Legislature(2005 - 2006)CAPITOL 124

03/01/2006 12:30 PM RESOURCES

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12:38:58 PM Start
12:39:09 PM HB488
04:36:12 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 12:00 pm 3/2 --
-- Location Change --
Heard & Held
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         March 1, 2006                                                                                          
                           12:38 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                                                                                                       
OTHER LEGISLATORS PRESENT                                                                                                     
Representative Ethan Berkowitz                                                                                                  
Representative Eric Croft                                                                                                       
Representative Les Gara                                                                                                         
Representative Berta Gardner                                                                                                    
Representative David Guttenberg                                                                                                 
Representative Beth Kerttula                                                                                                    
Representative Vic Kohring (via teleconference)                                                                                 
Representative Mark Neuman                                                                                                      
Representative Norman Rokeberg                                                                                                  
Representative Woodie Salmon                                                                                                    
Representative Peggy Wilson                                                                                                     
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                                                                            
02/27/06       (H)       Heard & Held                                                                                           
02/27/06       (H)       MINUTE(RES)                                                                                            
02/28/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
02/28/06       (H)       Heard & Held                                                                                           
02/28/06       (H)       MINUTE(RES)                                                                                            
03/01/06       (H)       RES AT 12:30 AM CAPITOL 124                                                                            
WITNESS REGISTER                                                                                                              
JOHN ZAGER, General Manager - Alaska                                                                                            
Chevron Corporation                                                                                                             
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Expressed concerns with regard to HB 488.                                                                  
KEVIN TABLER, Manager                                                                                                           
Lands and Governmental Affairs                                                                                                  
Chevron Corporation                                                                                                             
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Answered questions about HB 488.                                                                            
MARK HANLEY, Manager                                                                                                            
Public Affairs for Alaska                                                                                                       
Anadarko Petroleum Corporation                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  During hearing  of HB 488,  related Anadarko                                                               
Petroleum Corporation's views.                                                                                                  
PAT FOLEY, Manager                                                                                                              
Land, Commercial                                                                                                                
Regulatory Affairs                                                                                                              
Pioneer Natural Resources                                                                                                       
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   Testified  in  support  of   HB  488,  but                                                               
requested that the tax credits be refundable.                                                                                   
JIM WEEKS, Alaska Operations Manager                                                                                            
Ultra Star Exploration LLC                                                                                                      
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Testified in support of HB 488.                                                                             
ACTION NARRATIVE                                                                                                              
CO-CHAIR  RALPH  SAMUELS  called  the  House  Resources  Standing                                                             
Committee  meeting  to order  at  12:38:58  PM.   Representatives                                                             
Ramras,  Samuels, Gatto,  Olson,  Seaton,  Crawford, and  Kapsner                                                               
were  present  at  the  call to  order.    Representative  LeDoux                                                               
arrived  as  the  meeting  was   in  progress.    Representatives                                                               
Berkowitz,  Croft, Gara,  Gardner, Guttenberg,  Kerttula, Kohring                                                               
(via teleconference),  Neuman, Rokeberg, Salmon, and  Wilson were                                                               
also in attendance.                                                                                                             
HB 488-OIL AND GAS PRODUCTION TAX                                                                                             
12:39:09 PM                                                                                                                   
CO-CHAIR SAMUELS announced that  the committee would continue its                                                               
discussion  of 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."                                                                    
12:41:35 PM                                                                                                                   
JOHN  ZAGER,  General  Manager   -  Alaska,  Chevron  Corporation                                                               
("Chevron"),  said his  the company  has had  a relatively  short                                                               
time  in  which to  review  the  proposed profit-based  petroleum                                                               
production tax (PPT),  and therefore some of  the conclusions are                                                               
preliminary.   He then familiarized the  committee with Chevron's                                                               
asset  base, which  was formed  when Chevron  acquired Union  Oil                                                               
Company  of California  (Unocal) in  August of  this year.   Both                                                               
companies,  he noted,  have  been active  in  Alaska for  several                                                               
years.    In  fact,  both  companies were  active  in  the  early                                                               
discoveries  at Cook  Inlet.   Currently, Chevron  is the  fourth                                                               
largest  producer  in the  state,  although  it's far  below  the                                                               
state's  third largest  producer  in terms  of total  production.                                                               
Chevron is large  enough that it would be treated  similar to the                                                               
producers with  regard to  the PPT, but  the company  isn't small                                                               
enough to reap the benefits aimed  at the smaller producers.  Mr.                                                               
Zager  informed  the committee  that  Chevron  has 382  full-time                                                               
employees or contractors,  of which 272 are located  on the Kenai                                                               
Peninsula   and   the  remainder   in   Anchorage.     With   the                                                               
aforementioned  staff and  a more  than $45  million payroll,  he                                                               
opined that  it's obvious that  it would  have a large  impact on                                                               
the economies of  the earlier mentioned areas.   The company also                                                               
contributes to the  economy by serving customers  such as Tesoro,                                                               
ENSTAR  Natural  Gas  Company,   Chugach  Electric,  Agrium,  and                                                               
12:44:54 PM                                                                                                                   
MR. ZAGER  highlighted that  Chevron is unique  in that  it's the                                                               
only producer in the state  with a relative balance of production                                                               
between the  Cook Inlet  and the North  Slope with  production in                                                               
the amount  of 60 percent  and 40 percent, respectively.   Either                                                               
stream of  production alone is  large enough to trigger  the PPT.                                                               
Because  of this,  Mr.  Zager opined  that  Chevron's Cook  Inlet                                                               
assets are uniquely  positioned to suffer from the  PPT, in terms                                                               
of  its low  margin  of  business and  difficulty  to support  an                                                               
additional tax.   He then reviewed Chevron's assets  on the North                                                               
Slope, as illustrated  on slide 3, which are as  follows:  Alpine                                                               
- 1 percent;  Greater Prudhoe Bay - 1 percent;  Greater Kuparuk -                                                               
5  percent;  Endicott  -  11  percent; and  Point  Thomson  -  25                                                               
percent.   Additionally,  Chevron is  one  of the  owners of  the                                                               
currently leased land within the  Arctic National Wildlife Refuge                                                               
(ANWR).  Chevron also has  exploration acreage on the North Slope                                                               
as well  as a fairly  extensive lease interest in  the foothills.                                                               
He acknowledged that  Chevron did participate in a  lease sale in                                                               
Anchorage in  which it spent  approximately $7  million acquiring                                                               
42 leases, for a total of some  480 square miles of new leases in                                                               
the area from Kuparuk down south.                                                                                               
12:47:00 PM                                                                                                                   
MR. ZAGER,  in response to  Representative Gatto,  explained that                                                               
the reference  to "ORRI" stands  for overriding  royalty interest                                                               
and  means that  the  company doesn't  pay any  of  the cost  but                                                               
receives 1  percent of the  production.   He likened this  to the                                                               
royalty the state has on certain leases.                                                                                        
REPRESENTATIVE BERKOWITZ  surmised that if Chevron  just spent $7                                                               
million to  acquire 42 leases,  it wouldn't seem to  be concerned                                                               
with the implementation of a new tax regime.                                                                                    
MR. ZAGER reminded  the committee that originally  the lease sale                                                               
was scheduled for October and  Chevron had decided to participate                                                               
in the lease.   However, the lease sale was  delayed until today,                                                               
which led  the company  to discuss whether  it should  change its                                                               
plans due  to the possibility of  a new tax regime.   The company                                                               
decided that due to the many  unknowns at this time, it's hard to                                                               
evaluate the company's  economic position based on  what might be                                                               
the final form of  HB 488.  Since the state  has always seemed to                                                               
establish reasonable tax regimes, Chevron  decided that it was in                                                               
the best interest to proceed with the lease sale.                                                                               
12:48:34 PM                                                                                                                   
MR.  ZAGER then  turned  the committee's  attention  to slide  4,                                                               
which  relates Chevron's  more complicated  Cook Inlet  position.                                                               
He reiterated  that Chevron,  which is  the dominant  operator in                                                               
the Cook Inlet, operates 10 of the  15 platforms in the area.  He                                                               
noted  that  eight  of  its  platforms  in  the  Cook  Inlet  are                                                               
producing  while  two platforms  have  been  shut  in.   He  then                                                               
reviewed  Chevron's onshore  and offshore  assets in  Cook Inlet.                                                               
Mr.  Zager highlighted  that  Chevron is  100  percent owner  and                                                               
operator of  the Swanson  River field, which  is the  location of                                                               
the Kenai  gas storage facility  where the  gas is stored  in the                                                               
summer  months until  needed  in  the winter.    The gas  storage                                                               
facility has proven  to be very instrumental in  meeting the peak                                                               
needs  of the  Cook Inlet  area in  the winter  months.   He then                                                               
mentioned that Chevron is constructing  a new storage facility at                                                               
Pretty Creek field.   He then highlighted new  exploration at the                                                               
Ninilchik  Unit,  which is  operated  by  Marathon and  in  which                                                               
Chevron has a  40 percent working interest, and  the Happy Valley                                                               
field,  which is  a 100  percent Chevron  asset. Chevron's  total                                                               
production in the  Cook Inlet is about 25,000 barrels  per day of                                                               
net oil  and about 16,000  barrels per  day of net  production on                                                               
the North Slope.                                                                                                                
12:51:46 PM                                                                                                                   
MR. ZAGER,  in response to  Co-Chair Samuels, reiterated  that of                                                               
the 10 platforms, eight are  currently producing and two are shut                                                               
in  and not  producing.    He then  shared  a  photograph of  the                                                               
Trading Bay  Unit [on  slide 5] and  reminded the  committee that                                                               
the North Slope isn't the  only location with difficult operating                                                               
conditions in the state.  The  Cook Inlet also has its challenges                                                               
with its  high tides and ice  floes.  Mr. Zager  acknowledged the                                                               
notion of bringing  in new producers to the  state, and requested                                                               
that  the committee  consider the  implications/risks  of a  much                                                               
smaller  and  perhaps  thinly capitalized  company  behind  these                                                               
assets.   He highlighted that  these operations require a  lot of                                                               
maintenance and  integrity because no one  wants an environmental                                                               
MR.  ZAGER  moved  on to  the  graphs  on  slide  6, which  is  a                                                               
logarithmic  scale  that   plots  time/years  against  production                                                               
rates.   He informed the committee  that in the 1970s  Alaska was                                                               
just  at 200,000  barrels per  day of  production as  compared to                                                               
today when there  is about 13,000 barrels per  day of production.                                                               
Although  the aforementioned  illustrates  that  production is  a                                                               
small fraction  of what it used  to be, operating costs  have not                                                               
decreased at  all, which is  illustrated with the water  cut line                                                               
that specifies that  today a little over 90 percent  of the fluid                                                               
being moved is water.  The  aforementioned adds to the expense of                                                               
the Cook Inlet.                                                                                                                 
12:55:14 PM                                                                                                                   
MR. ZAGER turned  the committee's attention to  similar graphs on                                                               
slide 7, although  they only refer to the Trading  Bay Unit.  The                                                               
graph  illustrates that  the peak  production  was about  120,000                                                               
barrels a  day, which  has decreased to  about 7,000  barrels per                                                               
day.  The water cut is up  to about 95 percent of the production.                                                               
Mr. Zager informed the committee that  Cook Inlet is a very high-                                                               
cost area in  that its direct lift costs are  $20-$25 per barrel,                                                               
and therefore  including the  transportation and  indirect costs,                                                               
it amounts to  more than $30 per barrel to  operate in the inlet.                                                               
Therefore, the breakeven on a cash  flow basis is a bit more than                                                               
$30 a barrel.                                                                                                                   
CO-CHAIR RAMRAS asked if those figures include depreciation.                                                                    
MR. ZAGER  replied no.  He  noted that this entire  discussion is                                                               
focused on profit as defined by  the PPT, which he referred to as                                                               
free  cash  flow.    However,  in  business,  earnings  are  very                                                               
important and  it means that  another depreciation line  would be                                                               
added.   For  the Cook  Inlet [holdings],  that amounts  to about                                                               
$10-$12 a barrel  of additional noncash expense  that is reported                                                               
for earnings  purposes.  He  pointed out that  large corporations                                                               
are especially  graded on their  earnings per barrel,  the priced                                                               
earnings  ratio.   Therefore,  a  company  generating barrels  in                                                               
production but  not earnings is  an issue  that would need  to be                                                               
addressed in the portfolio of that company.                                                                                     
12:57:34 PM                                                                                                                   
REPRESENTATIVE  GARA reminded  everyone  that until  a few  years                                                               
ago,  oil  was  at  $18  and  $20  per  barrel.    Therefore,  he                                                               
questioned whether  Chevron was  losing money  on its  Cook Inlet                                                               
operations at that time.                                                                                                        
MR.  ZAGER answered  that in  certain  parts of  the Cook  Inlet,                                                               
Chevron  was losing  money, as  evidenced by  the closing  of two                                                               
platforms.  The other platforms  were basically breakeven or in a                                                               
slightly  positive position,  but  given the  uncertainty in  oil                                                               
prices and that  things could get better, the  company decided to                                                               
continue to  operate those.  He  noted that once the  decision is                                                               
made to cease production, it's  irrevocable and "you really can't                                                               
go back and  decide to start those platforms up  again."  At this                                                               
point, the  decision to continue  was the right  decision because                                                               
at  current  prices Chevron  is  obviously  making some  profits.                                                               
However, when  one reviews the  amount of  operations, resources,                                                               
capital, and expense  that go into it, one must  question at what                                                               
point is that amount of profit  irrelevant to the operations.  He                                                               
explained that although  the PPT will not  take Chevron's profits                                                               
negative, it will  reduce them to the point at  which the company                                                               
may  decide to  say, "enough  is enough."   Furthermore,  the PPT                                                               
will  tend  to  drive  Chevron's earnings  per  barrel  into  the                                                               
negative range.   The aforementioned  would all be  considered in                                                               
deciding the future of the operations.                                                                                          
KEVIN TABLER,  Manager, Lands  and Governmental  Affairs, Chevron                                                               
Corporation,  interjected  that  one   must  also  remember  that                                                               
production is continuing to decline.                                                                                            
REPRESENTATIVE  GATTO  inquired as  to  the  cost  to shut  in  a                                                               
MR. ZAGER  explained that to  shut in  a platform means  to cease                                                               
production  on the  platform permanently,  which is  an expensive                                                               
proposition.   There is  an initial cost  to the  platform during                                                               
the   initial  closure   because   the   platforms  are   cleaned                                                               
thoroughly.  The cost to  cease production and clean the platform                                                               
is  several  million  dollars  per platform.    However,  if  the                                                               
platform is abandoned,  it could amount to a  million dollars per                                                               
well.   He noted that  ultimately the  platform would have  to be                                                               
removed,  which  would  be  an expensive  process.    In  further                                                               
response to  Representative Gatto, Mr. Zager  explained that once                                                               
the platform is  shut in, it moves into the  lighthouse phase and                                                               
it will  continue to have power  in order to maintain  the lights                                                               
and  avoid the  platform  becoming a  navigational  hazard.   The                                                               
aforementioned alone  costs hundreds of thousands  of dollars per                                                               
year per platform.   He noted that the  company also periodically                                                               
checks  the  shut  in  platforms  to  ensure  that  there  aren't                                                               
1:01:14 PM                                                                                                                    
MR. ZAGER related that if  production continues to decline at the                                                               
rate that it  will without additional capital  spending, the life                                                               
of  [Chevron's]  platforms will  be  fairly  limited.   Moreover,                                                               
there are significant operational  risks to merely maintain these                                                               
platforms in  Cook Inlet.   Although the  risk of having  a large                                                               
incident in  Cook Inlet is  very low, it  could have a  very high                                                               
impact if there was an incident.   He reminded the committee that                                                               
two platforms are shut in.   He then explained that the platforms                                                               
are codependent  and share overhead  and the onshore  facility is                                                               
located  in Nikiski.   When  one platform  becomes economic,  the                                                               
remaining overhead  and fixed  costs must  be shared  amongst the                                                               
remaining  platforms,  which  makes  it more  difficult  for  the                                                               
remaining platforms  to be viable.   "So, once one starts  to go,                                                               
