly  understood.  Under the  new system he worked  out the                                                               
difference in taxes, and said,  "We're going from $160 million to                                                               
$360 million  when we go into  the next year.   That's the nature                                                               
of what  we're talking about  by making  this shift in  real life                                                               
terms.   Which is why this  is a considerable paradigm  shift for                                                               
the producers  to concede."   He said  he really wants  people to                                                               
understand that it is "not 20 in and 20 out."                                                                                   
                                                                                                                                
1:34:41 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  said  the PPT  is  deductible  against                                                               
corporate income  tax.  He  said there  is another fund,  the 470                                                               
fund or  oil spill prevention  fund, that's not included  as part                                                               
of the tax  bill.  He asked  how much of an impact  that would be                                                               
on the numbers that Mr. Wenzel is showing.                                                                                      
                                                                                                                                
1:35:24 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said  the PPT will be deductible  for corporate income                                                               
tax  purposes,  and the  numbers  displayed  don't include  those                                                               
effects.    The deduction  at  the  federal level  will  decrease                                                               
Conoco's tax burden but it won't  account for all the increase of                                                               
the PPT.                                                                                                                        
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked how significant it will be.                                                                      
                                                                                                                                
MR. WENZEL  said the effective tax  rate line on the  graph would                                                               
shift down.                                                                                                                     
                                                                                                                                
REPRESENTATIVE BERKOWITZ said  the 470 fund will be  removed as a                                                               
tax burden.  He  asked how much of an impact  that would have and                                                               
if the PPT makes other changes to Conoco's benefit.                                                                             
                                                                                                                                
1:36:44 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said he will have to get back to him.                                                                                
                                                                                                                                
MR.  WENZEL spoke  of  the transitional  provision  in the  bill,                                                               
where expenses  in the past five  years may be deducted  from the                                                               
taxes owed  in the  future, and  Conoco supports  that provision.                                                               
He said it is an essential piece of the bill.                                                                                   
                                                                                                                                
1:37:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ asked if  the impact of the transitional                                                               
plan will lower Conoco's effective tax rate.                                                                                    
                                                                                                                                
MR. WENZEL said his chart includes the transitional plan.                                                                       
                                                                                                                                
REPRESENTATIVE  SEATON said  he  was interpreting  the "core"  as                                                               
already having  the capital  expenditures, versus  satellites, so                                                               
there  would not  be a  20  percent capital  [deduction] in  core                                                               
areas.  "Is that the difference between these two?"                                                                             
                                                                                                                                
MR.  WENZEL  said historical  capital  is  already expended,  but                                                               
maintenance  capital  is  definitely  included  as  part  of  the                                                               
effective tax rate.                                                                                                             
                                                                                                                                
1:39:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked about  the difference between the two                                                               
dotted  lines,  the new  fields  and  the satellite  fields,  "if                                                               
that's not  mainly explained by  the capital tax credit,  what is                                                               
mainly  explaining the  difference in  those two  lines from  the                                                               
solid effective tax rate?"                                                                                                      
                                                                                                                                
MR.  WENZEL said,  "It  is  explained by  tax  credits, just  not                                                               
exactly the tax credits on  maintenance capital.  The investments                                                               
in the satellites  and the new fields are much  larger.  You have                                                               
large investments  early on to put  all the holes in  the ground,                                                               
put the  facilities in place,  and then ramp up  with production.                                                               
The yellow  dotted line here at  the top only includes  a smaller                                                               
level  of  maintenance  capital,  not  the  original  capital  to                                                               
actually put the facility in [and]  the wells on line."  He spoke                                                               
of a chart  showing the capital profile of  a particular project.                                                               
"The lower effective  tax rate on new and  satellite fields would                                                               
represent all  this capital  plus the revenue  that comes  off of                                                               
it, whereas  the orange  line up  on the  top would  instead only                                                               
include  a smaller  level of  maintenance capital.   It  wouldn't                                                               
include all the early capital to put the fields in place."                                                                      
                                                                                                                                
1:40:54 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD noted  that depreciating capital expenses                                                               
is accelerated and most of the benefit is gotten up front.                                                                      
                                                                                                                                
MR. WENZEL said not to  confuse depreciation deductions for state                                                               
corporate  income tax  with a  production  tax.   "These are  two                                                               
totally  different taxes."   For  state  corporate income  taxes,                                                               
yes, "you'd  appreciate assets  to recognize  the value  of those                                                               
assets over time, and try to  line that depreciation up with your                                                               
revenues.  On production taxes,  under the ELF-based system, it's                                                               
a tax  simply based  on revenue.   The  new system...is  based on                                                               
profits."   He said the  capital is  recognized when it  is spent                                                               
instead of depreciating it over time.                                                                                           
                                                                                                                                
REPRESENTATIVE CRAWFORD  said he was  referring to the  claw back                                                               
provision.                                                                                                                      
                                                                                                                                
MR.  WENZEL  said,  "The  rationale for  looking  back,  under  a                                                               
production  tax,  to  those  prior   investments  is  that  those                                                               
investments were  put in place at  a time prior to  this new PPT,                                                               
did not  receive any credits,  and yet  the profits off  of those                                                               
investments will be  heavily taxed as we go  forward...So we have                                                               
an unfair  treatment of these recent  capital expenditures, which                                                               
are very much contributing to our  revenues the day this tax goes                                                               
into place.   If  we don't  look back and  capture some  of those                                                               
very recent capital expenditures for  the last five years, we end                                                               
up  with a  higher tax  rate under  this new  PPT than  is really                                                               
appropriate relative  to our true  profits and cash  expenses, if                                                               
you will."                                                                                                                      
                                                                                                                                
1:43:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG said that  most people think of capital                                                               
investment  as pipes,  pumps and  similar  things.   He asked  if                                                               
finance charges are built into those costs.                                                                                     
                                                                                                                                
MR.  WENZEL  said, "No,  we  are  not including  any  capitalized                                                               
interest or  things of  that nature  in those  capital costs.   I                                                               
think that  will be driven  by the  definition of those  terms in                                                               
the bill."                                                                                                                      
                                                                                                                                
CO-CHAIR  SAMUELS  asked  what  is   spent  every  year  to  keep                                                               
production  going, and  how its  behavior would  have changed  if                                                               
Conoco had known  about the PPT.   Of all the money  spent in the                                                               
last  five  years,  how  much  of  that  was  meant  to  increase                                                               
production and how  much was spent to keep production  going?  He                                                               
said  there were  expenses that  Conoco would  have had  to spend                                                               
even  if it  was taxed  at 100  percent.   He questioned  how the                                                               
legislature  should judge,  as policy  makers, what  Conoco would                                                               
have spent  anyway.  "How  much of it  was to bump  up production                                                               
and how much of it was the way of the world?"                                                                                   
                                                                                                                                
1:45:55 PM                                                                                                                    
                                                                                                                                
MS. KAH asked if he was talking about administrative costs.                                                                     
                                                                                                                                
CO-CHAIR SAMUELS said he is talking  about the money that will be                                                               
considered for the transitional provision.                                                                                      
                                                                                                                                
MS. KAH said it is hard  to separate "because the natural decline                                                               
rate, production  would be in  steep decline if you  didn't spend                                                               
what you're  probably thinking  of as  maintenance capital.   But                                                               
that counts.  It's keeping the decline rate from dropping."                                                                     
                                                                                                                                
CO-CHAIR SAMUELS said,  "And what would you have  spent no matter                                                               
what the tax rate was?"  He  said it was somewhat of a rhetorical                                                               
question, but he is struggling with it.                                                                                         
                                                                                                                                
REPRESENTATIVE GATTO said  it may be a good idea  to go back five                                                               
years, but  to go back  the same amount  for each of  those years                                                               
does not seem  reasonable.  "Wouldn't you suggest  that we should                                                               
ladder all the way back?"                                                                                                       
                                                                                                                                
1:47:39 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said, "There's actually  another argument here that we                                                               
should go through...It's related to  the expectations we had when                                                               
we  decided   to  make  those  investments...No,   we  would  not                                                               
recommend a laddered approach going  back over time.  Rather...we                                                               
invested  in the  past based  on expectation  of future  profits.                                                               
That's how we make our decisions  about whether to invest or not.                                                               
It's  based  on  maintaining  production.    It's  based  on  new                                                               
production.   Those expectations  were based  on an  ELF system."                                                               
He  said suddenly  that expectation  was  very wrong.   "Now  our                                                               
effective tax rate on the production tax side has doubled."                                                                     
                                                                                                                                