there's going to be a  cascading effect," he related.  Therefore,                                                               
the  Cook  Inlet   is  very  challenging  and   can't  afford  an                                                               
additional production tax.                                                                                                      
MR.  ZAGER then  updated the  committee with  regard to  what has                                                               
happened since Chevron acquired  Unocal, which occurred on August                                                               
10, 2005.  At the time,  there was speculation that Chevron would                                                               
divest the Alaska assets, especially  the Cook Inlet assets.  The                                                               
thought was  that a company  of Chevron's size wouldn't  see much                                                               
financial benefit  in retaining  those assets.   From  October to                                                               
January, Mr.  Zager said that  he and  his staff spent  time with                                                               
Chevron's   management   to   familiarize  them   with   Unocal's                                                               
operations  and  opportunities  in  Cook  Inlet.    Through  that                                                               
process, it was determined that  there are incremental investment                                                               
opportunities  in the  Cook Inlet,  although they  amount to  the                                                               
lowest  part  of Chevron's  portfolio  in  terms of  reinvestment                                                               
opportunities.   There was another  list of projects  that didn't                                                               
make the list, and thus at  the end about 35-50 projects made the                                                               
list  while  a  similar  amount didn't.    In  February,  Chevron                                                               
decided to retain  all of [Unocal's] Cook Inlet  assets, with the                                                               
intent  to begin  a multi-year  investment program.   He  related                                                               
that  on a  gross  basis, spending  with  Unocal's partners,  the                                                               
company envisions  spending about  $200 million over  a four-year                                                               
period.   He noted  that the aforementioned  spending is  only in                                                               
the oil portion of the business.                                                                                                
1:04:49 PM                                                                                                                    
MR. ZAGER  informed the  committee that  Chevron will  retain the                                                               
current office  locations and  all its employees.   In  fact, the                                                               
company  anticipates that  six months  from  now it  will have  a                                                               
larger  in-state staff  than currently.   He  noted that  over 99                                                               
percent of the  employees are in-state residents  and the company                                                               
anticipates  that six  months  from  now there  will  be an  even                                                               
larger in-state staff base.  However,  there's a bit of a problem                                                               
in that  the company  performed its  analysis several  months ago                                                               
with  the current  severance tax  paid  to Cook  Inlet, which  is                                                               
essentially  zero  for these  assets.    When modeled  under  the                                                               
proposed PPT,  it was determined  that the proposed  PPT affected                                                               
the economics of  the company's projects.  He  explained that the                                                               
economics  for the  best projects  in the  portfolio became  less                                                               
attractive.   He  attributed that  effect  to the  fact that  the                                                               
projects were  generating lots of  profits and would have  to pay                                                               
the  additional  PPT.    However,  the  projects  on  the  bubble                                                               
benefited  under the  proposed PPT  because the  projects weren't                                                               
generating  quite as  much income  on  which to  pay taxes  while                                                               
benefiting  from  the  capital  credit part  of  the  investment.                                                               
However,  the benefit  doesn't makeup  for the  increased tax  on                                                               
some of the other investments.                                                                                                  
REPRESENTATIVE  BERKOWITZ  inquired  as to  which  projects  were                                                               
positively affected and which were adversely affected.                                                                          
MR. ZAGER posed  a hypothetical example in which a  project had a                                                               
30  percent  internal rate  of  return  (IRR) and  after  running                                                               
through  this  proposed  model,  the  additional  taxes  and  the                                                               
capital credit would  cause the IRR of the project  to drop to 25                                                               
percent.   However, under the proposed  PPT, a project with  a 12                                                               
percent return that  wouldn't normally meet the cut  would see an                                                               
increase  in IRR  to about  15-18 percent.   When  all those  are                                                               
added  together  under  the  20/20 PPT,  the  entire  package  is                                                               
degraded somewhat.                                                                                                              
1:08:03 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ characterized  [HB 488]  as a  one size                                                               
fits all  approach.  Therefore, he  inquired as to how  Mr. Zager                                                               
would tailor it, if allowed.                                                                                                    
MR.  ZAGER  opined  that  there are  two  components  that  would                                                               
benefit, such  as the upfront  20 percent that takes  MPV [market                                                               
place  value] away  from  the  project in  the  out  years.   For                                                               
incremental  investments,   the  ratio   is  going  to   be  very                                                               
important, he said.                                                                                                             
REPRESENTATIVE  BERKOWITZ  asked if  Mr.  Zager  felt that  there                                                               
might be a better taxing regime than the proposed PPT.                                                                          
MR. ZAGER  surmised that the  economic limit factor (ELF)  is off                                                               
of  the table.   He  informed the  committee that  Chevron hasn't                                                               
analyzed other  possible taxing scenarios.   He  highlighted that                                                               
the current  taxing regime  is one under  which Chevron  can live                                                               
REPRESENTATIVE GARA  inquired as to  the IRR that Mr.  Zager felt                                                               
would be necessary on an oil  and gas project in order to proceed                                                               
with it.                                                                                                                        
MR.  ZAGER  answered  that  he  couldn't  provide  those  numbers                                                               
because they are held close.                                                                                                    
1:10:38 PM                                                                                                                    
REPRESENTATIVE GARA  surmised then, based on  Mr. Zager's earlier                                                               
testimony, that a 12-13 percent IRR peaks Chevron's interest.                                                                   
MR. ZAGER commented  that Representative Gara may  be reading too                                                               
much  into  the  earlier  hypothetical  investment.    Mr.  Zager                                                               
continued  by reminding  the committee  that  under the  proposed                                                               
PPT, the portfolio overall was  slightly degraded.  Therefore, by                                                               
lowering  the tax  rate  or  increasing the  tax  credit or  some                                                               
combination of  the two would  improve the situation.   The other                                                               
issue  with regard  to the  PPT is  related to  the alignment  of                                                               
partners.   Although the current  partners in the Cook  Inlet can                                                               
already find ways  in which to be misaligned,  this proposal will                                                               
create a direct financial misalignment  because the partners will                                                               
be in different  tax positions depending upon  whether the credit                                                               
is received and  the amount of capital invested  elsewhere in the                                                               
1:12:34 PM                                                                                                                    
MR. ZAGER moved on to the  production profile for the Cook Inlet,                                                               
the Cook Inlet  offshore production as presented in  the graph on                                                               
slide  11.   The  graph  relates  the  effects of  the  four-year                                                               
capital investment  program.   He explained  that the  green area                                                               
represents  the  base  production   with  no  additional  capital                                                               
investment.  The graph shows a  decrease from 2,000 barrels a day                                                               
to about 4,000  barrels a day.  "Even at  current oil prices, I'm                                                               
pretty  sure that  that  would  be under  water  on  a cash  flow                                                               
basis,"  he opined.   The  modeling demonstrates  that with  four                                                               
years of  capital spending, production  could be maintained  at a                                                               
flat level  for four years.   The hope is that  during those four                                                               
years  of   capital  programs,   Chevron  could   identify  other                                                               
programs.   Furthermore, more tax  credits could help  place some                                                               
of the  projects just below  the threshold of  investment quality                                                               
over  that threshold.   Therefore,  with  capital investment,  he                                                               
predicted  that  Chevron  should  be  able  to  maintain  current                                                               
production for that four years.                                                                                                 
1:14:39 PM                                                                                                                    
MR.  ZAGER  then  turned  attention to  slide  12  regarding  the                                                               
reasons to spur Cook Inlet investment.   Since the gas is running                                                               
out  there  needs to  be  a  plan to  meet  the  energy needs  of                                                               
Southcentral Alaska.   On  the oil  side, oil  redevelopment will                                                               
maintain and  add new jobs and  will extend field life.   Another                                                               
reason  to  spur  Cook  Inlet   investment  is  new  exploration.                                                               
Currently, there  is a lack  of real significant  exploration and                                                               
there seem to be a limited number of players looking for gas.                                                                   
1:16:45 PM                                                                                                                    
MR. ZAGER  concluded by relating that  HB 488 is a  huge increase                                                               
in taxes.   "When we model it,  it looks like a minimum  of a two                                                               
times  tax severance  tax increase.    And depending  on some  of                                                               
these other levers ... as changing  the tax rate, taking away the                                                               
transitional capital, it could be up  to a four times increase in                                                               
severance tax," he opined.                                                                                                      
REPRESENTATIVE BERKOWITZ  inquired as to Chevron's  effective tax                                                               
rate under  the current  system versus  under the  PPT.   He also                                                               
requested that the answer distinguish  between Cook Inlet and the                                                               
North Slope assets.                                                                                                             
MR. ZAGER said  that he may be  able to only answer  parts of the                                                               
question because Chevron and Unocal's  financial systems have not                                                               
been integrated  yet.  On  a statewide basis, the  Unocal portion                                                               
was about  1 percent.  He  recalled that on the  Chevron side, it                                                               
was much higher, perhaps more than 10 percent.                                                                                  
REPRESENTATIVE BERKOWITZ asked  if Mr. Zager felt  that 1 percent                                                               
for the Kuparuk [River Unit] is fair.                                                                                           
MR. ZAGER  said that he  didn't want to speculate  regarding what                                                               
is fair.   However,  he acknowledged  that it's  a big  oil field                                                               
that generates significant profits under the current system.                                                                    
1:18:53 PM                                                                                                                    
CO-CHAIR RAMRAS  inquired as  to what Chevron  gives back  to the                                                               
communities of Alaska each year.                                                                                                
MR.  ZAGER said  that  he  didn't have  a  specific  figure.   He                                                               
related that  Unocal has been  very active relative to  its size.                                                               
He noted  Unocal's involvement  with the United  Way.   He opined                                                               
that Unocal is  doing its fair share, if not  more.  He estimated                                                               
that for  this year there is  about a $300,000 budget  as well as                                                               
other funds that come from  the "corporate."  In further response                                                               
to  Co-Chair   Ramras,  Mr.  Zager  estimated   that  [Chevron's]                                                               
profits,  as  defined  under  HB   488,  are  in  the  amount  of                                                               
approximately $300 million in 2005.                                                                                             
REPRESENTATIVE   KOHRING  asked   if  Mr.   Zager  believes   the                                                               
restructuring is  a good  concept, although the  tax level  in HB
488 is  too high.  He  inquired as to Mr.  Zager's recommendation                                                               
as to how to modify HB 488.                                                                                                     
1:20:56 PM                                                                                                                    
MR. ZAGER said  that would be answered momentarily.   In summary,                                                               
Mr. Zager agreed  that HB 488 proposes a large  tax increase.  He                                                               
reiterated  that the  better projects  in  a company's  portfolio                                                               
will  be  degraded and  the  poorer  projects will  be  enhanced.                                                               
Therefore, the legislation is increasing  incentives to invest in                                                               
marginal  projects   or  projects   with  a   high  risk.     The                                                               
aforementioned  will   impact  each  company  differently   on  a                                                               
portfolio  basis.   He expressed  the  need to  review how  those                                                               
projects compete worldwide and domestically.                                                                                    
REPRESENTATIVE   GATTO   inquired  as   to   how   much  of   the                                                               
approximately $300  million Chevron  made in  the state  would HB
488 deduct.                                                                                                                     
MR.  ZAGER estimated  that a  10 percent  deduction would  not be                                                               
unreasonable, although it could be less than or more than that.                                                                 
1:24:11 PM                                                                                                                    
MR. ZAGER, in  response to questions, related  that production is                                                               
about  40,000 barrels  a  day.   The bill,  as  presented by  the                                                               
governor, is something  that [Chevron] can support.   However, he                                                               
expressed  concern that  there are  four major  levers, which  he                                                               
anticipated would  be changed/modified  to move into  the state's                                                               
direction.  If  all those levers move simultaneously,  it will be                                                               
a very  different position than  currently.  Chevron,  he opined,                                                               
believes  those  to all  be  material  levers.   For  the  larger                                                               
producers,  the  standard deduction  is  small  to the  company's                                                               
total business.   For those  companies that don't produce  oil or                                                               
haven't  invested in  the  state, the  transition  capital is  an                                                               
irrelevant number.  Mr. Zager  opined that Chevron, for its size,                                                               
has been  producing and  investing heavily  or more  heavily than                                                               
anyone in the state.                                                                                                            
CO-CHAIR  SAMUELS inquired  as to  the  credits Chevron  expected                                                               
from the transitional money in HB 488, as it stands now.                                                                        
MR. ZAGER  answered that Chevron has  spent in the range  of $400                                                               
million over the last five years.                                                                                               
CO-CHAIR RAMRAS inquired as to  how much [Chevron] has spent over                                                               
the last two years.                                                                                                             
MR. ZAGER  estimated that  [Chevron] spent in  the range  of $150                                                               
1:27:07 PM                                                                                                                    
MR. ZAGER  said that  [Chevron] has  a few  ideas.   He explained                                                               
that Chevron  is the only  company in  the state with  a relative                                                               
balance  of  production between  the  Cook  Inlet and  the  North                                                               
Slope.  He explained that  Chevron views the standard $73 million                                                               
deduction will  be eaten up  on Chevron's North  Slope production                                                               
and thus  leave the Cook  Inlet production  to bear the  brunt of                                                               
the  petroleum tax.   However,  Chevron's joint  venture partners                                                               
and competitors in  Cook Inlet are under the umbrella  of the $73                                                               
million  exemption.   He  opined  that the  state  would want  to                                                               
encourage investment wherever possible  in the state.  Therefore,                                                               
Mr. Zager  proposed that whatever standard  deduction applies, it                                                               
could be  narrowly applied to the  Cook Inlet offshore oil  or as                                                               
broadly as south of the Brooks  Range in order to encourage those                                                               
who  haven't had  production in  the North  Slope to  explore and                                                               
develop elsewhere  in the  state and  to be  on equal  footing as                                                               
those present.                                                                                                                  
CO-CHAIR  RAMRAS said  that  he didn't  disagree  with regard  to                                                               
drawing a  line south  of the  Brooks Range  in order  to address                                                               
Cook  Inlet.   However, he  questioned  how he  could explain  to                                                               
those in  his community  to allow  [Chevron] $146  million before                                                               
the state takes a single dollar in severance tax.                                                                               
MR. ZAGER  clarified that  it would  only be  20 percent  of $146                                                               
million.   He opined that it's  in the economic best  interest of                                                               
the  state to  keep the  production on  line in  Cook Inlet.   He                                                               
reminded  the committee  that it  receives the  severance tax  as                                                               
well  as  the  royalties,  the property  tax,  and  the  economic                                                               
benefit of the jobs and the jobs associated with them.                                                                          
CO-CHAIR RAMRAS  asked if it's  in the best economic  interest of                                                               
MR. ZAGER replied yes.                                                                                                          
CO-CHAIR  RAMRAS  asked if  it's  in  the  best interest  of  the                                                               
Fairbanks Northstar Borough School District.                                                                                    
MR. ZAGER answered,  "To the extent they're part of  the state of                                                               
Alaska,  I think  it's  in  the best  interest  of  the state  to                                                               
encourage  as   much  production  everywhere  in   the  state  as                                                               
possible,  and encourage  investment everywhere  in the  state as                                                               
possible because that benefits the  entire state and ... I assume                                                               
they  receive  money  from  the   state  to  support  the  school                                                               
1:31:23 PM                                                                                                                    
REPRESENTATIVE  GARA  inquired  as  to  Mr.  Zager's  view  of  a                                                               
proposal in which the tax rate  is reduced below $20 a barrel and                                                               
the same equivalent for gas while  raising the tax rate above $30                                                               
a  barrel in  order to  protect the  company on  the low  end and                                                               
provide the state with a larger share on the high end.                                                                          
MR. ZAGER responded that the idea  of a tiered system is going to                                                               
add a  lot of complexity  with regard to  tracking.  In  fact, he                                                               
suspected that it  would create the need for  additional staff to                                                               
monitor  it.    Therefore,  he  viewed keeping  it  simple  as  a                                                               
definite advantage.   Although he  said he wouldn't rule  it out,                                                               
he  suggested  the  need  to  achieve a  single  rate  for  which                                                               
everyone could agree.                                                                                                           
MR.  ZAGER clarified  his first  proposal, which  would take  the                                                               
standard deduction and  apply it not only to the  North Slope but                                                               
to another area where there  is a distinct and separate operation                                                               
such that  everyone is  on the  same playing  field.   The second                                                               
proposal  is around  the rates  such that  the front-end  rate is                                                               
lowered  or   the  capital  credit  is   increased  to  encourage                                                               
investment,  or a  combination of  the two.   He  highlighted the                                                               
importance  of taking  down the  front-end rate  because it  will                                                               
come  out  of the  base  operation.    He noted  that  additional                                                               