1:48:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS  said Conoco's  expectation of  the value  of oil                                                               
was wrong  too: $62 a  barrel instead of $30  a barrel.   He said                                                               
Conoco  made an  investments thinking  oil  would be  at $30  per                                                               
barrel,  and  "you  have  been  the  beneficiary  of  a  terrific                                                               
economic cycle."   He said Conoco was lucky and  "it doesn't wash                                                               
with me.   You're going to have  a damn hard time  getting all of                                                               
this claw back/transition provision by me.  I'm not buying it."                                                                 
                                                                                                                                
1:50:03 PM                                                                                                                    
                                                                                                                                
MS. KAH said, "When  we look at projects we price  risk them.  We                                                               
take both the  upside and the downside into account  when we look                                                               
at projects."  She said  Conoco makes investment decisions for 10                                                               
to 20  years.  "We are  not thinking of a  five year investment."                                                               
She said people think $60 is  a very high price, but people don't                                                               
realize  that  Conoco's  costs  are  high.    She  spoke  of  the                                                               
increases in  steel price.   She said, "The service  industry has                                                               
just not  kept pace with  us."  She said  that needs to  be taken                                                               
into account.   "We definitely did  not consider a change  in the                                                               
basic tax structure when we made that investment decision."                                                                     
                                                                                                                                
1:50:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR RAMRAS  asked how much  is the depreciation life  of the                                                               
$700  million.   He  further asked,  "How much  of  it is  5-year                                                               
goods, how  much of it  is 15-year goods, and  how much of  it is                                                               
39.5-year  goods?   When you  say it's  20-year replacement,  how                                                               
much of that $700  million is 5-year goods?  I  don't want to sit                                                               
here and  listen to  a bunch of  baloney."  He  said much  of the                                                               
testimony is impressive,  but when he feels he is  not being told                                                               
the truth, "I'm going to call you  on it.  Because I am not going                                                               
to  sit here  with  producers and  just rubberstamp  disingenuous                                                               
testimony.   A  great deal  of that  $700 million  is maintenance                                                               
material that's going  to be replaced on a 5  to 7-year lifecycle                                                               
and not  based on a 20-year  investment horizon.  I  am not going                                                               
to accept that."                                                                                                                
                                                                                                                                
MR. WENZEL  said there is  a mix  of capital expenditure,  but he                                                               
doesn't have  it broken  out.  He  added that  depreciation lives                                                               
are set  for income tax  purposes based  on deductions.   He said                                                               
when Conoco makes an investment it  looks at prices and takes the                                                               
risks of  upsides and downsides.   The fact that prices  are high                                                               
is not getting lucky but is  an offset when estimates were off in                                                               
the other  direction.  He  said Conoco stockholders  expect stock                                                               
to  increase in  value when  oil prices  go up.   He  said Conoco                                                               
recognizes that  there are upsides.   There are many  other years                                                               
when  Conoco sees  a downside.   "It  does look  like, and  it is                                                               
true, we are  being very profitable at the moment  because of oil                                                               
prices being high."   He said costs are up also,  but not as much                                                               
as  the  price  of  oil.     When  looking  at  all  of  Conoco's                                                               
investments, it  is imperative that  Conoco passes the  oil price                                                               
risk to stockholders.  It is  inappropriate for Alaska to come in                                                               
and  actually take  away part  of this  upside that  the investor                                                               
should get.   He said  Conoco did not  expect a change  in taxes.                                                               
He said the  company expects something much more stable.   "As we                                                               
change taxes  this dramatically  in the State  of Alaska,  we are                                                               
actually affecting investor confidence in the state."                                                                           
                                                                                                                                
1:54:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON asked  what price  Conoco is  budgeting for                                                               
next year.                                                                                                                      
                                                                                                                                
MR. WENZEL said Conoco doesn't disclose that.                                                                                   
                                                                                                                                
REPRESENTATIVE OLSON said  Alaska is predicting oil to  be $45 to                                                               
$50  per barrel,  and  one of  your competitors  is  in the  same                                                               
range.  "Apparently they didn't have a problem with it."                                                                        
                                                                                                                                
1:55:29 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  said the  State  of  Alaska is  taking  a                                                               
considerable downside risk  under the PPT, and it  takes away the                                                               
oil companies'  risk on the downside  by taxing profits.   At $20                                                               
per barrel  the state will  only be  getting a three  percent tax                                                               
instead of  six.  He  said the PPT  gives the state  the downside                                                               
risk while taking more profit on the upside.                                                                                    
                                                                                                                                
1:56:10 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said  it is a profits-based tax, so  the burden of the                                                               
tax comes  down as  profits decline.   When  the tax  is imposed,                                                               
Conoco will build it into its expectations.                                                                                     
                                                                                                                                
REPRESENTATIVE  SEATON asked  about Conoco's  investment strategy                                                               
when ELF was  aggregated.  He asked if Conoco  stopped putting in                                                               
capital investments when that happened.                                                                                         
                                                                                                                                
MR.   WENZEL   said  Conoco   continued   to   invest  with   new                                                               
expectations.    He  added  that  the  change  was  inappropriate                                                               
because it was a  change in the tax law on  a particular day when                                                               
investments  had been  made under  other expectations.   He  said                                                               
Conoco  paid its  taxes on  that  basis, but  it affected  future                                                               
projects.   He said Conoco  has requested clarification  from the                                                               
state  that their  Alpine field  would not  be aggregated  so the                                                               
economics would allow  the project to go forward.   Conoco proved                                                               
to the  state that  the project  was not  economic under  the ELF                                                               
system  in an  aggregation.   The Department  of Revenue  said it                                                               
understood, so it  gave them a letter saying the  field would not                                                               
be aggregated  with Alpine.   So the project proceeded  and added                                                               
production to the State of Alaska and royalties and taxes.                                                                      
                                                                                                                                
1:58:37 PM                                                                                                                    
                                                                                                                                
MR. JONES said,  "At Prudhoe we were planning to  move ahead with                                                               
part of  the development  of the Orion  heavy oil  resources that                                                               
overlies Prudhoe Bay reservoirs, and  we had a plan...but because                                                               
of  the change  in  the  ELF aggregation  that  the governor  put                                                               
forward, we delayed that work."                                                                                                 
                                                                                                                                
REPRESENTATIVE   SEATON  said   heavy  oil   was  excluded   from                                                               
aggregation.                                                                                                                    
                                                                                                                                
MR. JONES  said it  wasn't excluded and  the project  was delayed                                                               
because the  incremental impact of  the ELF  on that field  is in                                                               
the range of 20 percent.                                                                                                        
                                                                                                                                
1:59:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said Conoco  keeps indicating  that the                                                               
state has  benefited from everything  that Conoco has  done, "but                                                               
I'd also  like to remind  you...that Conoco has also  reaped some                                                               
pretty  handsome profits  over the  last couple  of years."   Not                                                               
everything done  by the  state is just  for the  state's benefit.                                                               
He asked  if Conoco has  recouped the transitional  expenses, and                                                               
if  not, "What  is  your internal  schedule  for recouping  those                                                               
expenses?  What do you consider to be price risk?"                                                                              
                                                                                                                                
2:00:25 PM                                                                                                                    
                                                                                                                                
MR.  WENZEL said  he  sees this  as a  partnership  and both  the                                                               
industry  and the  state  benefits from  a  healthy oil  industry                                                               
today.   The  transitional expenditures  have not  been recouped.                                                               
"They were  part of  our expectation."   They have  probably been                                                               
recouped for corporate  income tax and largely  depreciated.  But                                                               
he said  this is a  different tax.   The ELF doesn't  provide any                                                               
credits; it was a revenue-based tax.                                                                                            
                                                                                                                                
REPRESENTATIVE BERKOWITZ  noted that Conoco has  already expensed                                                               
them for corporate  income tax purposes, and with the  PPT it can                                                               
expense them against profits retroactively.                                                                                     
                                                                                                                                
MR. WENZEL said that  is correct and it is a  different tax.  "We                                                               
have taken  the benefit  of those to  reduce our  state corporate                                                               
income tax according  to the tax code."  He  said that it appears                                                               
there will  be a new  tax that is  a proxy  for profits so  it is                                                               
appropriate to deduct them on this side.                                                                                        
                                                                                                                                
REPRESENTATIVE  BERKOWITZ   noted  that  one  expense   will  get                                                               
deducted twice.                                                                                                                 
                                                                                                                                
MR. WENZEL said yes because it is two different taxes.                                                                          
                                                                                                                                
REPRESENTATIVE BERKOWITZ said Mr.  Wenzel mentioned a price risk,                                                               
and he asked him to explain it.                                                                                                 
                                                                                                                                
2:02:21 PM                                                                                                                    
                                                                                                                                
MS. KAH  said oil  prices are "mean  reverting", but  she doesn't                                                               
know what  the mean will  be, and part of  the price risk  is "we                                                               
don't know  what the  average sustainable price  is going  to be,                                                               
but  we also  don't know  where we're  going to  be in  the price                                                               
cycle  when we  bring our  projects  on."   She said  she uses  a                                                               
decision and  risk analysis.   The company  puts price  risk into                                                               
project  economics weighted  by probabilities  of future  prices.                                                               
It is a  sophisticated process.  She stated the  concern that the                                                               
government  loves to  take  on the  upside but  not  help on  the                                                               
downside.                                                                                                                       
                                                                                                                                
REPRESENTATIVE BERKOWITZ  assumed a price risk  analysis was done                                                               
and he asked where Ms. Kah thinks things are headed.                                                                            
                                                                                                                                
MS. KAH said  it is only done  at the project level,  not for the                                                               
Alaska business unit.                                                                                                           
                                                                                                                                
REPRESENTATIVE  GATTO said  Conoco answers  to its  stockholders.                                                               
He said the  risk/reward ratio changes over time.   Prices may go                                                               
up  or down,  and  he  said to  be  responsible to  stockholders,                                                               
unexpected  changes should  have been  already calculated.   This                                                               
tax   change   was   already   priced   into   Conoco's   overall                                                               
calculations.  He  said he would be surprised if  it wasn't.  "It                                                               
can't  be  a  complete  surprise  to you  that  sooner  or  later                                                               
something would  have had to  change, and you've already  had the                                                               
good changes, the enormous bump in  prices."  The increase in the                                                               
tax rate would have been anticipated, he surmised.                                                                              
                                                                                                                                
2:07:14 PM                                                                                                                    
                                                                                                                                
MS. KAH said Conoco takes  political risks into account and views                                                               
Alaska very  favorably.   Some countries are  viewed as  risky in                                                               
terms of  changing their tax  rates, "but  we don't expect  it of                                                               
the State  of Alaska."  She  said that makes it  more likely that                                                               
Conoco will invest in Alaska rather than other places.                                                                          
                                                                                                                                
2:07:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GUTTENBERG  said the ELF  has been in place  for a                                                               
number of  years and was  expected to  change.  He  said everyone                                                               
knew there was  a gasline on the horizon,  adding to expectations                                                               
of a change  of policy or attitude.  He  noted that Conoco builds                                                               
political  risk  into  its equations.    The  state  constitution                                                               
requires  maximizing  the  benefit  of  resource  development  to                                                               
Alaskans.   He said  roads are  going out  and schools  are being                                                               
closed  [indecipherable]  and  Alaska  "brings you  back  to  the                                                               
table, just as  you bring us back to the  table to reevaluate the                                                               
policy.  And I think this is  just the point that that's been out                                                               
there in the  future and now we're there.   And that's been built                                                               
into the equation."                                                                                                             
                                                                                                                                
2:09:42 PM                                                                                                                    
                                                                                                                                
MR.  WENZEL said  he disagrees.   He  said Conoco  staff who  are                                                               
running projects every  day would not have had a  doubling of the                                                               
tax rate built  into their expectations.  He  said it undoubtedly                                                               
must  be done  in other  countries  with political  risk, but  in                                                               
Alaska his  analysts are not  told to  expect a change  in taxes.                                                               
"We are willing to support this  bill with its tax increase based                                                               
on the  overall balance of where  we're going in the  future, our                                                               
desire  to move  forward on  large investments--gas  pipeline and                                                               
other."   He said  the company is  reluctantly supporting  HB 488                                                               
but it never expected a tax increase in Alaska.                                                                                 
                                                                                                                                
2:11:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD  noted that Ms.  Kah said Conoco  has not                                                               
projected its  future in Alaska  except on  a project basis.   He                                                               
asked  them  to  take  the  projects and  give  the  committee  a                                                               
projection over  the next several  years.  He asked  where Conoco                                                               
thinks the equilibrium  price for oil is, so  the legislature can                                                               
get an idea of the best tax policy.                                                                                             
                                                                                                                                
MR. WENZEL  said he would  do that and  he continued to  read his                                                               
testimony.  He  said a field was discovered in  1992 prior to the                                                               
discovery  of  the Alpine  field,  and  it  was not  possible  to                                                               
develop  it  by  itself.    With  the  expansion  of  the  Alpine                                                               
facilities in  2004, it  is now  possible.   He said  the project                                                               
began in  2003 and was faced  with ELF aggregation.   In 2005 the                                                               
administration allowed it  to be stand-alone and  thus pay little                                                               
severance tax, so Conoco  went ahead with it.  It  will be an 18-                                                               
well roadless  satellite with  17,000 barrels per  day.   He said                                                               
capital  costs  are  $300  million.   Oil  and  gas  prices  have                                                               
increased, so labor  and material costs have increased.   He said                                                               
costs will be $30 million higher than anticipated.                                                                              
                                                                                                                                
REPRESENTATIVE  KERTTULA asked  what the  production tax  on that                                                               
field would have been.                                                                                                          
                                                                                                                                
MR. WENZEL said  he doesn't have that figure, but  he can get it.                                                               
He said the costs were expended  before the PPT.  The project was                                                               
decided based  on the  premise of paying  little or  no severance                                                               
tax.  It  will be now be  subject to a 20 percent  tax rate, "and                                                               
without  the transition  plan, the  increased  fiscal terms  will                                                               
result in a  reduction of over $100 million in  gross value and a                                                               
six  percent reduction  in our  average  return at  the $40  West                                                               
Coast price."                                                                                                                   
                                                                                                                                
CO-CHAIR RAMRAS asked what the West Coast price is today.                                                                       
                                                                                                                                
MR. WENZEL said it is about $60.                                                                                                
                                                                                                                                
2:15:53 PM                                                                                                                    
                                                                                                                                
MR.  WENZEL continued  reading his  testimony.   He spoke  of two                                                               
other satellites that  will have similar losses of  value.  There                                                               
are several other projects undertaken  in the past few years that                                                               
will have full value eroded as a  result of the new tax.  He said                                                               
a transition plan is essential.                                                                                                 
                                                                                                                                
CO-CHAIR  RAMRAS noted  opening  remarks that  said Conoco  would                                                               
reluctantly accept this  20/20 plan.  He asked Conoco  to work on                                                               
a  finer  transitional plan.    "This  transition plan  will  not                                                               
survive in  its present form."   He said Conoco should  look at a                                                               
variable to  reduce the credits,  "because to get 100  percent of                                                               
the last five years, I think, is an unrealistic expectation."                                                                   
                                                                                                                                
2:17:05 PM                                                                                                                    
                                                                                                                                
MS. KAH said  her job is to describe to  the committee how Alaska                                                               
is  viewed  versus  other  locations.    She  read  from  written                                                               
testimony.   She  said Alaska  has higher  capital and  operating                                                               
costs than in other places.                                                                                                     
                                                                                                                                
CO-CHAIR SAMUELS asked how much  of the price is the Trans-Alaska                                                               
Pipeline System tariff.                                                                                                         
                                                                                                                                
MS. KAH answered about $3.50 per barrel.                                                                                        
                                                                                                                                
REPRESENTATIVE  BERKOWITZ  said the  tariff  is  scheduled to  be                                                               
reassessed, and he wondered if it will come down.                                                                               
                                                                                                                                
CO-CHAIR  SAMUELS  said  the  realistic   question  is  what  the                                                               
industry is  assuming will happen  in 2009 when  the Trans-Alaska                                                               
Pipeline  System  settlement  methodology  [TSM}  comes  to  play                                                               
again.                                                                                                                          
                                                                                                                                