credits  on the  back  side will  certainly  help on  incremental                                                               
1:34:50 PM                                                                                                                    
REPRESENTATIVE ROKEBERG related his belief  that if HB 488 worked                                                               
for Chevron, it  could work across the state.   He inquired as to                                                               
the affect  the PPT has  on the Cook Inlet  gas.  He  related his                                                               
assumption that  under HB 488, Chevron  would pay PPT on  the gas                                                               
only portion of the company's portfolio.                                                                                        
MR. ZAGER  noted his agreement,  and explained that  when Chevron                                                               
reviewed the basis for the  company's recommendations with regard                                                               
to  the Cook  Inlet  oil,  which is  a  low  margin business,  it                                                               
couldn't  make  the  same  arguments  for  the  Cook  Inlet  gas.                                                               
Therefore, it led to the  earlier suggestion to provide relief to                                                               
the Cook Inlet oil segment.                                                                                                     
REPRESENTATIVE ROKEBERG related his  pleasure in hearing that the                                                               
leases brought $7 million [in bids].                                                                                            
MR. TABLER commented that the decision  to bid on that was a leap                                                               
of faith  for which  only time  will tell whether  it was  a good                                                               
decision or not.                                                                                                                
REPRESENTATIVE  ROKEBERG  recalled  testimony  that  the  Chevron                                                               
board  had  approved or  there  had  been  a suggestion  to  make                                                               
substantial  investments.    He  inquired   as  to  the  type  of                                                               
investments being reviewed to boost the company's production.                                                                   
MR.  ZAGER   reminded  the  committee  that   Chevron  had  35-50                                                               
individual projects that were wells off of existing platforms.                                                                  
REPRESENTATIVE  ROKEBERG related  his understanding  that one  of                                                               
Mr. Zager's  recommendations is to  raise the tax credit  for CO2                                                               
MR. ZAGER  continued, and related  his recommendation  that there                                                               
be  an  additional  5  percent incentive  for  certain  types  of                                                               
projects that are challenged, such  as the heavy oil development.                                                               
He noted that  recently there has been discussion  with regard to                                                               
using  CO2  in  the  Cook   Inlet  for  tertiary  projects.    He                                                               
emphasized that it's a very  expensive proposition to take an old                                                               
field and  turn it into  a CO2  project, although there  could be                                                               
millions of  barrels of additional  resource.  He  then expressed                                                               
the need  to have absolute clarity  with regard to the  terms and                                                               
CO-CHAIR SAMUELS  related that there  have been  discussions with                                                               
the three  major producers  regarding having  a plan  for royalty                                                               
reduction rather  than having the  conflicts that arise  with the                                                               
cost allocations for a certain type of oil.                                                                                     
1:40:09 PM                                                                                                                    
MR.  ZAGER acknowledged  Co-Chair  Samuels  concerns and  related                                                               
that in a  large area, an oil field could  have several different                                                               
qualities of oil and lead  to conflicts.  Therefore, he suggested                                                               
that perhaps  an area  could be  designated as  a heavy  oil area                                                               
beforehand.   He then commented  that other mechanisms  should be                                                               
considered, in terms of how to  approach the heavy oil or the CO2                                                               
REPRESENTATIVE ROKEBERG asked if the  measurements of  the center                                                               
coil  of gravity  could  determine  what is  heavy  oil and  what                                                               
MR.  ZAGER replied  yes, but  expressed concern  that in  an area                                                               
with a  thick "pay" interval  there could be  different gravities                                                               
of  oil in  the  same well  or  field.   In  further response  to                                                               
Representative  Rokeberg,  Mr.  Zager related  his  understanding                                                               
that  those  in  Alaska  use  the terms  viscous  and  heavy  oil                                                               
interchangeably, although technically they  aren't.  He specified                                                               
that  he is  referring to  viscous oil  development in  which the                                                               
reservoir  temperature is  relatively low  and it's  difficult to                                                               
flow the oil.                                                                                                                   
REPRESENTATIVE ROKEBERG related that  he has reviewed carving out                                                               
the  Cook  Inlet sedimentary  basin  for  different treatment  in                                                               
order to enhance  the investment.  He announced that  he would be                                                               
willing to suggest  that the state default to the  ELF for oil in                                                               
the  Cook Inlet.    However,  he inquired  as  to  how one  would                                                               
account for  gas production in  Cook Inlet.  He  pondered whether                                                               
the PPT would be left in place for  that.  He then inquired as to                                                               
what would happen if a larger field was discovered.                                                                             
MR. ZAGER said that he didn't  have a silver bullet for that, and                                                               
noted that  some of  Chevron's fields produce  both oil  and gas.                                                               
Therefore, he  suggested that perhaps it  will have to move  to a                                                               
field-by-field basis designation.                                                                                               
REPRESENTATIVE  ROKEBERG  interjected  that the  legislature  has                                                               
done that in the past.                                                                                                          
1:42:48 PM                                                                                                                    
REPRESENTATIVE  GATTO   turned  attention   to  slide   2,  which                                                               
specifies  the number  of employees  and  the company's  payroll.                                                               
From  that he  extrapolated  that the  average  payroll for  each                                                               
employee is  $125,000 per  year.   He asked  if that's  a typical                                                               
industry standard.                                                                                                              
MR. ZAGER opined  that Chevron offers a competitive  pay with its                                                               
peers.  However,  he noted that the figure  presented may include                                                               
benefits and thus may not be the actual take-home pay.                                                                          
REPRESENTATIVE  GATTO  recalled   the  testimony  that  Chevron's                                                               
production  is  40,000  barrels  per day,  which  amounts  to  14                                                               
million barrels per  year.  The reported $300  million in profits                                                               
would come  out to $20  per barrel,  which is of  concern because                                                               
$20 per  barrel at these high  prices would mean that  a $20 drop                                                               
in  price would  place Chevron  at the  "break over  point."   He                                                               
asked if that's reasonable.                                                                                                     
MR.  ZAGER  clarified  that  the [$300  million]  in  profit  was                                                               
defined  by the  net profits  tax, which  means that  the capital                                                               
would need  to be added  in.  Doing  so would increase  the price                                                               
per barrel by $5  or so.  The point, he said,  is that Chevron is                                                               
significantly  more challenged  than those  operating exclusively                                                               
on the North Slope.                                                                                                             
1:45:18 PM                                                                                                                    
CO-CHAIR  SAMUELS asked  if  Mr. Zager  believes  that the  state                                                               
should offer  incentives for the  removal of a platform  that has                                                               
sellable tax credits for that particular function.                                                                              
MR. ZAGER highlighted  that the state has  benefited greatly from                                                               
the platforms  or the facilities on  the North Slope in  that the                                                               
state has  built an  envious financial  position.   Therefore, he                                                               
indicated that  when it comes  time to cleanup, the  state should                                                               
[pay] its fair share.                                                                                                           
CO-CHAIR SAMUELS inquired  as to whether Mr.  Zager believes that                                                               
all of  the royalty  owners in  the state  should be  treated the                                                               
MR. ZAGER said he couldn't answer that question.                                                                                
REPRESENTATIVE GARDNER reminded everyone  that over the course of                                                               
this  week, all  of  the  major producers  have  come before  the                                                               
committee with concerns,  but ultimately in support of  HB 488 as                                                               
written.     However,  Chevron  supports  the   legislation  with                                                               
stipulations.  She inquired as  to Chevron's position were HB 488                                                               
to pass as written.                                                                                                             
MR. ZAGER informed  the committee that since  Chevron first heard                                                               
about the  proposed PPT  tax, it raised  concerns with  regard to                                                               
the Cook  Inlet.   The company has  constantly been  ensured that                                                               
the Cook  Inlet will  be taken  care of.   However,  the proposal                                                               
doesn't seem  to do so,  from Chevron's perspective.   Therefore,                                                               
Mr.  Zager  said  that  he  would be  very  disappointed  if  the                                                               
legislation  doesn't include  something to  help the  Cook Inlet,                                                               
and thus  the company  put forward  two ideas  for consideration.                                                               
In   further  response   to   Representative   Gardner,  if   the                                                               
legislation  doesn't  provide  additional consideration  for  the                                                               
Cook  Inlet,  he  said  that   he  would  have  great  difficulty                                                               
supporting HB 488.                                                                                                              
1:48:07 PM                                                                                                                    
CO-CHAIR  SAMUELS  asked  if  Mr. Zager  believes  that  the  $73                                                               
million would  make a difference if  the company is only  in Cook                                                               
Inlet.   He noted that  it has been  argued that the  $73 million                                                               
has addressed  Cook Inlet, but  Chevron, with its  involvement in                                                               
both Cook Inlet and the North Slope, has a unique situation.                                                                    
MR. ZAGER specified  that if Chevron didn't have  any North Slope                                                               
assets, its  Cook Inlet  severance taxes  would double  under the                                                               
proposed scenario.   Mr. Zager said:                                                                                            
     I guess  if I own  a Cook  Inlet company, I  would then                                                                    
     certainly  take   some  comfort  in  the   $73  million                                                                    
     deduction  as   being  fair,  relative  to   the  other                                                                    
     producers.  I  still think we would have -  and it's in                                                                    
     the  best interest  of Chevron,  but it's  also in  the                                                                    
     best interest  of the state  ... to  encourage everyone                                                                    
     to expand  investment opportunities in the  Cook Inlet.                                                                    
     So, I  would still  be a  proponent of  considering ...                                                                    
     adjusting either  the tax  or the  credit rate  for the                                                                    
     Cook Inlet.                                                                                                                
REPRESENTATIVE SEATON  said that he  has been concerned  with the                                                               
inclusion  of  gas in  the  oil  because  the  two are  taxed  at                                                               
different rates and  receive different credits.  He  asked if Mr.                                                               
Zager was  saying that HB 488  would have the same  impact on gas                                                               
and oil and thus he sees no difference in the two.                                                                              
MR.  ZAGER replied  yes,  and  explained that  since  it's a  net                                                               
profits tax  when one  makes a  profit on gas,  a profit  is also                                                               
being  made  on oil.    However,  he said  that  he  does draw  a                                                               
distinction in Chevron's portfolio with  regard to its Cook Inlet                                                               
assets and  the cost  basis between its  oil and  gas operations.                                                               
Mr.  Zager  related that  from  Chevron's  perspective, the  most                                                               
critical  aspect is  the oil  operations.   If the  [legislation]                                                               
were expanded to include the  gas operations, he said he wouldn't                                                               
REPRESENTATIVE SEATON  surmised then  that Mr. Zager  didn't view                                                               
the difference in  the oil tax rate  and the gas tax  rate on the                                                               
production tax as significant.                                                                                                  
MR. ZAGER  said that [Chevron]  actually didn't do  that analysis                                                               
and  merely  reviewed  Chevron's current  severance  tax  without                                                               
breaking it down  between oil and gas.  Then,  it was reviewed on                                                               
a combined basis afterwards.                                                                                                    
1:51:49 PM                                                                                                                    
MR. ZAGER reminded the committee  that Chevron has been in Alaska                                                               
for a  long time  and, as  indicated by the  results of  the sale                                                               
today,  Chevron hopes  to  operate  in Alaska  for  a long  time.                                                               
However, that will depend, to  some degree, on the measures taken                                                               
on the new petroleum tax.   Mr. Zager opined that the state would                                                               
benefit if  it could  establish a  formula to  attract additional                                                               
1:53:58 PM                                                                                                                    
The committee took an at-ease from 1:54 p.m. to 2:03 p.m.                                                                       
2:04:03 PM                                                                                                                    
MARK  HANLEY,  Manager,  Public   Affairs  for  Alaska,  Anadarko                                                               
Petroleum  Corporation  ("Anadarko"),   began  by  informing  the                                                               
committee that Anadarko is a  large independent, which means that                                                               
it explores  for and produces  oil and gas.   Generally, Anadarko                                                               
doesn't have  refineries or  gas stations.   He  further informed                                                               
the committee that  Anadarko is a $23 billion  market cap company                                                               
with  a little  over 3,000  employees.   Mr. Hanley  related that                                                               
Anadarko is one of the larger independents.                                                                                     
2:06:00 PM                                                                                                                    
MR.  HANLEY  highlighted that  Anadarko  is  operating in  Alaska                                                               
exclusively on  the North Slope,  as illustrated by the  pink and                                                               
yellow  areas on  the slide  entitled "Anadarko's  Alaska Acreage                                                               
Position."   He noted that Anadarko  partners with ConocoPhillips                                                               
Alaska, Inc.  and Pioneer for  which ConocoPhillips  Alaska, Inc.                                                               
is the operator.   However, Anadarko also has  interests in which                                                               
it's the operator  in the amount of 2.2 million  net acres, which                                                               
results  in ConocoPhillips  Alaska, Inc.  and Anadarko  operating                                                               
about the same net acreage.   However, that will shortly decrease                                                               
because Anadarko  brought in a new  partner, BG, that is  a large                                                               
worldwide  gas  player.    Anadarko,   he  opined,  has  multiple                                                               
opportunities  and has  developed a  regional model  in order  to                                                               
model various  areas.  For  the purposes of this  PPT discussion,                                                               
Mr.  Hanley characterized  Anadarko as  a bit  of a  hybrid.   He                                                               
noted  that  although Anadarko  doesn't  have  interests in  Cook                                                               
Inlet, it does have production there.                                                                                           
2:08:20 PM                                                                                                                    
MR.  HANLEY related  that Anadarko  views  the North  Slope as  a                                                               
world class petroleum basin in which  much oil has been found and                                                               
much remains  to be found.   Anadarko, he further  related, tends                                                               
to  focus on  legacy  or anchor  field  opportunities that  would                                                               
support  stand-alone  facilities.   Furthermore,  Anadarko  views                                                               
Alaska as a favorable political  environment.  In response to Co-                                                               
Chair Samuels,  Mr. Hanley clarified  that Alaska is  a favorable                                                               
political environment  because it's a western  democracy in which                                                               
the  risks aren't  the same  as in  other areas.   Moreover,  the                                                               
State  of Alaska  views development  positively.   Also, Anadarko                                                               
views the abundant new entrants as partnering opportunities.                                                                    
CO-CHAIR RAMRAS  asked Mr. Hanley  if [Anadarko] views  the State                                                               
of Alaska as a partner or merely a taxing agent.                                                                                
MR. HANLEY  answered that generally,  [Anadarko] views  the state                                                               
as a  partner, and mentioned  that the  company has been  able to                                                               
work collaboratively with the state.                                                                                            
CO-CHAIR  RAMRAS related  his  fascination  with the  exploration                                                               
credits and the opportunity to  bring down the cost for explorers                                                               
and be in partnership financially.                                                                                              
MR. HANLEY  said he  would address that  at the  appropriate time                                                               
during his testimony.                                                                                                           
2:11:39 PM                                                                                                                    
MR. HANLEY continued  and added that Anadarko also  views the new                                                               
entrants as a positive in order  to explore the basin.  "The fact                                                               
that  there's new  players  with  different ideas  from  us is  a                                                               
positive for  us," he stated.   However, [the challenge]  is that                                                               
it's a maturing  basin with high costs, a  lack of infrastructure                                                               
in  some respects,  limited  access at  times  to facilities  and                                                               
pipelines,  extremely  long   lead-time  exploration,  and  short                                                               
operating windows.   Therefore, there is a cost  and the proposed                                                               
credits  help  to recover  some  of  those costs  faster  thereby                                                               
reducing the cost of the development.                                                                                           
2:14:14 PM                                                                                                                    
REPRESENTATIVE GARDNER  pointed out that although  Anadarko views                                                               
new entrants and partnering as  opportunities, it is competition,                                                               
which is a challenge.                                                                                                           
MR. HANLEY  clarified that the  reference in the  presentation to                                                               
competition is the  lack thereof.  However, he noted  that one of                                                               
the  reasons  Anadarko looks  for  anchor  fields is  because  it                                                               
doesn't necessarily  want to access existing  facilities and have                                                               
to deal with  the satellite issues.  It's a  factor that Anadarko                                                               
considers, he said.                                                                                                             
CO-CHAIR SAMUELS turned attention  to the challenge, as specified                                                               
by  Anadarko,  of limited  access  to  facilities and  pipelines.                                                               
With   regard  to   the  TAPS   [Trans-Alaska  Pipeline   System]                                                               
settlement methodology (TSM) reopening in  2009 or 2011, he asked                                                               
if Anadarko has a methodology to  [predict] the result of it.  He                                                               
asked whether  Anadarko factors  in the  aforementioned reopening                                                               
or  has to  utilize  the  economics of  the  current tariff  when                                                               
running the economics.                                                                                                          
MR. HANLEY said  that currently Anadarko is using  the numbers as                                                               
they are.   He expressed hope  that the state won't  have to deal                                                               
with  TSM   because  Anadarko  is   before  the   Federal  Energy                                                               
Regulatory Commission (FERC) challenging  those rates.  He opined                                                               
that well before 2009, there should  be a decision.  A judge will                                                               
determine  who is  in the  right in  this case,  and Anadarko  is                                                               
fairly  confident  that  interstate  rates  will  also  decrease.                                                               
Therefore, the state  may be able to reopen TSM  because the FERC                                                               
may have set a just and reasonable rate.                                                                                        
CO-CHAIR SAMUELS  mentioned that the  TSM will play into  the $73                                                               
million and the tax credits.                                                                                                    
2:16:57 PM                                                                                                                    
MR. HANLEY continued  with the challenge relating to  the lack of                                                               
a gas market.   He specified that Anadarko is  very supportive of                                                               
getting a gas  line built in Alaska because it  will improve both                                                               
oil and gas economics.  In  regard to Anadarko's view of the PPT,                                                               
Mr.  Hanley  opined  that  the  administration  did  a  good  job                                                               
balancing the  issues and the  priorities.  He related  that from                                                               
Anadarko's perspective, the  higher prices it might  pay from its                                                               
Alpine production are offset by  what the company generally views                                                               
as improved economics for exploration  and development as well as                                                               
protection on  the downside.   Therefore, overall  Anadarko views                                                               
[this proposal]  as a  positive balance  because it  improves the                                                               
company's  exploration economics  and  for  that reason  Anadarko                                                               
supports it.                                                                                                                    
REPRESENTATIVE GARA related, "It seems  to me that, as I've heard                                                               
from your company in the past  and others, the prospects of major                                                               
gas  finds, assuming  there is  a gas  pipeline and  ... an  open                                                               
season that lets you get gas  into the pipeline, ... are so great                                                               
that  nobody was  talking  about the  need  for these  additional                                                               
credits before."   Therefore, he  inquired as to what  Mr. Hanley                                                               
could  say to  convince him  that the  companies really  need the                                                               
proposed credits in HB 488.                                                                                                     
MR. HANLEY related that Anadarko  believes there's tremendous gas                                                               
potential, although it's  not a sure thing.   He then highlighted                                                               
that  there is  a difference  between finding  a lot  of gas  and                                                               
whether that  gas is  commercial.  Compared  to the  economics of                                                               
the existing gas,  "ours is less economic," he  opined.  Anadarko                                                               
has exploration risk,  development risk, et cetera.   He informed                                                               
the committee that there would have  to be very large field sizes                                                               
that  flow  fairly well  because  Anadarko,  in this  high  price                                                               
market,  can't afford  to drill  many  wells to  obtain the  gas.                                                               
Anadarko,  he   opined,  believes  there's  potential,   and  the                                                               
credits,  particularly the  exploration  incentive credits,  have                                                               
2:21:42 PM                                                                                                                    
MR. HANLEY  pointed out that Anadarko  has had the concept  for a                                                               
couple of  weeks and the legislation  for a week.   Therefore, he                                                               
said he  would like to reserve  the right for Anadarko  to change                                                               
its mind  because the company isn't  sure how HB 488  affects gas                                                               
economics.  Under  the old system, the maximum tax  on gas was 10                                                               
percent  and  there was  a  different  ELF.   He  explained  that                                                               
generally Anadarko, on  both its oil and gas  prospects, will pay                                                               
a high ELF because Anadarko is  looking for fields such as Alpine                                                               
and  large  fields on  gas.    Moreover, Anadarko's  modeling  is                                                               
generally based on high severance taxes.                                                                                        
MR. HANLEY  then turned  the committee's  attention to  the slide                                                               
entitled, "New  Small Oil Development,"  which specifies  that it                                                               
would have an  ultimate recovery of 47 million barrels.   He then                                                               
turned  to   the  graph  on   the  slide  entitled,   "Small  Oil                                                               
Development -  Rate of Return."   He specified that the  red line                                                               
is the  value of the  $73 million.  If  one views the  [small oil                                                               
development], one can  see the improvement in the  rate of return                                                               
in comparison to the current case.   He then highlighted that the                                                               
green  line is  the same  model, without  the $73  million.   The                                                               
aforementioned, he  said, is  Anadarko because  it would  use the                                                               
$73  million against  Alpine.    "It gives  you  an  idea of  the                                                               
relative value between an existing  player on this particular oil                                                               
development and a new player who  has the ability to use that $73                                                               
million  as  part of  their  economics."   Therefore,  there's  a                                                               
fairly good  delta there.   He pointed  out that the  graph [with                                                               
the maroon line]  assumes an existing producer at  the 25/20 PPT.                                                               
The  green   line  illustrates  that   Anadarko  would   have  an                                                               
improvement  in its  economics.    If the  tax  is  raised to  25                                                               
percent,  it actually  reduces the  economics  below the  current                                                               
system.  He pointed  out that Dr. Van Meurs' 11.6  chart for a 50                                                               
million barrel field  for which Dr. Van Meurs predicts  that at a                                                               
25/20 PPT without  the $73 million still  improves the economics.                                                               
Therefore,  the differing  model results  needs to  be addressed.                                                               
If the  goal is to  have more wells  drilled on the  North Slope,                                                               
and not  enough are being  drilled under the current  system, one                                                               
would  think the  [state] would  need to  improve its  economics.                                                               
However, raising  the tax to  25 percent  brings "it down  to the                                                               
same level," then that goal hasn't been achieved.                                                                               
2:26:32 PM                                                                                                                    
CO-CHAIR RAMRAS  requested that Mr.  Hanley explain the  graph on                                                               
the slide  entitled, "Small  Oil Development  - Rate  of Return."                                                               
He pointed  out that  the graph doesn't  specify what  happens if                                                               
the price  of oil reaches $60  a barrel.  He  also requested that                                                               
Mr. Hanley  explain where  Anadarko is  with the  production tax,                                                               
under the ELF.                                                                                                                  
CO-CHAIR  SAMUELS  also requested  that  Mr.  Hanley define  what                                                               
Anadarko considers  to be small  oil development in terms  of the                                                               
number of barrels per day.                                                                                                      
MR. HANLEY reminded  the committee that the small oil  field is a                                                               
47  million barrel  recoverable field  with a  maximum of  15,000                                                               
barrels of oil per day.   Again, these are all variables and thus                                                               
the  maximum doesn't  mean it's  the average.   Furthermore,  how                                                               
fast the  field comes  on line  and how  quickly the  company can                                                               
produce it make  a difference in the economics.   He informed the                                                               
committee  that  Anadarko  did  try   to  utilize  some  of  [the                                                               
elements]  used  by Dr.  Van  Meurs.   Although  Anadarko  didn't                                                               
totally  succeed in  that respect,  Mr. Hanley  related that  the                                                               
trends presented  by Dr.  Van Meurs are  correct.   For instance,                                                               
Dr. Van  Meurs used the  West Texas intermediate (WTI)  oil price                                                               
while Anadarko used  a wellhead price, which Mr.  Hanley said Dr.                                                               
Van Meurs  had to  establish in order  to determine  the impacts.                                                               
Therefore,  he  opined  that  everyone   should  be  placing  the                                                               
wellhead  oil prices  at the  bottom of  the graphs  in order  to                                                               
compare  apples  to apples  without  the  need for  a  conversion                                                               
2:29:34 PM                                                                                                                    
MR.  HANLEY  then addressed  effective  rates,  and informed  the                                                               
committee that currently at Alpine  Anadarko is paying just under                                                               
13 percent.   Last year  Anadarko was  paying in the  "low tens,"                                                               
which he explained is because  under the current system the first                                                               
five  years of  production a  company has  the ELF  multiplied by                                                               
12.5 percent  and after that it's  multiplied by 15 percent.   He                                                               
characterized  the current  ELF that  Anadarko pays  as high  and                                                               
suggested that  the ELF  for Prudhoe  Bay may  be the  only field                                                               
with a higher ELF.  He explained  that under the PPT as it exists                                                               
today, if  were it applied  in 2005, Anadarko would  actually pay                                                               
$13 million less  than under the old system.   Part of the reason                                                               
that Anadarko  would pay  less under  the proposal  in HB  488 is                                                               
that it  had a lot  of capital investments, which  offsets those.                                                               
In  further response  to Co-Chair  Ramras,  Mr. Hanley  specified                                                               
that over the  last five years, Anadarko has invested  in the $90                                                               
million range.  He offered to  determine how much the company has                                                               
invested in the last two years.                                                                                                 
2:31:53 PM                                                                                                                    
REPRESENTATIVE GARA,  referring to  the lines  on the  graph that                                                               
represent the existing ELF tax and  the 25/20 PPT, noted that the                                                               
two are  very close.   However, according  to Wood  MacKenzie the                                                               
rate  of return  in Alaska,  under existing  law, is  higher than                                                               
most  places at  $25, $35,  and $40  per barrel.   Therefore,  he                                                               
questioned  whether,  under  existing  law,  too  much  money  is                                                               
leaving the  state and thus  he further questioned  why something                                                               
better  than  25/20  shouldn't  be  adopted  if  it  also  leaves                                                               
Anadarko with a high rate of return.                                                                                            
MR. HANLEY  said that he  couldn't comment on the  Wood MacKenzie                                                               
study.   However, he  related that  most of  the small  oil field                                                               
developments are very challenging and  thus not many are drilled.                                                               
He said he  didn't believe the contention that a  lot of money is                                                               
left  on the  table  that  the state  could  tax  more under  the                                                               
current system and still have investment.                                                                                       
REPRESENTATIVE NEUMAN highlighted that  Anadarko's graphs seem to                                                               
stop at  the $45 to $50  per barrel range.   However, the reality                                                               
in recent  times has  been that  oil prices  are $60  per barrel.                                                               
Therefore, he  inquired as to what  the graph would look  like at                                                               
$60 per barrel oil.                                                                                                             
MR. HANLEY  offered to provide a  graph with $60 per  barrel oil.                                                               
However, he pointed out that the  graph he provided is based on a                                                               
wellhead to about $43  per barrel of oil.  He  noted that Dr. Van                                                               
Meurs' graphs  went to a  $40 WTI, which  equates to about  a $32                                                               
wellhead price.                                                                                                                 
2:35:19 PM                                                                                                                    
MR. HANLEY continued his testimony  by highlighting that the rate                                                               
of return  is just one measure.   He then referred  to [the graph                                                               
on  the  slide entitled  "Small  Oil  Development -  Net  Present                                                               
Value"], which includes  a 12 percent discount rate  on the after                                                               
tax net present value.   Generally, the discount rate changes the                                                               
crossover points, but  not necessarily in a relative  manner.  In                                                               
regard to what  Anadarko uses for a hurdle rate,  Mr. Hanley said                                                               
that it  isn't something  that the  company discloses.   However,                                                               
the numbers  can be  run at  various hurdle  rates and  he opined                                                               
that  the legislature's  consultants could  do so  and present  a                                                               
tight range of the numbers that  companies will use.  In concept,                                                               
the  graph relates  that at  the high  end, the  state gets  more                                                               
while at  the low end,  the [state] takes  some of the  risk [and                                                               
takes less].  Compared to the  current system, at the high prices                                                               
there is less net present value.                                                                                                
MR.  HANLEY, in  providing  clarification, pointed  out that  the                                                               
graph discounts  the value  of the  money in  the future  at some                                                               
rate.   The [after  tax net  present value]  is another  way that                                                               
companies look at measuring their return.   He offered to get the                                                               
committee a better explanation.                                                                                                 
2:39:18 PM                                                                                                                    
CO-CHAIR  RAMRAS  surmised that  the  graph  entitled "Small  Oil                                                               
Development -  Net Present  Value" isn't  about the  state's take                                                               
but questioned what it is actually addressing.                                                                                  
MR. HANLEY explained that this  graph is discussing the same case                                                               
as before,  just on a discounted  basis.  "If you  value the cost                                                               
of money  into the future and  the relative value of  that as you                                                               
go  forward, not  just on  a rate  of return  basis," he  further                                                               
CO-CHAIR  RAMRAS  related  his  understanding  that  Anadarko  is                                                               
supposed  to   be  speaking  as   the  representative   of  small                                                               
producers, and  therefore "what's good  for Anadarko is  good for                                                               
the  whole PPT  theory."   He related  his further  understanding                                                               
that Anadarko, under the PPT  system, would pay $13 million less.                                                               
Therefore, PPT incentivizes small producers  to explore more.  He                                                               
asked  if  the  graph  entitled, "Small  Oil  Development  -  Net                                                               
Present  Value"  is  showing four  different  scenarios  a  small                                                               
explorer  who  wants to  enter  the  Alaska market,  as  Anadarko                                                               
believes, may  face if  the net  present value  is utilized.   He                                                               
then inquired as to the  difference between the green line, which                                                               
refers  to  an  existing  producer for  which  the  exemption  is                                                               
applied  elsewhere, and  the  red  line, which  refers  to a  new                                                               
entrant for which the exemption is applied to the evaluation.                                                                   
MR. HANLEY  explained, "It's  a relative impact  on us  looked at                                                               
from  a  different way."    He  [turned  attention to  the  graph                                                               
entitled  "Small  Oil  Development   -  Rate  of  Return"]  which                                                               
illustrates that "they  all were either better or  about the same                                                               
as the current system ... [for]  a small field, I guess you would                                                               
CO-CHAIR RAMRAS related his understanding  that the discussion is                                                               
in regard to the profitably for [the company] that is drilling.                                                                 
MR. HANLEY stated his agreement and  mentioned that it could be a                                                               
small  producer or  a  large  producer.   He  specified that  the                                                               
difference between  the green line  and the  red line is  the $73                                                               
million in the  green line is applied elsewhere  with an existing                                                               
producer that won't  have that exemption to  help the [particular                                                               
field's] economics.   However, [as illustrated by]  the red line,                                                               
a  new entrant  would be  able to  apply the  $73 million  in its                                                               
economics with regard to how the particular field is valued.                                                                    
CO-CHAIR RAMRAS posed  a situation in which Chevron  says that it                                                               
used  the $73  million in  the Cook  Inlet, but  the $73  million                                                               
wouldn't be available to use  in another field unless the company                                                               
is allowed to apply it twice.                                                                                                   
MR. HANLEY indicated his agreement  and said that Chevron, in the                                                               
aforementioned case,  would be  the green  line.   Therefore, the                                                               
company would  say it  couldn't use the  $73 million  to evaluate                                                               
whether a  prospect is  of value.   He  said that  Anadarko would                                                               
probably view  it that  way on  this particular  prospect because                                                               
Anadarko has  used the $73  million elsewhere.   However, another                                                               
company  without production  would  use it  and  the $73  million                                                               
would be of value to them.                                                                                                      
2:43:42 PM                                                                                                                    
CO-CHAIR RAMRAS  surmised then  that the red  line appears  to be                                                               
more desirable  because it's  a higher rate  of return,  which is                                                               
why it refers to a new entrant.                                                                                                 
MR. HANLEY replied yes.                                                                                                         
CO-CHAIR SAMUELS posed  a situation in which TOTAL  E&P USA, INC.                                                               
(TOTAL) wants  to partner with  BP.   However, once they  run the                                                               
economics  on  the  same  project,   they  would  have  different                                                               
results.   The  major producers  pointed  this out  and thus  the                                                               
argument can either  be that it's philosophically  unfair or that                                                               
there will  be more problems with  joint ventures.  With  the $73                                                               
million, there is also the argument  that the state will get what                                                               
it asks for  and thus there will be many  [players], all with the                                                               
$73 million exemption and the ELF revisited.                                                                                    
MR.  HANLEY   remarked  that  [the   $73  million]  is   also  an                                                               
enticement.    He  recalled testimony  relating  that  Norway  is                                                               
actually giving  people a check for  $78 for every $1  [spent] to                                                               
every new  entrant.  Generally,  the companies coming  to Alaska,                                                               
after their first exploration, become an existing player.                                                                       
CO-CHAIR  SAMUELS, in  regard to  the 12  percent discount  rate,                                                               
asked whether that's what Anadarko uses.                                                                                        
MR. HANLEY reiterated that Anadarko  doesn't inform others of the                                                               
discount rate  it uses, although  [consultants] could  inform the                                                               
committee how discount rates are used.                                                                                          
CO-CHAIR RAMRAS asked  whether the lines would shift  down if the                                                               
discount rate is 10 percent.                                                                                                    
MR.  HANLEY said  that if  the  discount rate  is decreased,  the                                                               
lines will shift  up.  Therefore, the higher the  discount on the                                                               
dollars, the less the value overall.                                                                                            
CO-CHAIR  RAMRAS related  his understanding  that  under the  net                                                               
present value  one looks at the  return six years from  now, such                                                               