MR. JONES  said he  is supposed  to talk  about tariffs,  but his                                                               
company will  have to  renegotiate the  TSM.   He said  the other                                                               
factor is how much oil is  in the pipeline, because with less oil                                                               
the tariff could be higher.                                                                                                     
                                                                                                                                
2:21:03 PM                                                                                                                    
                                                                                                                                
MS. KAH  said her  slide does  not include  the fact  that Alaska                                                               
crude  does have  a lower  value because  it is  not at  the Gulf                                                               
Coast, "where  we set WTI."   She said it adds  another couple of                                                               
dollars to get it  to the WTI basis.  She said  her only point is                                                               
that costs  need to be  taken into  account when setting  the tax                                                               
rate.   Countries  with  the lowest  cost are  able  to have  the                                                               
highest tax.                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS asked  if Conoco looks at the  percentage of the                                                               
Trans-Alaska Pipeline System that it  is paying to itself through                                                               
Alyeska when looking at the economics of a project.                                                                             
                                                                                                                                
MR. JONES said it is looked at both ways.                                                                                       
                                                                                                                                
2:22:47 PM                                                                                                                    
                                                                                                                                
MS. KAH  said places  with high  cost and  low tax  are favorable                                                               
places  to operate.    High  cost and  high  tax  places are  not                                                               
getting  sufficient   investment,  she   stated.    There   is  a                                                               
relationship, as costs  go up, tax rates go down.   Alaska, under                                                               
ELF,  is in  high  cost, low  tax, but  under  the PPT,  Alaska's                                                               
position will rise  to the high cost, high tax  quadrant, and she                                                               
warned Alaska to consider that.                                                                                                 
                                                                                                                                
2:25:11 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS said  that in Norway taxes are  high and credits                                                               
are high,  and they do  have a lot of  exploration.  He  asked if                                                               
Conoco invests in Norway, how much,  and why, if Norway is in the                                                               
quadrant of high tax and high cost.                                                                                             
                                                                                                                                
MS. KAH said  Conoco invests in Norway because their  field is so                                                               
large it is attractive to  maintain investments.  She said Norway                                                               
is not getting enough investment.                                                                                               
                                                                                                                                
2:26:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ said  he has been hearing  that cost and                                                               
tax  are  critical  components  for investment,  but  he  is  not                                                               
hearing about the  effects of the market, which is  a much bigger                                                               
determinate  of  investment  than "these  relatively  incremental                                                               
amounts of  cost or tax."   If  Conoco predicts high  oil prices,                                                               
that should be a bigger  determinate of investments than tweaking                                                               
a tax rate.                                                                                                                     
                                                                                                                                
MS. KAH said Conoco price risks  all its projects, but it doesn't                                                               
know how  to take all  the political  risks and tax  rate changes                                                               
into account.   "What amazes me is that Norway  has not seen more                                                               
activity  despite the  fact that  we have  been in  a high  price                                                               
environment the  last three years."   She said they will  have to                                                               
lower tax rates to get that.                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ said Alaska  has concern with stability,                                                               
and it  can't forecast whether  mergers are  going to occur.   "I                                                               
would  argue that  there would  be  no Conoco  profits in  Alaska                                                               
whatsoever had the State of  Alaska not interceded to protect you                                                               
so you could continue to make  profits here."  He said that needs                                                               
to be considered.                                                                                                               
                                                                                                                                
2:28:26 PM                                                                                                                    
                                                                                                                                
MS. KAH said she  looks at her chart from the  bottom line of net                                                               
importing  countries,  which  generally want  to  maximize  their                                                               
production  and minimize  imports.    She said  Norway  is a  net                                                               
exporter, so  it is not  as desperate  for production.   Her next                                                               
slide is about "prospectivity."   Areas with higher prospectivity                                                               
can assess  higher taxes she  said.   The Alaska North  Slope has                                                               
limited prospectivity compared to  countries like Kazakhstan, she                                                               
noted,  and  tax  rates  need   to  reflect  that.    The  Alaska                                                               
consultant compared competitiveness of  Alaska's tax rate, but he                                                               
addressed something that is not  important to companies.  "If you                                                               
want to understand  how an investor would look at  it, you should                                                               
look  at  the  net  present  value."   She  said  the  consultant                                                               
provides both.                                                                                                                  
                                                                                                                                
CO-CHAIR SAMUELS asked about the net present value.                                                                             
                                                                                                                                
MS. KAH  said, "The net present  value is king even  though we do                                                               
look at all available indicators."                                                                                              
                                                                                                                                
                                                                                                                                
2:30:38 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON asked if political  or tax stability is more                                                               
important.                                                                                                                      
                                                                                                                                
MS. KAH said  both are factored into the  equation, but political                                                               
risk  is  not as  quantifiable,  but  the company  would  require                                                               
higher returns  to be  willing to  be in  a higher  risk country.                                                               
She  noted  that  Pedro  van   Meurs  tried  to  compare  Russia,                                                               
Azerbaijan  and Angola  to Alaska,  and  it is  not a  meaningful                                                               
comparison because of the field size.   The risk of a 700 million                                                               
field in  Russia is not comparable  to a 50 million  barrel field                                                               
in Alaska.  So tax rate needs to  be a lot lower in Alaska before                                                               
Conoco would be equally interested.                                                                                             
                                                                                                                                
REPRESENTATIVE GARDNER asked about Russia.                                                                                      
                                                                                                                                
MS. KAH  said she does  not have data,  but Conoco is  looking at                                                               
investing in arctic Russia.                                                                                                     
                                                                                                                                
2:33:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ said Ms. Kah  made the comparison of the                                                               
700  million barrel  field in  Russia and  the 50  million barrel                                                               
field in  Alaska, and he  asked if  Conoco can get  investors for                                                               
Russia, "shouldn't we be able to  get someone to come in here and                                                               
invest for our 50 million barrel fields?"                                                                                       
                                                                                                                                
MS. KAH  said she will  be talking about the  independents later.                                                               
She said  she has a  sense that the new  tax law is  designed for                                                               
new  players, and  she will  address  that later,  but the  state                                                               
needs the major producers.                                                                                                      
                                                                                                                                
REPRESENTATIVE  BERKOWITZ   said  the   majors  have   been  fine                                                               
partners,  but the  state is  reaching  a maturity  in the  North                                                               
Slope;  the  state  needs  to   make  sure  Alaska's  fields  get                                                               
developed.    "We don't  have  the  option  of going  to  another                                                               
place."                                                                                                                         
                                                                                                                                
2:34:34 PM                                                                                                                    
                                                                                                                                
MS.  KAH  said  her point  is  that  the  tax  rate needs  to  be                                                               
commensurate with prospectivity, field size and costs.                                                                          
                                                                                                                                
CO-CHAIR  SAMUELS  said  Ms. Kah  said  Conoco  doesn't  quantify                                                               
political risks,  but in Azerbaijan or  Nigeria it has to  be far                                                               
more risky  than what the  legislature comes up with,  which will                                                               
be reasonable.   "We are not going to nationalize  you and we are                                                               
not going to blow up the  pipeline and we're not going to execute                                                               
your workers."                                                                                                                  
                                                                                                                                
MS. KAH said  there is risk in those places,  but there have been                                                               
very few nationalizations.   She said they  have seen incremental                                                               
tax changes,  and Venezuela has  given them  substantial payback;                                                               
it has been  an attractive place to invest in  spite of political                                                               
risk.  Alaska has been  attractive because of low political risk,                                                               
she noted.                                                                                                                      
                                                                                                                                
2:36:52 PM                                                                                                                    
                                                                                                                                
MS. KAH said the state's  consultant said Norway is comparable to                                                               
Alaska,  but  Norway  has  a  lower  cost  structure  and  better                                                               
prospectivity.  It has unique  circumstances of a large field, so                                                               
Conoco will continue  to invest there.   Norway has significantly                                                               
higher taxes  than Alaska,  and it is  not a  helpful comparison.                                                               
Crude production has declined in Norway since 2001.                                                                             
                                                                                                                                
REPRESENTATIVE GATTO asked if all  production in Norway is in the                                                               
North Sea.                                                                                                                      
                                                                                                                                