that the  dollar is  discounted back.   Therefore, at  12 percent                                                               
per year, that dollar would be worth $.28 in today's dollars.                                                                   
MR. HANLEY  said he agreed  with Co-Chair  Ramras' understanding.                                                               
However, he suggested that others  could better explain this.  He                                                               
pointed out  that under "this  model, the higher the  price, more                                                               
of the  people ... are underneath  as far as the  return based on                                                               
this method  of evaluating it,  compared to the  current system."                                                               
Therefore, at  higher prices,  the state  receives more  and "you                                                               
see under  this system  some of those  better prospects  they had                                                               
get taken down at the high prices."                                                                                             
2:48:42 PM                                                                                                                    
REPRESENTATIVE CROFT  returned to the chart  entitled, "Small Oil                                                               
Development - Rate of Return,"  which illustrates that all of the                                                               
lines  have the  same  curve.   Although  there  is a  difference                                                               
between the  lines in  terms of  the rate  of return,  it doesn't                                                               
seem to fluctuate by oil price.   However, the curves produced by                                                               
the net present value discount  causes radically different curves                                                               
and thus  there are different  results for different  oil prices.                                                               
Representative Croft  inquired as to  what curve is  desirable if                                                               
the goal to have a small  oil development with a good net present                                                               
value.  He  assumed that one would want a  good net present value                                                               
at a  range of  prices and  a relatively flat  curve in  order to                                                               
ensure that there is a good return at $20 and $40.                                                                              
MR. HANLEY pointed out that if  the tax rate is reduced, then the                                                               
economics will  be approved,  even under  the net  present value.                                                               
If  the credits  are  increased, the  same  can be  accomplished.                                                               
Combinations  of  what  one  does  under  the  system  will  have                                                               
different  impacts and  the question  is regarding  what is  [the                                                               
state's] goal.   If the desire to have all  the scenarios produce                                                               
a better  net present value than  the system, then at  all prices                                                               
the state would take less money.   He reminded the committee that                                                               
Anadarko  believes that  while the  company may  pay more  on its                                                               
production in  the future, it will  be balanced by the  fact that                                                               
the state  is taking more at  high oil prices and  it's a balance                                                               
under some  measures.   If the  goal is to  obtain more  money at                                                               
high  oil  prices,  balancing  that   off  against  the  economic                                                               
indicators that allow  the companies to take more at  the low end                                                               
while  there  is  an  improvement   in  the  economics  [counter]                                                               
balances paying more, he said.                                                                                                  
2:52:08 PM                                                                                                                    
REPRESENTATIVE SEATON  surmised that these graphs  are presenting                                                               
[the take]  from Anadarko's view.   He related  his understanding                                                               
that at  $25 there is a  crossover breakeven point.   He asked if                                                               
the  sensitivity  calculation  is   merely  a  different  set  of                                                               
MR. HANLEY clarified,  "This is this proposal, the  PPT, based on                                                               
those numbers."                                                                                                                 
REPRESENTATIVE SEATON further surmised then  that with the PPT at                                                               
20/20,  the red  line, no  matter the  price, the  company has  a                                                               
higher after  tax present  value than  under the  current system.                                                               
Under the  20/20 proposal  with higher oil  prices, the  state is                                                               
supposed to  receive more.  He  asked if the aforementioned  is a                                                               
function of  change in money  from the federal government  to the                                                               
state government.   He inquired as  to how the company  makes out                                                               
better in every scenario while the state does so as well.                                                                       
MR.  HANLEY  attributed [the  difference  in  the green  and  red                                                               
lines] to the  $73 million deduction.  As  [the prices increase],                                                               
it  gets  closer   to  the  existing  system,   he  pointed  out.                                                               
Therefore,  eventually "all  of those"  will crossover  and at  a                                                               
certain  high  price  even  the  red line  will  fall  under  the                                                               
existing system, he opined.                                                                                                     
REPRESENTATIVE  SEATON  posed a  situation  at  $50 Alaska  North                                                               
Slope (ANS)  price and surmised  that the graph  illustrates that                                                               
the   company  has   higher   profits,   although  that   doesn't                                                               
necessarily  mean that  the state  is receiving  less money  than                                                               
under the  current ELF.  He  asked if the graph  illustrates that                                                               
in  the development  of  a  small oil  development  at $50,  it's                                                               
absolute that  the red line  specifies that the oil  company will                                                               
make more money in comparison to the state.                                                                                     
MR. HANLEY said  he didn't know the answer because  it would be a                                                               
cash  flow analysis  versus the  net present  value.   Mr. Hanley                                                               
then  moved on  to the  graph  entitled, "Medium  Oil Prospect  -                                                               
Risked Rate  of Return."   The aforementioned presents  a similar                                                               
type of  approach based  on a  larger field.   He  explained that                                                               
it's  a risk  analysis  and thus  there is  a  certain chance  of                                                               
success.   He pointed out that  the graph illustrates that  for a                                                               
larger field, the PPT improves the  after tax rate of return line                                                               
for all the  cases.  Furthermore, the difference  between the red                                                               
and green lines isn't as significant as in the earlier graphs.                                                                  
2:56:48 PM                                                                                                                    
CO-CHAIR RAMRAS inquired as to what  it would take to support the                                                               
same  line, increase  credits, and  reduce the  $73 million.   He                                                               
then inquired  as to whether  the $73  million could be  in place                                                               
for a  few years and then  sunset it and place  the company under                                                               
the 20/20 proposal.  If the  aforementioned is an option, then he                                                               
inquired as  to the number of  years that a credit  would need to                                                               
be  provided and  still enjoy  new entrants  who are  then phased                                                               
into the regular PPT plan that is applicable to the majors.                                                                     
MR. HANLEY  opined that  in one  view the  $73 million  credit is                                                               
equal  across  the board  because  everyone  gets it.    However,                                                               
companies without  production don't receive the  credit, although                                                               
it  helps  the  exploration  economics.   He  specified  that  20                                                               
percent  multiplied  by $73  million  is  $15 million  in  value,                                                               
regardless  of the  size of  the  producer.   Therefore, in  that                                                               
respect it's  a level playing field.   In regard to  the relative                                                               
value,  he  posed a  situation  in  which  a company  has  20,000                                                               
barrels per day of production and,  for the sake of argument, the                                                               
$73  million is  equivalent  to  5,000 barrels  per  day at  $40.                                                               
Therefore, 25 percent of  the aforementioned company's production                                                               
would be tax free whereas a  company with 250,000 barrels per day                                                               
would receive  2 percent  tax-free production.   Mr.  Hanley then                                                               
provided the following example:                                                                                                 
     If you want  to get rid of the $73  million and use the                                                                    
     tax rate,  I don't have a  tax credit.  If  you want to                                                                    
     use the  tax rate  to keep  them whole  ... effectively                                                                    
     ... for the  20,000 barrel a day person you  get rid of                                                                    
     the $73 million  you've got to lower the  tax rate from                                                                    
     20 percent to 15.  That  keeps them whole.  For the guy                                                                    
     with 250,000  barrels a day, if  you lower it a  half a                                                                    
     percent, it keeps them whole.                                                                                              
MR. HANLEY surmised that it was all  part of a package to come to                                                               
an overall  dollar amount in  which the  tax rate was  figured in                                                               
with the $73  million.  He related his belief  that if the larger                                                               
companies receive a 1 percent rate  reduction in the tax or could                                                               
prevent a  1 percent increase  those companies would give  up the                                                               
$73 million.  However, if a  company gives up the $73 million and                                                               
can't  decrease 5  percent, there  is  an adverse  impact on  the                                                               
smaller players.                                                                                                                
3:01:07 PM                                                                                                                    
MR.  HANLEY related  that there  seems to  be an  assumption that                                                               
there's a level playing field already.   He suggested that to the                                                               
extent  there is  a tilted  playing  field, [under  HB 488]  it's                                                               
still  heavily  tilted  away  from some  of  the  smaller,  newer                                                               
players and  toward the larger  players.  Mr. Hanley  pointed out                                                               
that this is  a net back approach in which  one would normally be                                                               
able to deduct expenses.  He  explained that if Anadarko puts oil                                                               
down  the pipeline  and it  costs the  company $4  to send  it to                                                               
Valdez, that's  what the company pays.   However, an owner  has a                                                               
return on  that and will,  under the proposed system,  be allowed                                                               
to  deduct  a  profit  as  an  expense.    He  characterized  the                                                               
aforementioned  as  an unlevel  playing  field.   Therefore,  Mr.                                                               
Hanley said he wouldn't argue  that it unfairly tilts the playing                                                               
field  against  the  large  players, although  it  does  have  an                                                               
impact.    He suggested  that  even  without  this there  may  be                                                               
different  companies  in the  same  fields  paying different  tax                                                               
rates under this  proposed system.  He reiterated  that whether a                                                               
company  is exploring  or not  impacts the  value of  the credits                                                               
under the proposed tax structure.                                                                                               
3:03:34 PM                                                                                                                    
CO-CHAIR  RAMRAS  surmised then  that  if  the $73  million  were                                                               
reduced while  continuing to incentivize small  entrants, the tax                                                               
rate could be  lowered or the amount of credits  could be raised.                                                               
However, he  opined that lowering  the tax rate and  reducing the                                                               
tax credit would [be received] poorly in many of the districts.                                                                 
MR.  HANLEY,  in  response  to   Co-Chair  Ramras,  informed  the                                                               
committee that Anadarko has over  3,000 employees [worldwide] and                                                               
market  capital of  over $23  billion.   Mr. Hanley  acknowledged                                                               
that Anadarko is a large company.                                                                                               
CO-CHAIR RAMRAS  pointed out that  Anadarko would be  the largest                                                               
company in  Alaska were it  based in Alaska, although  it's being                                                               
referred to as a small company.                                                                                                 
MR. HANLEY  mentioned that  the view one  takes of  this proposal                                                               
depends upon  whether the  company has  production and  what it's                                                               
looking to find.  Again, the  difference, under HB 488, for a new                                                               
entrant versus  an existing  producer is less  for a  [medium oil                                                               
prospect  as  illustrated  on the  graph  entitled,  "Medium  Oil                                                               
Prospect - Risked Rate of Return"].   Therefore, there is less of                                                               
an impact on the company's economics as it goes forward.                                                                        
3:05:29 PM                                                                                                                    
CO-CHAIR SAMUELS recalled Mr. Hanley's  testimony that if the $73                                                               
million is  eliminated, Anadarko would  want to have a  lower tax                                                               
on a  certain amount of barrels  or revenue.  Still,  the company                                                               
would effectively  end up at the  same place in that  the benefit                                                               
would still be given to the large companies.                                                                                    
MR.  HANLEY said,  "To the  extent that  you want  to incent  new                                                               
companies, this is a much bigger  issue and much more valuable to                                                               
the companies."   He suggested that  many companies, particularly                                                               
those without production,  would view the elimination  of the $73                                                               
million with a  1 percent decrease in  the tax rate to  be a much                                                               
worse system.                                                                                                                   
3:07:17 PM                                                                                                                    
REPRESENTATIVE GARA  surmised that on  one hand Mr.  Hanley's and                                                               
Dr. Van Meurs'  presentations say that at a 25/20  PPT at $40 per                                                               
barrel, the state  would take more money than  it does currently.                                                               
On the other hand, Mr. Hanley's  graph shows that under the 25/20                                                               
PPT the  company's rate  of return  is higher  at $40  per barrel                                                               
than  it is  currently.   Therefore, he  inquired as  to how  the                                                               
company and the state can be making more money at the same time.                                                                
MR. HANLEY offered  to provide the committee  with an explanation                                                               
[at a later time].                                                                                                              
REPRESENTATIVE CRAWFORD related his  understanding that the after                                                               
tax  rate of  return axis  is  the return  to the  company.   The                                                               
existing ELF  is lower in  all cases  on the graph,  although the                                                               
committee has  been told that this  is a tax hike.   However, the                                                               
companies receive  a larger after  tax rate of  return regardless                                                               
of the proposals presented on the graph.                                                                                        
MR. HANLEY  explained that  the graph  views the  field as  a new                                                               
prospect  such that  the company  is allowed  to use  all of  its                                                               
credits  against the  prospect.   The  tax  increase, he  further                                                               
explained, comes  from the  existing fields.   He related  that a                                                               
company would  have past  capital that's invested  and thus  if a                                                               
company were to do a new  Prudhoe Bay, its economics would change                                                               
because the  company has a  higher tax rate.   Furthermore, there                                                               
would  also  be  the  many  credits against  the  capital.    The                                                               
aforementioned  is  why there  is  reluctance  from the  existing                                                               
producers.    He  opined, "It's  essentially  hammering  existing                                                               
production."   In some  respects, under  the 20/20  proposal, the                                                               
state is paying for 40 percent  of the cost of development, which                                                               
more than  offsets the higher  tax rate.  Therefore,  the dollars                                                               
are coming from the tax increase on existing production.                                                                        
3:11:10 PM                                                                                                                    
REPRESENTATIVE   CRAWFORD   characterized   this  as   a   "scary                                                               
proposition" because if  the state is very  successful with this,                                                               
the state could receive a lot less in the future.                                                                               
CO-CHAIR SAMUELS  related his understanding from  economists that                                                               
getting many new entrants with  the lengthy necessary exploration                                                               
lead time  will result in the  $73 million losing its  value over                                                               
REPRESENTATIVE  GARA   opined  that  the  early   tax  credit  is                                                               
important in  achieving a  higher rate of  return and  more taxes                                                               
under the  analysis.  Therefore,  he surmised that the  early tax                                                               
credit is almost  more important to a new developer  than the tax                                                               
rate once a field becomes profitable.   He then posed a situation                                                               
in which the 25/25 system that  was raised to 30/25 such that the                                                               
company is  protected on the  downside and receives a  larger tax                                                               
credit when  the situation  is riskier.   Therefore, it  would be                                                               
worth the extra  tax the company pays when  the situation becomes                                                               
profitable.  He asked whether he  can assume that by raising both                                                               
5 percent,  a new developer would  be better off than  if neither                                                               
were raised.                                                                                                                    
MR.  HANLEY  related his  understanding  that  if  there is  a  5                                                               
percent  increase, there  would  be a  decline  in the  economics                                                               
because  the   tax  rate  is   more  valuable  than   the  credit                                                               
increasing.   In regard to  the crossover point, Mr.  Hanley said                                                               
that it's based on many variables.  He offered to model it.                                                                     
REPRESENTATIVE GARA said that if  the answer isn't clearly in the                                                               
affirmative, then such a model isn't necessary.                                                                                 
3:14:14 PM                                                                                                                    
MR.  HANLEY opined  that  there would  have  to be  significantly                                                               
larger incentives on  the back end to make up  for tax increases.                                                               
He  stated that  Anadarko  absolutely prefers  a  lower tax  rate                                                               
because it  improves the company's  economics.  This is  a policy                                                               
call for the legislature.                                                                                                       
REPRESENTATIVE GATTO  commented that  it doesn't matter  what the                                                               
tax rate is  if the company is paying zero.   However, under some                                                               
scenario it's  possible to take  the credits  and pay a  tax rate                                                               
that's higher  and do better,  although he wasn't sure  that most                                                               
of the companies would fit such a scenario.                                                                                     
3:15:19 PM                                                                                                                    
MR. HANLEY related  his understanding that it  seems that there's                                                               
concern  that people  made  decisions based  on  low oil  prices.                                                               
However, the  prices have  been higher  and [the  companies] have                                                               
been able to pay back their  capital such that one would question                                                               
why the lookback should be  allowed.  In response, he highlighted                                                               
the  Alpine  field  in  which  a  project,  two  satellites,  was                                                               
sanctioned  in  December   of  2004  during  a   high  oil  price                                                               
environment.   The satellites  are due to  come online  this year                                                               
and thus  there hasn't been  a decrease  of dollars coming  in to                                                               
offset those.   Therefore, one  could argue that they  are taking                                                               
the high side  from Anadarko.  With regard to  an earlier comment                                                               
that price  is what  drives many of  the issues,  he acknowledged                                                               
that the price is a variable and the tax needs to be fixed.                                                                     
3:17:49 PM                                                                                                                    
MR. HANLEY  clarified that some  have said  that the tax  rate is                                                               