MS. KAH said it is in the North Sea.                                                                                            
                                                                                                                                
REPRESENTATIVE GATTO said the risk in  the North Sea must be high                                                               
expenses.                                                                                                                       
                                                                                                                                
2:38:22 PM                                                                                                                    
                                                                                                                                
MS. KAH  said that  on the  United Kingdom  side, the  costs have                                                               
gone up,  but it was one  of the lowest cost  regions before that                                                               
because  they did  a  lot  of work  on  getting joint  facilities                                                               
between the  competitors.  The  UK has  been low cost  and Norway                                                               
has been more expensive.                                                                                                        
                                                                                                                                
2:38:49 PM                                                                                                                    
                                                                                                                                
MS.  KAH said  investors need  stable fiscal  terms, that  is why                                                               
Alaska  has been  an attractive  place to  invest.   "I am  truly                                                               
becoming concerned  that global  tax takes  are reaching  a point                                                               
where private  companies...are finding  it challenging  to invest                                                               
and meet our  shareholders' return requirements."   She said that                                                               
is the reason industry reinvesting  rates are not keeping up with                                                               
oil price  increases.   "I believe  one of  the major  reasons is                                                               
that we  are finding  it increasingly difficult  to invest  [in a                                                               
way] that meets our shareholder requirements."                                                                                  
                                                                                                                                
MS.  KAH said  investment may  be declining  because there  is an                                                               
expectation that prices  will cycle down, and because  there is a                                                               
lag time in  developing new projects to invest in.   She said the                                                               
oil industry is  afraid countries will change tax  rates, and "we                                                               
did not  have that fear five  years ago."  She  is concerned that                                                               
private oil companies will not  be able to invest in conventional                                                               
oil and be forced to  invest in alternative energy supplies, with                                                               
more favorable  tax terms.   She said she  has never seen  in the                                                               
last 20 years oil companies  being pushed out of the conventional                                                               
oil business.                                                                                                                   
                                                                                                                                
2:40:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON asked if slide  number 22 represents Alaska                                                               
only.                                                                                                                           
                                                                                                                                
MS. KAH said  it was worldwide total spending.   This is a global                                                               
trend, she  noted.   She said major  oil companies  are concerned                                                               
that  there  is  a  bias  in  favor  of  new  investors,  smaller                                                               
investors instead of  the "legacy" investors.  She  said there is                                                               
a common misperception that small  petroleum companies have lower                                                               
return requirements than  the majors, but she  doesn't think that                                                               
is true.  Independents have higher  costs of capital and they are                                                               
less diversified  and have higher  risk, and therefore  they need                                                               
higher returns.                                                                                                                 
                                                                                                                                
2:41:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ asked  what Conoco's  targeted rate  of                                                               
return is.                                                                                                                      
                                                                                                                                
MS.  KAH  said  she  can't   tell  because  it  is  competitively                                                               
sensitive.  She  stated that oil companies are not  happy in this                                                               
economic environment.  "We are worried about the future."                                                                       
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked if  she could  tell him  what the                                                               
expected rates of return would  be for Alaska independents.  "You                                                               
made the statement  that they need higher rates of  return, and I                                                               
need to be able to quantify that."                                                                                              
                                                                                                                                
MS.  KAH told  the committee  to  look at  other investments  the                                                               
independents might  be considering.   They will look at  the Gulf                                                               
of  Mexico and  the  United Kingdom  as alternative  investments,                                                               
"and I might  say that all of  those tax rates are  in that lower                                                               
left hand quadrant of the chart  we looked at earlier."  She said                                                               
their alternative  investments have  a much better  cost position                                                               
than Alaska.  She said she  would think independents would want a                                                               
higher return than they are  getting from their existing lower 48                                                               
production to invest in Alaska.                                                                                                 
                                                                                                                                
2:43:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said that  is just  an assumption.   He                                                               
said the  legislature is trying  to set concrete numbers  for tax                                                               
rates, and  it is  very difficult  to be  told it  is proprietary                                                               
information.   "You're  asking us  to  make a  concession to  you                                                               
without  you  telling us  what  it  is  that  you are  trying  to                                                               
achieve, and that to me is problematic."                                                                                        
                                                                                                                                
MS.  KAH said  she  feels uncomfortable  talking  about what  the                                                               
independents want.   There does seem to be a  bias for newcomers.                                                               
She  said, "Well  what about  us, the  legacy investors  who have                                                               
been investing here year after year?"                                                                                           
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said, "We  are not forgetting  you; you                                                               
have  been making  handsome profits  for  a good  long period  of                                                               
time, and  we hope you  continue to  make handsome profits  for a                                                               
good  long period  of  time.   But  when  you're making  internal                                                               
investment decisions that force you  to choose between an Alaskan                                                               
investment and a Russian investment, we  want you to go ahead and                                                               
make whatever  investment you want to  make, but we also  want to                                                               
make sure that the Alaskan  investment comes to fruition somehow.                                                               
Because we  don't have a  choice.   Our money comes  from Alaskan                                                               
oil; it doesn't come from Russian oil."                                                                                         
                                                                                                                                
2:44:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON said  other  than the  $73 million,  won't                                                               
Conoco be getting exactly the  same capital credits and allowance                                                               
for operating costs as the smaller companies?                                                                                   
                                                                                                                                
MS. KAH  said the  committee told  her that  Conoco was  going to                                                               
have  problems  with the  transition  program,  and that  is  how                                                               
Conoco would be treated unfairly.                                                                                               
                                                                                                                                
REPRESENTATIVE   SEATON  said   in   trying   to  stimulate   new                                                               
investment, Conoco's investments are treated the same.                                                                          
                                                                                                                                
MR. WENZEL said  that is correct, for new investment  the bill is                                                               
equal for small  and large producers.  He said  Conoco's issue is                                                               
around the  fact that it already  has a lot of  investment, which                                                               
does not receive some of the benefits from the new program.                                                                     
                                                                                                                                
2:46:37 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE KERTTULA  said Conoco gets a  deduction both under                                                               
the  current system  and the  new  one on  the corporate  income.                                                               
Conoco doesn't  get the credit,  but it  didn't get it  under ELF                                                               
either, so "I don't see the change there."                                                                                      
                                                                                                                                
MR. WENZEL said that is correct,  there wasn't a tax credit under                                                               
the  ELF system,  but  the system  was based  on  revenue and  it                                                               
wasn't appropriate to have a tax credit there.                                                                                  
                                                                                                                                
REPRESENTATIVE KERTTULA  said, "It didn't exist  then, it doesn't                                                               
exist now, and you  did get the corporate income tax.   So I know                                                               
we're putting  a new tax  onto the  revenue but the  other things                                                               
have not changed."                                                                                                              
                                                                                                                                
MR. WENZEL said there is a dramatic change in the tax rate.                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA said she doesn't  see the change in terms                                                               
of the deduction.                                                                                                               
                                                                                                                                
2:48:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  referred  to a  statement  that  independents'                                                               
money might  go to  the UK,  where taxes  have gone  up 50  to 60                                                               
percent in the last couple of years.                                                                                            
                                                                                                                                
MS. KAH said the UK has no royalties,  but the UK is still in the                                                               
lower  left hand  quadrant.   She said  they went  from 30  to 50                                                               
percent tax,  and now it  is viewed as  a risky place  to invest.                                                               
She guaranteed that the UK will now get less investment.                                                                        
                                                                                                                                
CO-CHAIR  SAMUELS asked  if other  countries  are changing  taxes                                                               
because profits  are so massive.   "If they all switch  that way,                                                               
the competition for capital will be on an even playing field."                                                                  
                                                                                                                                
2:49:33 PM                                                                                                                    
                                                                                                                                
MS. KAH  said she  is very  worried about the  future of  the oil                                                               
industry because  "I feel like  the entire oil industry  is being                                                               
pushed out  of conventional  oil investment."   She said  some of                                                               
that investment  is continuing, but  it's national  oil companies                                                               
from  consuming   countries  who   are  still  willing   to  make                                                               
investments  with lower  returns  than a  private  company.   "My                                                               
worry is the  future of the industry is pushing  the oil industry                                                               
out  of  oil and  into  unconventional  oil and  LNG...and  other                                                               
things.                                                                                                                         
                                                                                                                                
MS.  KAH said  she wishes  "you  would like  us to  stay in  this                                                               
country."   She  spoke of  the environmental  sensitivity of  the                                                               
North Slope and  said Conoco has a good track  record with strong                                                               
standards put in  place.  If Alaska replaces Conoco  with lots of                                                               
small companies,  there may  be environmental  problems.   She is                                                               
particularly  worried   if  Conoco  is  partnering   with  "these                                                               
people".  Conoco wants to continue  to have a significant role in                                                               
Alaska and has  the skills and experience for  all projects under                                                               
arctic  conditions.   Conoco has,  in particular,  experience and                                                               
technology for  heavy oil, and  it is the second  largest refiner                                                               
in the  United States,  so it  can allow  the refineries  to take                                                               
more heavy  crude.  Conoco has  access to markets that  allows it                                                               
to maximize  the value of the  resource.  Conoco has  strong risk                                                               
management skills  with a  diversified portfolio.   Conoco  has a                                                               
long-term investment  horizon, which  means that it  invests year                                                               
in and year out regardless of market conditions.                                                                                
                                                                                                                                
CO-CHAIR RAMRAS asked Ms. Kah  to talk about exploration credits.                                                               
He said he  is fascinated that development  and exploration costs                                                               
are approached  with the same  credit.   "What kind of  change do                                                               
you think would be enjoyed by  the State of Alaska if we lessened                                                               
your concern  on the  exploration side  and participated  more in                                                               
the risk side with oil  companies and increased significantly the                                                               
exploration credit?"                                                                                                            
                                                                                                                                
2:54:01 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said  Conoco would view that very favorably.   He said                                                               
Conoco  continues  to explore  in  Alaska  and is  using  current                                                               
exploration credits.                                                                                                            
                                                                                                                                
REPRESENTATIVE  CRAWFORD said  that the  governor's advisor  said                                                               
everything in this  "so-called" oil tax relates to gas  too, in a                                                               
ratio of 6,000 cubic  feet of gas to one barrel of  oil.  He said                                                               
he asked  him how this  ranks Alaska in  the world, and  was told                                                               
not to worry because the gas  tax part will be changed within two                                                               
or three weeks,  "but we may never get to  that part--this may be                                                               
the only stage that we deal with."   He asked what Conoco says as                                                               
to where Alaska  will be in the  range of gas tax if  this is the                                                               
gas tax that we are faced with.                                                                                                 
                                                                                                                                
2:56:02 PM                                                                                                                    
                                                                                                                                
MR. WENZEL  said with respect  to Alaska's  gas tax, "I  think we                                                               
will  definitely tell  you...without  that  fiscal stability  and                                                               
those provisions of  that stranded gas fiscal  contract that will                                                               
come out, there  is not sufficient incentive to  develop that gas                                                               
and bring it  to market today, under the current  system or under                                                               
this PPT."                                                                                                                      
                                                                                                                                
MS. KAH said the investment  contemplated for the pipeline is $20                                                               
billion and has a ten-year lead  time, and is much more risk than                                                               
Conoco  is comfortable  with.   "It would  need better  treatment                                                               
than even an LNG project that's  $5 billion because it's just too                                                               
big a  risk for a  company even  our size to  contemplate without                                                               
making  sure we  had good  enough fiscal  terms and  stability of                                                               
fiscal terms."                                                                                                                  
                                                                                                                                
2:57:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  CRAWFORD  asked if  Conoco  would  be adverse  to                                                               
someone else using  the $18 billion worth of  loan guarantees and                                                               
building a pipeline that Conoco could put its gas through.                                                                      
                                                                                                                                
MS. KAH said she has not been involved in the issue.                                                                            
                                                                                                                                
MR.  WENZEL  said, "We  don't  view  that  as the  most  economic                                                               
answer.  We  believe our project is viable and  doable.  Sure, we                                                               
will  look  at any  possible  way  of monetizing  that  resource,                                                               
bringing it  to market for  the full  benefit of both  Alaska and                                                               
ConocoPhillips.  If there are  other alternatives better than the                                                               
one that we've come up with, we're happy to consider those."                                                                    
                                                                                                                                
2:58:07 PM                                                                                                                    
                                                                                                                                
MR.  JONES  said  controlling  the   risks  is  one  of  the  big                                                               
challenges.                                                                                                                     
                                                                                                                                
CO-CHAIR  SAMUELS asked  how the  PPT looked  for Conoco  in Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
2:58:39 PM                                                                                                                    
                                                                                                                                
MR. JONES  said there is  a difference  between oil on  the North                                                               
Slope and gas  in Cook Inlet.   He said people may  ask why there                                                               
hasn't been more exploration for gas  in Cook Inlet.  "And as you                                                               
probably know,  it has  been a stranded  gas market,  where there                                                               
has been a lot more gas  resource than market that needs the gas.                                                               
So just changing the credit system  to try and get people to just                                                               
produce more gas,  other than very small  amounts...you won't get                                                               
people  going out  looking for  half  a TCF  or TCF-sized  fields                                                               
because once you  find it, it's now stranded again."   He said he                                                               
hasn't thought through the ramifications of  the PPT, and it is a                                                               
big change that may have  unintended consequences.  "What kind of                                                               
happens  is that  profits from  the existing  assets get  used to                                                               
incentivize new development,  so what may happen  is that profits                                                               
from Cook Inlet  get used to incentivize new  developments on the                                                               
North  Slope, since  it's...around all  of  Alaska.   So I  think                                                               
that's a challenge that you may want to consider."                                                                              
                                                                                                                                
3:00:02 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SAMUELS  said he has worked  hard to not have  this be a                                                               
forum  on any  proposal  that  may or  may  not  ever be  brought                                                               
forward by the  producers on a gas pipeline.   He noted that this                                                               
is complicated enough without that  overlay.  "You guys have been                                                               
very careful not to say that if  the oil tax regime does x, y, or                                                               
z, that  it has a  direct impact  on any potential  gas pipeline.                                                               
Now,  I  am   still  not  convinced  I   understand  how  they're                                                               
politically  attached.     I  understand  how   they're  attached                                                               
obviously in geography, but  economically-speaking, I am thinking                                                               
the gas  deal has  to stand alone  on the gas  deal, and  the oil                                                               
deal has to stand alone on the  oil deal.  And I fully understand                                                               
why you  want fiscal stability so  that we don't bait  you in and                                                               
half way  down the project,  and we  go: 'Well, just  kidding, we                                                               
want  more money  out  of our  hydrocarbons in  general.'   So  I                                                               
understand the  fiscal stability you're  looking for, but  what I                                                               
don't have  a grasp on  yet, or I guess  I disagree with,  is how                                                               
the  economics are  so completely  tied together  that you  can't                                                               
divorce  the discussions  and do  what is  best for  oil and  oil                                                               
development  and oil  exploration, and  then hopefully,  sometime                                                               
soon, do what  is best for gas, gas development,  and build a gas                                                               
pipeline."    He  asked  Conoco  to   say  how  the  two  are  so                                                               
economically interlinked.                                                                                                       
                                                                                                                                
3:02:00 PM                                                                                                                    
                                                                                                                                
MR.  WENZEL said  he  cannot give  more comfort  in  terms of  an                                                               
economic  linkage.    He  said  it  is  very  much  about  fiscal                                                               
stability  and knowing  that taxation  on the  gas side  will not                                                               
result  in instability  on the  oil side.   "They  are definitely                                                               
linked that  way."  He said  there is no doubt  that allowing the                                                               
gas project  to move ahead  will further enhance  oil production;                                                               
it will  extend the  life of  the pipeline.   He stated  that for                                                               
Conoco the  key part of  where it stands on  HB 488 "is  the fact                                                               
that we  want that gas  pipeline to go ahead.   We see  this bill                                                               
and the  balance it provides as  sort of a maximum  we can accept                                                               
as a  balance and move  forward and  stay aligned with  the other                                                               
sponsors of  that project."  He  said it is a  difficult balance,                                                               
but Conoco sees HB 488 as the most expedient way to go forward.                                                                 
                                                                                                                                
3:03:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said Conoco jumped first  and signed an                                                               
agreement  on gas  prior to  any understanding  or discussion  of                                                               
oil.  He asked  why Conoco was willing to go  ahead at that point                                                               
and now, all of a sudden, linkage is important.                                                                                 
                                                                                                                                