insignificant  compared  to  the  swings in  the  price  of  oil.                                                               
However, Mr.  Hanley reiterated  that the  price is  the variable                                                               
and  everyone has  to  deal with  that.   Therefore,  he said  he                                                               
wouldn't encourage  a 40  percent tax rate  because if  the price                                                               
increases to $60, one has to  review the variable price, which if                                                               
it decreases, will have a larger  impact.  With regard to prices,                                                               
Mr. Hanley  indicated that  without being  able to  determine the                                                               
price of oil  between 2014-2034 or have protections  on the price                                                               
during   those   times,   [Anadarko]   would   be   conservative,                                                               
particularly  in an  environment  in which  production in  Alaska                                                               
takes longer  from startup to  production.  Therefore,  he opined                                                               
that  companies   are  probably  more  conservative   with  price                                                               
estimates in Alaska.   Despite the fact that prices  are up, from                                                               
a  company's perspective,  companies could  argue that  the state                                                               
has  been receiving  higher  than it  should for  a  while.   Mr.                                                               
Hanley informed  the committee that  one of the  reasons Anadarko                                                               
can support  HB 488 is because  there is some protection  in some                                                               
cases and  some downside protection.   Depending upon  the model,                                                               
the state  is going  to take  less money  than under  the current                                                               
system.   However, "if we think  that 10 years from  now when the                                                               
price goes  down, they're going to  change it back and  take that                                                               
...  that hasn't  helped us."   He  noted that  such wouldn't  be                                                               
3:21:30 PM                                                                                                                    
REPRESENTATIVE BERKOWITZ,  in regard to  modeling conservatively,                                                               
opined that it  must mean that Anadarko has some  estimates as to                                                               
what the company believes the price will be in the future.                                                                      
MR. HANLEY  agreed that is  the case.   He said that  on internal                                                               
rates of  return, hurdle  rates, discount  rates, and  prices one                                                               
can  put those  on graphs  in order  to review  the ranges.   The                                                               
consultants  can provide  the  committee with  ideas  as to  what                                                               
companies might use.                                                                                                            
3:22:45 PM                                                                                                                    
MR. HANLEY  commented that  independents are  sensitive.   In one                                                               
respect  independents  don't  have  as  broad  a  portfolio,  but                                                               
independents tend to  want to "confirm and  condemn."  Therefore,                                                               
things that  the legislature does  will impact  independents, and                                                               
perhaps to a larger extent than some larger companies.                                                                          
REPRESENTATIVE  BERKOWITZ  recalled  that   one  of  the  earlier                                                               
presenters  suggested  that  independents need  higher  rates  of                                                               
return than the majors.  He asked if Mr. Hanley agreed.                                                                         
MR. HANLEY  opined that each  company's different.   He suggested                                                               
that the committee  ask its consultants to determine  the cost of                                                               
finding versus  the cost of  capital.  He highlighted  that those                                                               
who are looking  for new oil and  gas on the North  Slope are the                                                               
independents and new entrants, which  he attributed mainly to the                                                               
internal hurdle rate on  the size of the field.   For some of the                                                               
larger companies, the  expected size of fields  aren't in Alaska.                                                               
However,  he further  opined that  it does  take a  mix that  one                                                               
needs "to balance  that off."  He expressed the  need to have the                                                               
investment  in  the   existing  fields  in  order   to  have  the                                                               
infrastructure and  the pipeline  in order to  move oil  down it.                                                               
Still, some companies  will not look for things  that others will                                                               
and thus  the committee should be  aware of the mix  of heavy oil                                                               
as well as small fields and frontier fields.                                                                                    
3:25:40 PM                                                                                                                    
MR.  HANLEY then  discussed the  credits that  aren't.   He noted                                                               
that  Anadarko would  be able  to  utilize credits  since it  has                                                               
income, and  therefore he said that  he would speak in  regard to                                                               
companies  that don't  have existing  income  against which  they                                                               
could use these  credits.  To the extent  that the aforementioned                                                               
is  the case,  the new  companies have  to discount  the credits.                                                               
Therefore,  it's not  a  level playing  field  if companies  with                                                               
existing  income can  use the  credits at  100 percent  while the                                                               
newer companies  cannot.  In  fact, the new companies  would have                                                               
to  sell the  credits to  the [existing  companies] and  thus the                                                               
[existing  companies] will  take 10  percent more  and the  newer                                                               
companies will receive  10 percent less.   Furthermore, the state                                                               
incents  the same  amount of  money.   Mr. Hanley  then suggested                                                               
that a refundable  credit should be considered.   If it's costing                                                               
the state the  same, he questioned "why not just  cut the check."                                                               
The  aforementioned would  level the  playing field  for the  new                                                               
entrants.  To  the extent the committee  views refundable credits                                                               
as  a problem,  he  suggested expanding  the  taxes and  payments                                                               
against which companies can utilize  those.  He further suggested                                                               
that  it could  be utilized  against corporate  income taxes  and                                                               
bonus  bids.    In  fact,  there is  a  precedent  for  such,  as                                                               
demonstrated  by   the  broader   incentive  credits   under  the                                                               
Department  of Natural  Resources (DNR).   Mr.  Hanley emphasized                                                               
the need to keep the tax  credit level for the players that don't                                                               
have  production, which  he opined  is best  accomplished with  a                                                               
refundable credit.                                                                                                              
3:29:02 PM                                                                                                                    
REPRESENTATIVE  GARA  expressed  his   discomfort  with  the  $73                                                               
million.   To that end,  he inquired as to  why a lower  tax rate                                                               
during the  first few years  of production wouldn't  be continued                                                               
versus the free $73 million credit in profits.                                                                                  
MR.  HANLEY  clarified  that  the $73  million  is  an  allowance                                                               
deduction.   Although  the state  can structure  this any  way it                                                               
wants, it will be difficult for  the newer players to replace the                                                               
$73 million because of the relative value, as described earlier.                                                                
REPRESENTATIVE  BERKOWITZ pointed  out  that  although there  has                                                               
been discussion with regard to  incentives, there hasn't been any                                                               
real  discussion in  the way  of  punishment for  the failure  to                                                               
perform.    He asked  if  Mr.  Hanley  has  any thoughts  on  the                                                               
aforementioned.  He suggested that perhaps  a "use it or lose it"                                                               
provision  could be  utilized  in  terms of  whether  a lease  is                                                               
developed or not.                                                                                                               
MR. HANLEY said  the aforementioned can be done  because there is                                                               
already a  process by  which the state  can increase  or decrease                                                               
the length of term of a  lease.  However, he said that incentives                                                               
are a better way to encourage development.                                                                                      
3:32:47 PM                                                                                                                    
REPRESENTATIVE  CRAWFORD recalled  the charts  the committee  has                                                               
been given that relate the  state's oil production if there isn't                                                               
a gas  line by 2012 to  2015.  He related  his understanding that                                                               
the state's  oil production is  enhanced if  it has a  market for                                                               
its gas.   He suggested that  it would be  best if a gas  line is                                                               
built and producing during that timeframe.                                                                                      
MR.  HANLEY commented  that for  Anadarko's purposes,  the sooner                                                               
the gas  line is built  the better.   He then continued  with his                                                               
presentation  in regard  to the  state needing  to be  careful in                                                               
regard to what it asks  because what the legislature decides will                                                               
drive behavior.   Anadarko would like to drill more  wells and to                                                               
have  more  exploration economics  as  well  as more  shareholder                                                               
value, all  of which he  didn't believe to be  mutually exclusive                                                               
from the state's goal.  He  then expressed the need to review how                                                               
much the  economics decrease if  the tax  rate is increased.   He                                                               
also expressed the  need to review how much  the minimum economic                                                               
field  size  for  certain  areas  increase as  the  tax  rate  is                                                               
increased.   All things  being equal, Mr.  Hanley opined  that as                                                               
the tax  rate is increased  the economics decrease, which  can be                                                               
offset by certain credits or  incentives.  Drawing to conclusion,                                                               
Mr. Hanley urged the committee to  do what it wants and mesh that                                                               
with what  [the companies] want.   Furthermore, he  expressed the                                                               
need for  all the players  to talk in order  to come to  a common                                                               
understanding of  the legislation  otherwise the policy  call and                                                               
impacts can't be reached.                                                                                                       
3:36:50 PM                                                                                                                    
MR. HANLEY  then recommended  using some type  of a  work session                                                               
during which  a range of  the various  elements can be  chosen in                                                               
order  to  model for  the  various  players  and scenarios.    He                                                               
related  his  belief  that currently  there  will  be  unintended                                                               
consequences because  the models being presented  vary because of                                                               
the  differing assumptions.   Although  Mr. Hanley  said that  he                                                               
seems to understand  the intent of HB 488, it  doesn't seem to be                                                               
clear in the statute.                                                                                                           
3:39:55 PM                                                                                                                    
REPRESENTATIVE  GATTO related  that it  would be  fair to  assume                                                               
that the  large oil companies  would really enjoy a  very complex                                                               
system because  they have a  lot of certified  public accountants                                                               
(CPAs)  and  attorneys.   Therefore,  he  questioned whether  the                                                               
course to  take should be  to forget the incentives,  specify the                                                               
tax, and specify  the percentage the state will  give the company                                                               
that looks for a well.                                                                                                          
MR. HANLEY  acknowledged that  such a course  could be  taken and                                                               
the companies could  model it.  However, the problem  is that one                                                               
size  doesn't always  fit all.    Mr. Hanley  echoed his  earlier                                                               
comment  that the  proposal encompassed  in HB  488 is  a "decent                                                               
mix."   Again, the  question is  in regard to  what the  state is                                                               
trying to incent.  From  Anadarko's perspective, while it may pay                                                               
more, the legislation  as it's written actually  seems to improve                                                               
the companies economics and improve  the downside.  Therefore, he                                                               
suggested that  some of Anadarko's  prospects are more  likely to                                                               
be drilled than they were before the legislation.                                                                               
3:43:11 PM                                                                                                                    
The committee took an at-ease from 3:43 p.m. to 3:48 p.m.                                                                       
3:48:35 PM                                                                                                                    
PAT  FOLEY,   Manager,  Land,  Commercial,   Regulatory  Affairs,                                                               
Pioneer  Natural  Resources  ("Pioneer"),  paraphrased  from  the                                                               
following written testimony [original punctuation provided]:                                                                    
     Pioneer began  its investment in  Alaska in  early 2003                                                                    
     with  the  drilling  of  3  exploration  wells  in  the                                                                    
     shallow   waters  of   the  Beaufort   Sea.     Pioneer                                                                    
     significantly  expanded its  Alaskan  inventory at  the                                                                    
     October 2003 Alaska  State Lease Sale where  it was the                                                                    
     largest   participant   and    successful   bidder   on                                                                    
     approximately 150,000  acres.   We opened an  office in                                                                    
     Anchorage in  early 2004 and  now employ 26  persons in                                                                    
     Alaska.     In  2004,  Pioneer   concluded  exploration                                                                    
     agreements  with ConocoPhillips  and Anadarko  across a                                                                    
     vast portion of NPR-A.   In 2005, Pioneer acquired a 10                                                                    
     percent working  interest and the option  to acquire up                                                                    
     to  an  additional  40  percent  working  interest  and                                                                    
     possibly succeed ConocoPhillips as  the operator of the                                                                    
     Cosmopolitan Unit  located in the Cook  Inlet.  Pioneer                                                                    
     has  significantly  invested  in   the  state  and  has                                                                    
     assembled a  substantial portfolio with an  interest in                                                                    
     approximately 1.6 million acres of leasehold.                                                                              
     On  February   6,  2006,  Pioneer  announced   that  it                                                                    
     approved and is commencing  the development of Oooguruk                                                                    
     field on  the North  Slope of Alaska.   Pioneer  is the                                                                    
     operator of the  field, which is in  the shallow waters                                                                    
     of   the  Beaufort   Sea   approximately  eight   miles                                                                    
     northwest  of  the Kuparuk  River  Unit.   Pioneer  has                                                                    
     commenced  operations  to  install an  offshore  gravel                                                                    
     drilling and production site and  we expect to complete                                                                    
     gravel  hauling  activities  by   the  end  of  winter.                                                                    
     Following  construction  of  the  gravel  drilling  and                                                                    
     production, a  subsea flowline  and facilities  will be                                                                    
     installed  during 2007  to  carry produced  three-phase                                                                    
     liquids  to existing  onshore processing  facilities at                                                                    
     the Kuparuk River Unit.                                                                                                    
CO-CHAIR SAMUELS turned attention  to the transitional phase, and                                                               
inquired as  to how  much Oooguruk  is going  to cost  Pioneer to                                                               
develop in the  last five years and two years.   He also inquired                                                               
as to whether Pioneer has any other major developments.                                                                         
3:51:21 PM                                                                                                                    
MR. FOLEY answered that currently  Pioneer is exclusively focused                                                               
on the  Oooguruk project.   However, he related that  this summer                                                               
Pioneer is  likely to make a  decision regarding what it  will do                                                               
to continue  work on Cosmopolitan.   He highlighted  that Pioneer                                                               
is heavily involved in exploration  and has drilled five wells to                                                               
date.     This  winter  Pioneer   has  been  involved   in  three                                                               
exploration wells.   He said  that on a long-term  basis, Pioneer                                                               
would  expect to  have  a  capital program  similar  to the  last                                                               
several years.   In regard  to Pioneer's investment in  the state                                                               
to date,  he estimated  it to  be roughly  $100 million  over the                                                               
last three years.   He returned to his  testimony and paraphrased                                                               
from  the  following   written  testimony  [original  punctuation                                                               
     Pioneer  plans  to  drill approximately  40  horizontal                                                                    
     wells to  develop 50 million  to 90 million  barrels of                                                                    
     estimated gross oil resources.   Total gross capital to                                                                    
     be invested  in drilling and facilities  is expected to                                                                    
     range from $450 million to $525 million.                                                                                   
MR.  FOLEY  added that  Pioneer  has  a  70 percent  interest  in                                                               
Oooguruk and is a partner with Eni on this project.                                                                             
REPRESENTATIVE  GATTO  inquired  as   to  whether  there  is  any                                                               
connection between Evergreen Resources and Pioneer.                                                                             
MR.  FOLEY   replied  yes,   explaining  that   Pioneer  acquired                                                               
Evergreen Resources in 2005.                                                                                                    
3:53:14 PM                                                                                                                    
MR. FOLEY returned to his testimony and paraphrased from the                                                                    
following written testimony [original punctuation provided]:                                                                    
     The wells are  expected to be brought  on production as                                                                    
     drilling progresses,  with peak rates  of approximately                                                                    
     15,000 to  20,000 barrels  of oil  per day  expected by                                                                    
     For independent companies  like Pioneer, the challenges                                                                    
     to building a  business in Alaska are  formidable.  The                                                                    
     remaining North  Slope resources  are nothing  like the                                                                    
     billion barrel fields  that opened the Slope.   The new                                                                    
     wave of  developers are working  to commercialize:   a)                                                                    
     smaller, lower  quality oil reservoirs, b)  viscous oil                                                                    
     resources, c)  remote resources in NPRA,  the foothills                                                                    
     and offshore  and d) natural gas  resources, which will                                                                    
     not have a market until the  next decade.  All of these                                                                    
     resources are  challenging to commercialize, but  it is                                                                    
     a challenge that  must be met to insure  new sources of                                                                    
     supply for the state.                                                                                                      
     The North  Slope is  one of the  highest cost  areas in                                                                    
     the world.  Remote geography  translates to some of the                                                                    
     highest   capital,   lease    operating   and   product                                                                    
     transportation  costs  in  the  world.    Additionally,                                                                    
     North  Slope projects  have  comparatively long  cycles                                                                    
     [sic] times.  From buying  a lease to selling oil takes                                                                    
     5  to  10 years  depending  upon  drilling success  and                                                                    
     distance to existing infrastructure.                                                                                       
MR. FOLEY  interjected that  Pioneer's Oooguruk  development will                                                               
be at the  shorter end.  However, he reminded  the committee that                                                               
Oooguruk was  a resource  that was discovered  in the  late 1970s                                                               
and  early 1980s  and remained  undeveloped until  now.   He then                                                               
continued  his  testimony  and  paraphrased  from  the  following                                                               
written testimony [original punctuation provided]:                                                                              
     The largest  challenge independents  face on  the North                                                                    
     Slope is  arguably uncertainty.   To be  successful, we                                                                    
     must properly  assess and make  provision for  a number                                                                    
     of  uncertainties related  to exploration  risk, future                                                                    
     oil   and  gas   prices,   fiscal  policy,   regulatory                                                                    
     processes and access to infrastructure.                                                                                    
3:55:59 PM                                                                                                                    
     The long  cycle times for Alaska  projects require that                                                                    
     we  make our  investment  decisions based  upon a  long                                                                    
     term price projection.   Although current prices exceed                                                                    
     $50 per  barrel, the  10 year  average price  for North                                                                    
     Slope  crude  is approximately  $25  per  barrel.   For                                                                    
     Pioneer's Alaska Projects, the price  of oil in 2006 is                                                                    
     irrelevant.    The prevailing  price  in  the next  two                                                                    
     decades  will  determine  future   cash  flow  for  new                                                                    
MR. FOLEY, in  response to Co-Chair Samuels'  query, related that                                                               
Pioneer, in  general, has  an aggressive view  toward price.   He                                                               
then  returned   to  his  testimony  and   paraphrased  from  the                                                               
following written testimony [original punctuation provided]:                                                                    
     Accurate assessment of risk is  critical to the success                                                                    
     of an  exploration portfolio.   Will  the value  of the                                                                    
     fields we  ultimately discover offset  the cost  of dry                                                                    
     holes, land,  seismic data and development  costs?  For                                                                    
     many of the  remote exploration areas in  Alaska, it is                                                                    
     difficult to project acceptable full cycle returns.                                                                        
3:57:37 PM                                                                                                                    
     In  2003,  the  state initiated  exploration  incentive                                                                    
     credits    for     certain    qualifying    exploration                                                                    
     expenditures.   These incentives encouraged  Pioneer to                                                                    
     invest   significantly  in   infrastructure  challenged                                                                    
     areas such as NPR-A.                                                                                                       
CO-CHAIR SAMUELS noted  that Pioneer has taken  advantage of some                                                               
exploration  tax credits  already; and  asked if  those are  also                                                               
available  for development  tax  credits.   He  further asked  if                                                               
Pioneer  would  benefit  from  the  proposed  provisions  in  the                                                               
transitional money.                                                                                                             
MR.  FOLEY clarified  that Pioneer  has yet  to be  issued a  tax                                                               
certificate and the [exploration]  credits were derived from work                                                               
that was performed  last winter.  Therefore, the  company has not                                                               
yet monetized those credits.  Mr.  Foley said that a company like                                                               
Pioneer would benefit from the transitional capital.                                                                            
REPRESENTATIVE  SEATON inquired  as  to the  rate  of credit  for                                                               
which Pioneer has applied and believes it qualifies.                                                                            
MR. FOLEY  specified that the  wells Pioneer drilled  last winter                                                               
should qualify for the 40 percent  tax credit rate.  He mentioned                                                               
that this winter Pioneer is drilling one exploration well that                                                                  
the company believes will also qualify for exploration incentive                                                                
credits, which should be creditable at a rate of 20 percent.                                                                    
4:00:08 PM                                                                                                                    
MR. FOLEY again returned to his testimony and paraphrased from                                                                  
the following written testimony [original punctuation provided]:                                                                
     When Pioneer  was considering its first  investments in                                                                    
     Alaska,  state officials  were  promoting the  resource                                                                    
     merits  of Alaska  basins.   Alaska certainly  contains                                                                    
     world  class  petroleum  systems.    Additionally,  the                                                                    
     officials promoted the fiscal  policy including the ELF                                                                    
     formula  and exploration  incentives.    Under the  ELF                                                                    
     formula,  only   very  large   new  fields   would  pay                                                                    
     severance tax  and qualifying  exploration expenditures                                                                    
     in  remote areas  would  receive exploration  incentive                                                                    
     credits at either  a 20 or 40% rate.   With this fiscal                                                                    
     system in place, Pioneer invested  heavily in the state                                                                    
     over the  last several years.   When we learned  that a                                                                    
     new  severance tax  policy  was  under development,  we                                                                    
     were  quite  concerned that  any  new  system would  be                                                                    
     detrimental to  our future investments and  a departure                                                                    
     from the fiscal system  promoted to the independents by                                                                    
     the state.                                                                                                                 
     We recognize  that the  existing severance  tax policy,                                                                    
     as it applies  to the large fields on  the North Slope,                                                                    
     is likely not  sustainable and we are  pleased that the                                                                    
     proposed  PPT  taxes   profits  rather  than  revenues.                                                                    
     Given that  the state collects royalties  right off the                                                                    
     top,  it makes  sense  that  any additional  government                                                                    
     take  should   be  assessed   after  costs   have  been                                                                    
     recovered.   This concept is important  to the smaller,                                                                    
     lower  productivity  and  remote  resources  which  are                                                                    
     critical  to future  production growth.   Although  the                                                                    
     proposed  production tax  rate  of 20%  is quite  large                                                                    
     when  layered upon  the other  burdens  of royalty,  ad                                                                    
     valorem tax,  state income tax and  federal income tax,                                                                    
     the impact  of the  large tax rate  is tempered  by the                                                                    
     allowance of cost recovery,  investment tax credits and                                                                    
     the proposed taxable income threshold.                                                                                     
CO-CHAIR SAMUELS turned the committee's attention to the tax                                                                    
rate at Oooguruk, and related his understanding that Pioneer                                                                    
received a royalty  reduction on that particular  field and after                                                               
cost  recovery Pioneer  will pay  30 percent  in that  particular                                                               
field.   He then inquired as  to what Pioneer would  consider its                                                               
effective tax rate.                                                                                                             
MR. FOLEY  said that  he doesn't  know Pioneer's  total effective                                                               
tax  rate.    When  Pioneer   made  its  investment  decision  on                                                               
Oooguruk,  it was  with  an expectation  that  the severance  tax                                                               
would  be zero.    He informed  the committee  that  some of  the                                                               
leases at Oooguruk were a  one-sixth royalty flap and others were                                                               
a  one-eighth royalty  with a  30 percent  net profit  component.                                                               
The 30 percent net profit  component is preserved and the royalty                                                               
reduction has taken all of the  royalties down to 5 percent until                                                               
payout at which  point they would increase linearly  over a four-                                                               
year period to reach the rates today.                                                                                           
4:04:15 PM                                                                                                                    
MR. FOLEY continued  with his testimony and  paraphrased from the                                                               
following written testimony [original punctuation provided]:                                                                    
     Pioneer  is pleased  to see  the provision  included in                                                                    
     the  proposed legislation  regarding the  deductibility                                                                    
     of  transitional  capital.   The  provision  serves  to                                                                    
     compensate  those  companies,  including  Pioneer,  who                                                                    
     have  made  significant  capital investments  over  the                                                                    
     past five  years based upon  the fiscal terms  in place                                                                    
     at that time.                                                                                                              
     We have  reviewed the  testimony of  the administration                                                                    
     and  agree  that the  PPT,  as  proposed, will  provide                                                                    
     incentives  for   new  investment  by   all  companies.                                                                    
     Economic  metrics  for  new  investments  will  improve                                                                    
     under the  PPT versus  existing tax  law.   This should                                                                    
     encourage the  development of marginal fields  and will                                                                    
     reduce  the  minimum   economic  size  for  exploration                                                                    
     prospects,   thus   prompting  more   exploration   and                                                                    
     increasing  the  chances  of  finding  commercial-sized                                                                    
     fields.  In addition,  it should encourage reinvestment                                                                    
     in existing  fields.   We believe  the PPT  as proposed                                                                    
     will  entice  more  companies to  Alaska  and  increase                                                                    
     competition.   More companies and more  ideas will lead                                                                    
     to smarter field  development methods, smarter drilling                                                                    
     and  production equipment,  which  will further  reduce                                                                    
     the minimum economic size  of exploration prospects and                                                                    
     grow the resource pie.                                                                                                     
4:05:42 PM                                                                                                                    
     The tradable  tax credits are a  particularly effective                                                                    
     incentive for  the exploration  and development  of new                                                                    
     resources.   Under the proposed  PPT, the  higher risk,                                                                    
     higher  cost and  log  project  cycle times  associated                                                                    
     with  new  resource  exploration  and  development  are                                                                    
     partially  offset  by  the ability  to  monetize  these                                                                    
     credits shortly  after investment.   In  an exploration                                                                    
     portfolio,  the  large  majority of  projects  are  not                                                                    
     successful  resulting in  a total  loss from  all lease                                                                    
     acquisition, seismic and drilling  costs.  The tradable                                                                    
     tax  credits   would  lessen  the   negative  financial                                                                    
     consequences  of  the  inevitable dry  holes  explorers                                                                    
     will drill.                                                                                                                
     A significant  concern to Pioneer is  the potential for                                                                    
     a  lack  of liquidity  for  the  tradable tax  credits.                                                                    
     Pioneers'  outlook  is  to  continue  with  very  large                                                                    
     capital  expenditures  in  the   state  over  the  next                                                                    
     several  years.   With  only a  handful  of very  large                                                                    
     producers as potential buyers for  the credits, and the                                                                    
     proposed  limit that  a company  may utilize  purchased                                                                    
     credits to offset  no more than 20% of its  tax, we are                                                                    
     concerned that  the market for  the credits may  not be                                                                    
4:07:02 PM                                                                                                                    
CO-CHAIR  SAMUELS  surmised  then  that  Pioneer's  concern  with                                                               
regard to  the credits is  that the three [major  producers] will                                                               
buy  enough of  the  credits  and the  value  of each  individual                                                               
credit  will  decrease.    In that  scenario,  the  [three  major                                                               
producers] become the driving market force.                                                                                     
MR. FOLEY indicated that to be  the case as well as the imperfect                                                               
nature of a market with so few buyers.                                                                                          
REPRESENTATIVE  SEATON asked  whether  Pioneer  views oil  prices                                                               
below  $40  per  barrel  as   untradable  without  a  significant                                                               
discount.  He asked if  the aforementioned has been considered in                                                               
relation to the credits.                                                                                                        
4:07:53 PM                                                                                                                    
MR. FOLEY  said Pioneer  has not  considered the  consequences of                                                               
REPRESENTATIVE  SEATON  said  that  he  might  be  mixing  things                                                               
because the tradables  are down to 20 percent  and the investment                                                               
clawback is at $40.                                                                                                             
CO-CHAIR  RAMRAS clarified  that the  transition provision  has a                                                               
$40 threshold  while there  is no  threshold for  the use  of the                                                               
4:08:31 PM                                                                                                                    
MR.  FOLEY returned  to his  testimony and  paraphrased from  the                                                               
following written testimony [original punctuation provided]:                                                                    
     New investors could face selling  credits at a discount                                                                    
     to  taxpayers who  would in  turn cash  them in  to the                                                                    
     state at  full value.   We appreciate  that a  buyer of                                                                    
     tax credits  should recover  its transition  costs, but                                                                    
     we are  concerned that the  required discount  might be                                                                    
     substantially  greater.     We  respectfully   ask  the                                                                    
     legislature   to   consider   implementing   refundable                                                                    
     credits  with appropriate  limitations  to protect  the                                                                    
     state's cash flow in the event  of low oil prices.  The                                                                    
     program  could provide  that credits  be refunded  at a                                                                    
     modest discount  to face value.   This would  allow the                                                                    
     State, and not a third  party producer, to benefit from                                                                    
     any discount that a seller would be willing to accept.                                                                     
4:09:24 PM                                                                                                                    
CO-CHAIR RAMRAS inquired as to what a modest discount would be.                                                                 
MR. FOLEY said it would be  close to 100 percent; and the closer,                                                               
the  better.   He  related that  during his  career  he has  been                                                               
involved in  purchasing and selling several  credits, which often                                                               
sell at a discount of only a few percentage points.                                                                             
4:10:13 PM                                                                                                                    
MR. FOLEY continued  with his testimony and  paraphrased from the                                                               
following written testimony [original punctuation provided]:                                                                    
     We believe  that the PPT as  proposed improves Alaska's                                                                    
     competitive position  with respect to  other investment                                                                    
     opportunities  around  the  world.     Mr.  Van  Meurs'                                                                    
     testimony  indicated   that  the  proposed   PPT  would                                                                    
     improve  Alaska's competitiveness  versus  a number  of                                                                    
     mostly  large,  international investment  opportunities                                                                    
     around the  world.  To  attract companies  of Pioneer's                                                                    
     size  and   smaller,  we   believe  that   Alaska  must                                                                    
     effectively  compete with  U.S. lower  48 opportunities                                                                    
     as well.  With higher  prevailing natural gas prices in                                                                    
     the lower  48, gas resource plays  (tight sands, shales                                                                    
     and  coalbed methane)  are attracting  huge amounts  of                                                                    
     capital due  to the relatively  low risk, low  cost and                                                                    
     short project cycle time relative  to exploration.  The                                                                    
     size  of  some  of   these  resources  is  quite  large                                                                    
     resulting  in increased  competition  in  the U.S.  for                                                                    
     independent's capital.  If Alaska  wants to improve its                                                                    
     competitive  position  and  attract new  investors,  we                                                                    
     believe that the legislature should  take great care in                                                                    
     making  changes to  the administration's  proposal that                                                                    
     would make it less competitive.                                                                                            
4:11:36 PM                                                                                                                    
     For  new  investors  to  Alaska,  particularly  smaller                                                                    
     companies,  exempting the  first  $73  million of  cash                                                                    
     flow from  taxation is a  valuable feature of  the PPT.                                                                    
     The  obstacles to  new investors  are high.   Most  new                                                                    
     investment  opportunities in  Alaska are  either small,                                                                    
     infrastructure challenged, risky  (exploration) or some                                                                    
     combination of  these factors.  New  investors are also                                                                    
     handicapped by  not owning the  existing infrastructure                                                                    
     and they  lack the  economies of  scale enjoyed  by the                                                                    
     large operators.   To be  an effective operator  in the                                                                    
     state requires a huge  commitment in highly compensated                                                                    
     personnel  to effectively  navigate the  regulatory and                                                                    
     operational  challenges  that  are  unique  to  Alaska.                                                                    
     Under  existing law,  it is  unlikely that  an explorer                                                                    
     would  pay significant  production  tax  unless a  huge                                                                    
     field was discovered.   A number of  new companies were                                                                    
     recruited to  Alaska by the state  and made substantial                                                                    
     investments based on  the existing tax law.   Under the                                                                    
     proposed PPT, exempting  the first $73 MM  of cash flow                                                                    
     from taxation  will help deliver an  investment climate                                                                    
     more   consistent  with   the  system   that  initially                                                                    
     encouraged Pioneer  to explore in Alaska  and will help                                                                    
     offset the high "start-up" costs.                                                                                          
     In general, we  believe the proposed PPT  is a balanced                                                                    
     program  with appropriate  incentives to  encourage new                                                                    
     investment in the state.   We encourage the legislature                                                                    
     to  carefully evaluate  the proposal  and take  care to                                                                    
     insure  that it  results  in fiscal  policy that  makes                                                                    
     Alaska more competitive.   We also respectfully request                                                                    
     your  consideration to  make the  tax  credits in  this                                                                    
     bill  refundable to  allow the  new investors  the full                                                                    
     intended advantage  of the tax  credit program.   Thank                                                                    
     you  for this  opportunity to  express Pioneer  Natural                                                                    
     Resource's views on HB 488.                                                                                                