MR. WENZEL  said Conoco did  step out  and reached a  point where                                                               
the terms of  the gas project were sufficient to  move ahead.  He                                                               
said that  even then  Conoco recognized that  if the  project was                                                               
going to  be moved forward  on a reasonable and  expedited basis,                                                               
"the other two sponsors needed  to come to that same recognition,                                                               
and I  think they've come  there now  in the last  couple weeks."                                                               
He said  they are continuing  to work with the  administration to                                                               
find the  right balance  that "gets everyone  on the  same page."                                                               
He said  he can only reiterate  that fiscal certainty on  gas and                                                               
oil  are  now critical  to  all  three  sponsors for  moving  the                                                               
project forward.                                                                                                                
                                                                                                                                
REPRESENTATIVE  BERKOWITZ said  there was  introduced legislation                                                               
on oil  taxes, "and  even then  you were still  willing to  go on                                                               
gas.  I'm just trying to understand why."                                                                                       
                                                                                                                                
MR. WENZEL said from Conoco's  perspective, it reached that point                                                               
where the  terms on the gas  deal were sufficient to  move ahead,                                                               
and Conoco announced that.                                                                                                      
                                                                                                                                
REPRESENTATIVE  SEATON stated  that  he wants  to  set aside  the                                                               
pipeline and  consider this bill  as involving  oil and gas.   He                                                               
said,  "So we  have a  whole different  relationship here  with a                                                               
whole different  set of tax  credits, a whole different  tax rate                                                               
and tax system."  He said  he asked the administration for charts                                                               
showing the  effect on gas  under this PPT.   He said  he doesn't                                                               
think the data  show that there has been a  conjoining of gas and                                                               
oil on  a BTU basis.   He thinks they have  been quite disparate.                                                               
He wants to  understand if Conoco thinks gas needs  to be in this                                                               
PPT,  and whether  it complicates  or  simplifies the  structure.                                                               
"We were  considering this PPT as  an oil tax bill,  and now it's                                                               
an oil and gas tax bill."  He  asked if it is beneficial for this                                                               
oil tax to also apply to gas.                                                                                                   
                                                                                                                                
3:07:53 PM                                                                                                                    
                                                                                                                                
MR. WENZEL  said in  moving to  a PPT, it  would be  important to                                                               
combine  the  taxation  of  oil  and gas  together  in  order  to                                                               
simplify  the process.    He  said that  trying  to separate  all                                                               
expenses  and  revenue   between  gas  and  oil   might  be  very                                                               
difficult, because they are often  produced out of the same area.                                                               
Gas is a smaller piece of  Conoco's business, and Conoco has been                                                               
more focused  on the  taxation of its  future gas  business under                                                               
the stranded gas fiscal contract.                                                                                               
                                                                                                                                
REPRESENTATIVE SEATON  said he is  also concerned that  the state                                                               
hasn't looked  at the tax  ramifications of this proposal  on gas                                                               
and gas  production, and  whether gas  becomes more  favorable or                                                               
less for Conoco's business.                                                                                                     
                                                                                                                                
MR.  JONES said  Conoco  has  not run  economics  on  all of  its                                                               
projects for  the new  bill, but initial  estimates are  that the                                                               
PPT  will double  the severance  tax in  Cook Inlet.   These  tax                                                               
increases will  be passed  on to the  consumers in  South Central                                                               
Alaska.   He said  some independents  may say  that the  PPT will                                                               
increase investments, but you need a market to sell the gas.                                                                    
                                                                                                                                
3:10:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON  said assuming there is  fiscal certainty on                                                               
gas and  oil in the next  few months, what impact  will that have                                                               
on the 2009 export license renewals?                                                                                            
                                                                                                                                
MR. JONES said Conoco's current  LNG export license ends in 2009,                                                               
and "we're  looking to...extending it  assuming we have  the gas,                                                               
assuming South  Central demands are  met and that it's  the right                                                               
thing to do."  He said the  PPT will make it less profitable, and                                                               
that may impact it.                                                                                                             
                                                                                                                                
REPRESENTATIVE SEATON  said he represents  that area and  is very                                                               
concerned that nobody has done  an economic analysis on that, and                                                               
it may  be good to  just throw [a  gas tax]  in, but if  it means                                                               
that  the  export  license  doesn't make  any  sense  with  world                                                               
markets  on  LNG,  "that's  a  huge  deal  to  us  on  the  Kenai                                                               
peninsula."   He  said  he would  sure like  Conoco  to run  some                                                               
numbers on  the other effects  of the PPT,  and not just  look at                                                               
the North Slope.                                                                                                                
                                                                                                                                
3:12:30 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KERTTULA  asked  if   Conoco  has  thought  about                                                               
crediting its gas costs against its  oil profits and how it plays                                                               
into HB 488.                                                                                                                    
                                                                                                                                
MR.  WENZEL said  gas costs,  including capital  and expense,  go                                                               
into the formula and affect the overall taxation.                                                                               
                                                                                                                                
3:13:08 PM                                                                                                                    
                                                                                                                                
MS.  KAH said  large producers  are desirable  because they  have                                                               
large investment  spending capacity.   She said the  tax proposal                                                               
is the upward boundary of what is fair.                                                                                         
                                                                                                                                
3:13:53 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said  Conoco has suggestions for changes  in the bill,                                                               
including how eligible deductions  and credits are identified and                                                               
how the  value at  the point  of production should  be done.   He                                                               
noted  that  the proposed  tax  will  more than  double  Conoco's                                                               
effective  tax  rate.   In  isolation  it  is not  reasonable  or                                                               
appropriate,  particularly   because  the  state  has   a  budget                                                               
surplus,  but   to  facilitate  future  investment   the  company                                                               
reluctantly supports HB 488.                                                                                                    
                                                                                                                                
3:15:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BERKOWITZ noted  that Mr.  Wenzel doesn't  want a                                                               
tax increase  when the state  has a  surplus, but when  the state                                                               
has a deficit, the industry opposes a tax increase.                                                                             
                                                                                                                                
MR. WENZEL  said if  the state was  running a  deficit, investors                                                               
would be more  understanding, but if the state has  a surplus, it                                                               
is important  to consider  the message the  state sends  when the                                                               
money is not needed.                                                                                                            
                                                                                                                                
REPRESENTATIVE BERKOWITZ  said a  progressive structure  has been                                                               
discussed  for a  long time,  with oil  companies suggesting  it.                                                               
"We have  been locked  into a  regressive structure,  which hurts                                                               
industry at low prices and didn't  help the state at high prices,                                                               
and  that's  why you're  seeing  the  change today...It's  really                                                               
about getting a more equitable share."                                                                                          
                                                                                                                                
MR. WENZEL  said he  doesn't dispute  moving to  a PPT;  it could                                                               
work very  well.  But  his point is  the state is  increasing the                                                               
tax burden.                                                                                                                     
                                                                                                                                
3:17:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked if Mr.  Wenzel would favor  a tax                                                               
that is more progressive.                                                                                                       
                                                                                                                                
MR. WENZEL  said he would be  happy to consider some  step levels                                                               
depending on  the price.  "We  are very much focused  on the base                                                               
tax  rate and  the ability  to  look at  that base  tax rate  and                                                               
figure out  what our upside  is in the future.   So for  us, this                                                               
balance  works, but  to  the extent  that  the legislature,  this                                                               
committee, had a proposal along the  lines of a stepped series of                                                               
tax rate, that could  work also.  Again, it would  be key to look                                                               
at the  base rate  that's appropriate  at more  commonly expected                                                               
prices as opposed to setting it at today's prices."                                                                             
                                                                                                                                
REPRESENTATIVE BERKOWITZ  asked if he would  share those commonly                                                               
expected prices with the committee.                                                                                             
                                                                                                                                
MR. WENZEL  said there are  a number of  forecasts.  But  he will                                                               
not  divulge Conoco's  forecast.   He said  Ms. Kah  is concerned                                                               
about where oil prices are headed.                                                                                              
                                                                                                                                
MS.  KAH said  she reads  the  external forecasts  of prices  not                                                               
staying at the current level.   She said it is uncertain how fast                                                               
prices will  drop.  Inventory  is extremely  high, so there  is a                                                               
potential  for a  collapse.    She said  there  is concern  about                                                               
supply  disruptions, so  historically,  at the  current level  of                                                               
inventory, the price  of oil today should be $35,  but it is not,                                                               
it  is $60  per  barrel  because of  insecurity.    She said  the                                                               
question  is whether  the price  will decline  slowly or  bounce.                                                               
She said  most forecasts are between  $30 to $50 per  barrel, but                                                               
oil companies are more conservative.                                                                                            
                                                                                                                                
3:20:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO noted  that the  tax is  doubling under  HB
488,  but Conoco  stated there  will be  a 200  percent increase,                                                               
which is a tripling.                                                                                                            
                                                                                                                                
MR. WENZEL said Conoco was inappropriate in saying 200 percent.                                                                 
                                                                                                                                
CO-CHAIR SAMUELS  asked why  the state should  give a  tax credit                                                               
for abandonment expenses.   He asked how  many abandonments there                                                               
have been during the claw back provision.                                                                                       
                                                                                                                                
MR. WENZEL  said he doesn't  have those numbers.   Those expenses                                                               
are simply related  to abandoning individual wells.   His view is                                                               
that those  are appropriate expenses that  should be incorporated                                                               
in  any profits-based  tax.   It  is a  cost  of doing  business.                                                               
Those expenses do  not receive a capital tax  credit because they                                                               
are operating expenses.  There won't  be many profits to take the                                                               
credits  against for  abandonment  of large  fields like  Prudhoe                                                               
Bay.  They have to be  taken against production tax, and can't be                                                               
moved.  He said the company could  turn them into a tax credit by                                                               
virtue of  having a  loss, but  they could  only be  used against                                                               
other production tax.                                                                                                           
                                                                                                                                
3:23:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   GATTO  asked   if  there   is  a   "removal  and                                                               
rehabilitation" for  when the  last barrel  of oil  flows through                                                               
the pipe.  "Don't we already put that as upfront expenses?"                                                                     
                                                                                                                                
3:24:11 PM                                                                                                                    
                                                                                                                                
MR. JONES said the TAPS  settlement methodology includes a factor                                                               
for dismantling and restoration of  the pipeline, and that is the                                                               
only context for that allowance.                                                                                                
                                                                                                                                
3:24:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ said the  removal and rehabilitation has                                                               
the industry setting aside money  to accommodate that.  It should                                                               
have been expensed in already.                                                                                                  
                                                                                                                                
3:24:53 PM                                                                                                                    
                                                                                                                                
MR.  WENZEL said,  "We need  to  remember we're  talking about  a                                                               
profits-based tax on  production.  The fact that  those costs are                                                               
usable either in tariff methodology  or elsewhere, doesn't change                                                               
the fact that if  you are going to do a  tax for production based                                                               
on profit, you need to bring in expenses."                                                                                      
                                                                                                                                
3:25:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BERKOWITZ said you need  to remember that there is                                                               
a deal  that has already  been struck  that shouldn't be  part of                                                               
another  bite   of  the   apple.    He   said  the   removal  and                                                               
rehabilitation is a  done deal, and if it's not,  he would surely                                                               
like to know.  There should  be billions of dollars there at this                                                               
point.    "I'd  like to  have  that  money  if  we are  going  to                                                               
renegotiate it."                                                                                                                
                                                                                                                                
3:25:43 PM                                                                                                                    
                                                                                                                                
MR.   JONES  said   the  TAPS   investors/owners  have   received                                                               
reimbursement for that expense as part  of the TAPS tariff.  That                                                               
money is what  is set aside, there is no  similar account for the                                                               
North Slope oil fields.                                                                                                         
                                                                                                                                
3:26:10 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  KERTTULA  said  that  will work  under  the  TAPS                                                               
settlement; that isn't something that's covered by this bill.                                                                   
                                                                                                                                
                                                                                                                                
3:26:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON said  he thought  that 30  years ago  there                                                               
were open-ended bonds posted to handle that.                                                                                    
                                                                                                                                
MR. WENZEL said he would get back on that.                                                                                      
                                                                                                                                
MR. JONES said it is likely there  were bonds, but there is not a                                                               
similar TAPS mechanism for the North Slope oil fields.                                                                          
                                                                                                                                
3:27:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE CRAWFORD  asked if  Conoco would be  expensing for                                                               
that all along.                                                                                                                 
                                                                                                                                
MR. JONES  said in  Conoco's financial  books, clean-up  is taken                                                               
into account.                                                                                                                   
                                                                                                                                
3:28:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  said that  having  the  gas  tax in  the  bill                                                               
doesn't  bother him  much  because  gas from  the  slope will  be                                                               
locked into  a contract.   He  said his concern  is with  the tax                                                               
credits   for  Point   Thompson  where   there  is   very  little                                                               
exploration  risk, so  why should  the state  have a  tax credit?                                                               
The  state  doesn't need  incentives,  and  this issue  at  Point                                                               
Thompson is where  his red flags go up when  he sees gas included                                                               
in this bill.  He said Cook Inlet will be a separate issue.                                                                     
                                                                                                                                
3:29:47 PM                                                                                                                    
                                                                                                                                
MR. WENZEL said  Conoco's view on tax credits  for Point Thompson                                                               
is not  different from its  view on all  other tax credits.   "We                                                               
believe  the  tax  credit  should   apply  uniformly  across  all                                                               
investments  in  a basin,  at  the  very  least.   We  would  not                                                               
recommend  creating  some  differential   treatment  for  a  very                                                               
specific asset in this bill."  He said it would set a precedent.                                                                
                                                                                                                                
REPRESENTATIVE SEATON said the $73  million allowance was to give                                                               
stability  and to  not  over-tax production  of  less than  5,000                                                               
barrels.   He said he is  concerned that that number  was arrived                                                               
at for  oil prices of  $43 per barrel, so  the state is  giving a                                                               
pass for $23 a barrel oil  for a field producing 20,000 barrels a                                                               
day.   He asked  if it is  reasonable that that  size of  a field                                                               
would pay no tax.                                                                                                               
                                                                                                                                
3:31:40 PM                                                                                                                    
                                                                                                                                
MR.  WENZEL said  that base  allowance  is worth  $15 million  to                                                               
Conoco, so it  is appropriate to discuss it with  others where it                                                               
represents a larger cut.                                                                                                        
                                                                                                                                
REPRESENTATIVE SEATON noted  that the monthly tax  bill will have                                                               
a 10  percent holiday, and  no interest owed  on that money.   He                                                               
asked if  Conoco pays  interest on  the underpayment  for federal                                                               
taxes and why not have that same system.                                                                                        
                                                                                                                                
3:33:27 PM                                                                                                                    
                                                                                                                                
MR. WENZEL  said there  is no  interest as  long as  the taxpayer                                                               
meets  that  90 percent  threshold,  and  he doesn't  know  about                                                               
federal taxes.                                                                                                                  
                                                                                                                                
REPRESENTATIVE SEATON  said if  it is normal,  will Conoco  do it                                                               
for the state?                                                                                                                  
                                                                                                                                
MR. WENZEL  said Conoco  will pay  interest if  that is  what the                                                               
legislature wants.                                                                                                              
                                                                                                                                
3:34:31 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SAMUELS  said that  Dan  Dickenson  testified that  the                                                               
point of  production was going to  change, and he asked  what the                                                               
advantages or disadvantages of changing it is to Conoco.                                                                        
                                                                                                                                
MR.  WENZEL  said  he  is  not  up  to  speed  on  the  point  of                                                               
production.   He  said  the  North Slope  is  a  large heavy  oil                                                               
resource  that  is  significantly  disadvantaged  in  technology,                                                               
quality and  cost.  He said  it will be key  to incentivize heavy                                                               
oil to increase production.   The transition plan is essential to                                                               
ensure equitable  treatment.  Many investments  were marginal and                                                               
only justified under the ELF system.   The tax rate pushes Alaska                                                               
into a  high tax bracket, so  the state must be  comfortable with                                                               
the risk  that such a  high rate gives  the state.   He concluded                                                               
that many variables need to be considered in a tax regime.                                                                      
                                                                                                                                
[HB 488 was held over]                                                                                                          
                                                                                                                                
3:37:21 PM                                                                                                                    
                                                                                                                              
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 3:38 PM.                                                                

Document Name Date/Time Subjects