4:13:41 PM                                                                                                                    
CO-CHAIR  RAMRAS inquired  as to  Mr. Foley's  view if  the state                                                               
offers to [make the tax  credits refundable], but will not refund                                                               
the credits for a specific amount  of time.  In such a situation,                                                               
the state would  benefit from the time value of  the money, while                                                               
[delaying  the  refund]  acts  as a  backstop.    Therefore,  the                                                               
company  could  determine  whether  to  redeem  the  credits  for                                                               
production, sell them to a major  producer at a discount, or wait                                                               
the specified amount  of time and redeem them with  the state for                                                               
98 percent face  value.  He asked if that  would be an attractive                                                               
MR.  FOLEY replied  no, pointing  out that  if a  company doesn't                                                               
realize the value  of the credit for two or  three years, the MPV                                                               
of that  credit would be less.   He opined that  the [discounted]                                                               
credit  could  be  sold  into  the market  sooner  and  would  be                                                               
discounted less than the program Co-Chair Ramras described.                                                                     
CO-CHAIR RAMRAS noted that he didn't disagree.                                                                                  
MR. FOLEY  said the  fundamental concept is  that money  is being                                                               
left on the table.  In other  words, a seller might be willing to                                                               
sell  its  credits   at  a  discount,  and   therefore  it  seems                                                               
appropriate for the state to take advantage of that discount.                                                                   
4:15:57 PM                                                                                                                    
CO-CHAIR SAMUELS posed  a situation in which the  state offers to                                                               
provide the  company a 100  percent [tax credit] if  it continues                                                               
to reinvest  those funds  into capital  in Alaska.   If  not, the                                                               
company could take its chances  with selling it privately [to the                                                               
major producers].                                                                                                               
MR. FOLEY  said that anything  better than what is  expected from                                                               
the market is an improvement.                                                                                                   
4:17:32 PM                                                                                                                    
REPRESENTATIVE SEATON  opined that  Pioneer is in  an interesting                                                               
position due to its Cosmopolitan  holding, which he presumed will                                                               
be a  gas play.  He  asked if Mr.  Foley has analyzed the  PPT on                                                               
the sole  gas operation that  Pioneer has in  Cosmopolitan versus                                                               
an  oil  play on  the  North  Slope.   He  further  asked if  the                                                               
differing tax  structures and credits mean  that the relationship                                                               
and advantage or disadvantage is  different for the two resources                                                               
or are the two considered the same.                                                                                             
MR.  FOLEY  related  his   understanding  that  the  Cosmopolitan                                                               
development  has  both  oil  and  gas  potential.    Pioneer  has                                                               
considered Cosmopolitan  in a hypothetical success  portfolio and                                                               
doesn't  differentiate  the  value  of  a  gas  molecule  or  oil                                                               
molecule other than to make them (indisc.) equivalents.                                                                         
4:18:38 PM                                                                                                                    
REPRESENTATIVE SEATON said this is a  concern for him in the Cook                                                               
Inlet where  there are a  number of  gas plays that  are strictly                                                               
gas.  He  expressed concern that there hasn't been  any review of                                                               
any  differential  effect  of  the   changes  from  the  gas  tax                                                               
structure,  which differs  from  the oil  tax  structure, to  the                                                               
unified tax  structure.  Therefore,  he requested that  Mr. Foley                                                               
review that  and determine if  there is a differential  impact or                                                               
REPRESENTATIVE  GATTO highlighted  that the  smaller the  player,                                                               
the more excited they are about going to the PPT.                                                                               
REPRESENTATIVE SEATON noted the $73 million credit.                                                                             
REPRESENTATIVE  GATTO  pointed  out that  when  Pioneer  acquired                                                               
Evergreen,  Evergreen  held  leases   know  as  Pioneer  that  he                                                               
recalled were coalbed  methane leases.  He then  asked if Pioneer                                                               
is going to drill for anything else in that Pioneer unit.                                                                       
4:20:12 PM                                                                                                                    
MR. FOLEY clarified that the  Pioneer Unit held by Evergreen that                                                               
was acquired  by Pioneer  was named the  Pioneer Unit  because of                                                               
[the  proximity  to]  Pioneer  Peak.    Mr.  Foley  informed  the                                                               
committee that Pioneer  has surrendered all of its  leases in the                                                               
Matanuska-Susitna Valley.   All of  the leases held  by Evergreen                                                               
were  focused on  coalbed methane,  and that  was a  project that                                                               
Pioneer  decided  not   to  pursue.    In   further  response  to                                                               
Representative  Gatto,  Mr.  Foley explained  that  Pioneer,  the                                                               
parent corporation, acquired Evergreen for which the vast                                                                       
majority of its assets were in Colorado.                                                                                        
4:21:07 PM                                                                                                                    
JIM WEEKS, Alaska Operations Manager, Ultra Star Exploration                                                                    
LLC, paraphrased from the following written testimony:                                                                          
     Mr.  Chairman,  distinguished   members  of  the  House                                                                    
     Resources Committee.   My name  is Jim Weeks, and  I am                                                                    
     here  today representing  UltraStar Exploration  LLC, a                                                                    
     very  small  all  Alaskan owned  independent  explorer,                                                                    
     with strategically  located leases on the  North Slope.                                                                    
     UltraStar is  based in Anchorage, with  offices at 3111                                                                    
     C Street,  Suite 500.   The Company was formed  in 2002                                                                    
     by me, John Winther, and  Dale Lindsey, for the primary                                                                    
     purpose  of  exploring  and developing  leases  on  the                                                                    
     North Slope.   UltraStar is 100% owned by  Alaskans.  I                                                                    
     am  Managing Member,  and moved  to  Anchorage in  1984                                                                    
     with ARCO,  and have  had a  presence here  ever since.                                                                    
     Dale, whom  most of you  know, was born and  raised and                                                                    
     still lives  in Seward.   John, whom  most of  you also                                                                    
     know, was born  in Fairbanks and raised in  Juneau.  He                                                                    
     currently  lives   in  Petersburg.    Thanks   for  the                                                                    
     invitation to testify on this important legislation.                                                                       
     First  of all,  I'd like  to commend  the Governor  and                                                                    
     members  of  the  Administration  for  addressing  this                                                                    
     issue, and  your Committee for the  timely and thorough                                                                    
     review  it is  being given.   During  the last  several                                                                    
     days,  I've  listened to  a  lot  of testimony  on  the                                                                    
     proposal.    Some  witnesses wanted  the  Committee  to                                                                    
     delay  decisions on  this issue.   There  should be  no                                                                    
     delay, nor  should there  be a  rush.   This is  a very                                                                    
     important piece of legislation, and  you need to get it                                                                    
     right, less it results  in unexpected and/or un-desired                                                                    
     outcomes.   You are doing  it right, giving the  bill a                                                                    
     thorough and fair hearing in a timely fashion.                                                                             
     I will now  offer a few specific comments  on the bill.                                                                    
     You've  heard lots  of testimony  supporting the  20-20                                                                    
     tax  and exploration/development  incentive split,  and                                                                    
     the arguments  in favor of  these provisions  have been                                                                    
     articulated   very  thoroughly   and  clearly,   and  I                                                                    
     certainly  cannot embellish  on them,  so I  won't even                                                                    
     attempt to.   I'll just add  UltraStar's strong support                                                                    
     for  the  positions  of   the  existing  producers  and                                                                    
     independents and explorers on these issues.                                                                                
     John Winther  testified to the  Joint House  and Senate                                                                    
     Committee  hearing last  Saturday, echoing  UltraStar's                                                                    
     support for  the 20/20 provisions, and  the $73 million                                                                    
     deduction  allowance in  the bill.   Since  then, we've                                                                    
     learned that the $73 million  allowance, granted to all                                                                    
     companies  in Alaska  regardless of  the size  of their                                                                    
     cash flow streams, may be  a difficult pill for you and                                                                    
     your  colleagues to  swallow.   Thus, you  may want  to                                                                    
     eliminate it  from the  bill.  I  encourage you  not to                                                                    
     jettison it entirely, but  consider an alternative that                                                                    
     will   provide    incentives   for    exploration   and                                                                    
     development of small fields.                                                                                               
     It's  generally agreed  that the  big  Prudhoe Bay  and                                                                    
     Kuparuk  sized  fields  have  been   found.    The  big                                                                    
     structures have been drilled, and  what remains are the                                                                    
     10-100 million barrel accumulations.   These are modest                                                                    
     by   North  Slope   standards,  but   can  add   up  to                                                                    
     significant  amounts   of  oil  and   related  economic                                                                    
     activity.      The   stock   market   rewards   reserve                                                                    
     replacement.  The current  producers are huge, publicly                                                                    
     traded companies  that have become so  large that their                                                                    
     reserve  replacement needs  cannot  be  met by  chasing                                                                    
     small  satellites on  the North  Slope.   For instance,                                                                    
     ExxonMobil  produces 20  million  barrels  in 10  days.                                                                    
     We'd do  jumping jacks in  downtown Juneau if  we found                                                                    
     that much oil on our leases.                                                                                               
     But smaller  accumulations can  be attractive  to small                                                                    
     independents  like us,  provided the  right incentives.                                                                    
     Rather  than   the  $73   million  allowance   for  all                                                                    
     companies,  I  suggest   you  consider  establishing  a                                                                    
     ceiling above  which large companies would  not get the                                                                    
     $73   million  allowance,   and  below   which  smaller                                                                    
     companies would.  There is  a precedent for this in the                                                                    
     "Charter  for Development",  a  1999 agreement  between                                                                    
     the  State,   BP  and  ConocoPhillips  that   made  the                                                                    
     combination of  ARCO and BP  possible.  There  are many                                                                    
     provisions in  the Charter, but  none of  them requires                                                                    
     BP  and ConocoPhillips  to give  preferential treatment                                                                    
     to small producers, called  "qualified producers".  The                                                                    
     Charter  defines  qualified  producers  as  those  with                                                                    
     worldwide assets  of less than $1  billion dollars, and                                                                    
     establishes 5000  barrels per  day as a  maximum amount                                                                    
     of crude oil  that a qualified producer  can produce to                                                                    
     receive the preferential treatment.                                                                                        
MR. WEEKS,  in response to  Co-Chair Samuels' question as  to how                                                               
UltraStar would define large and  small companies, opined that it                                                               
would do  so by  calibrating a  company by  size and  a threshold                                                               
amount of oil per day.                                                                                                          
4:26:44 PM                                                                                                                    
MR. WEEKS then continued with his testimony and paraphrased from                                                                
the following written testimony [original punctuation provided]:                                                                
     I  realize  that the  provisions  of  the Charter  were                                                                    
     developed  for a  different purpose,  but certainly  it                                                                    
     distinguished  between "little  guys", and  "big guys",                                                                    
     and established  a maximum  production level  for which                                                                    
     the  benefits apply.   Whether  $1  billion dollars  or                                                                    
     5000 barrels  per day are the  appropriate ceilings for                                                                    
     the  PPT is  subject to  more debate,  but such  a two-                                                                    
     tiered  approach will  accomplish  what  I believe  you                                                                    
     want:    to  provide   incentive  for  entry  by  small                                                                    
     newcomers  without giving  an  un-deserved windfall  to                                                                    
     the established  players.  Please don't  throw the baby                                                                    
     out with the bath water  by eliminating the $73 million                                                                    
     allowance altogether.                                                                                                      
4:27:26 PM                                                                                                                    
     My  last  issue  is  pretty   specific,  but  could  be                                                                    
     significant  for small  independents.   It regards  the                                                                    
     exclusion   of   "amounts    paid   for   purposes   of                                                                    
     indemnification." on  line 15 of  page 14 of  the bill.                                                                    
     Small   independents  like   UltraStar  will   need  to                                                                    
     indemnify  facility  owners   and  operators  who  will                                                                    
     process  our oil  through their  facilities.   We  will                                                                    
     need  to  purchase  real,   third  party,  arms  length                                                                    
     insurance to satisfy these requirements.   We will also                                                                    
     need  insurance  to  meet  the  bonding  and  financial                                                                    
     responsibility  requirements   of  the   Department  of                                                                    
     Natural Resources  and Environmental  Conservation, and                                                                    
     the  Alaska   Oil  and  Gas   Conservation  Commission.                                                                    
     Depending upon the circumstances,  membership in an oil                                                                    
     spill clean up  cooperative may also be  required.  All                                                                    
     these costs  can broadly be characterized  as costs for                                                                    
     the purposes of indemnification,  and could arguably be                                                                    
     excluded when  direct costs are calculated,  as defined                                                                    
     at line 21 on page 13.                                                                                                     
     Nearly  15   percent  of  the   cost  of   the  Winstar                                                                    
     exploration  well  at Oliktok  Point  in  2003 was  for                                                                    
     insurance premiums, so  these indemnification costs can                                                                    
     be significant  for the little guy,  and should clearly                                                                    
     be  deductible  to  determine direct  costs.    In  his                                                                    
     letter   transmitting   this    legislation   to   this                                                                    
     committee, the Governor said that  a number of indirect                                                                    
     costs are  listed in the  bill, and are to  be excluded                                                                    
     from the calculation of  direct costs.  Indemnification                                                                    
     is one  of the  indirect costs listed.   Trust  me, Mr.                                                                    
     Chairman,   there  was   nothing  indirect   about  the                                                                    
     $370,000  check I  wrote for  the insurance  premium on                                                                    
     our last well.   The money went directly  from our bank                                                                    
     account  into  theirs.   I  urge  you to  clarify  your                                                                    
     intent  on   this  issue,   and  allow   real,  invoice                                                                    
     supported,  arms  length  indemnification costs  to  be                                                                    
     Thanks  for   the  opportunity   to  testify   at  this                                                                    
     important proceeding.                                                                                                      
REPRESENTATIVE  KERTTULA  thanked  Mr. Weeks  for  reminding  the                                                               
committee about the charter, which she said he is correct about.                                                                
MR. WEEKS related that UltraStar  holds the view that the charter                                                               
enables his company to look for small satellite accumulations.                                                                  
4:30:31 PM                                                                                                                    
REPRESENTATIVE SEATON recalled that  the $73 million [credit] was                                                               
based on a 5,000 barrel  field by $40 [wellhead].  Representative                                                               
Seaton related  his understanding that  Mr. Weeks is  saying that                                                               
although   the  5,000   might  be   an  adequate   distinguishing                                                               
production value,  perhaps a more  long-term projection  of price                                                               
should be used to arrive at a lesser figure.                                                                                    
MR. WEEKS  said it would not  be related to price.   He suggested                                                               
that the 5,000  barrel a day was  in the charter and it  may be a                                                               
coincidence that  the same figure  was used to calculate  the $73                                                               
million.   Mr. Weeks opined that  there should be a  threshold in                                                               
the maximum level that's excluded  until new entrants can start a                                                               
business and build a production  stream from which they can begin                                                               
to pay taxes.                                                                                                                   
REPRESENTATIVE BERKOWITZ asked  Mr. Weeks if he  believes the ELF                                                               
is broken.                                                                                                                      
MR.  WEEKS  replied  yes.     For  example,  the  leasehold  that                                                               
UltraStar now holds that abuts  the western boundary of the Point                                                               
McIntyre participating area  can be drilled from  a deviated well                                                               
from Point  McIntyre No.  1, which  is in  the Prudhoe  Bay unit.                                                               
Currently, UltraStar is  negotiating with BP, as  the operator of                                                               
the  unit,  for access  to  the  drill  site and  the  production                                                               
facilities  that  would  process  any  oil  found.    Before  the                                                               
governor's reinterpretation  of the ELF  in 2004, Mr.  Weeks said                                                               
that  his  economic  model/assumption  was that  any  pool  under                                                               
UltraStar's  lease would  be  a separate  reservoir  from an  ELF                                                               
standpoint and carry little or  no severance tax.  However, after                                                               
the reinterpretation to include  the satellites with the facility                                                               
pools, the  aforementioned became unclear.   Therefore, Mr. Weeks                                                               
changed his  assumptions such  that any  pool held  by UltraStar,                                                               
since  it  would  be  produced   and  processed  by  Prudhoe  Bay                                                               
facilities, would  attract the  crude oil.   Mr. Weeks  said that                                                               
the proposal in HB 488 is a cleaner method.                                                                                     
4:34:00 PM                                                                                                                    
REPRESENTATIVE  BERKOWITZ  asked  if   Mr.  Weeks  knows  of  any                                                               
mechanism besides the ELF and PPT that would be better.                                                                         
MR. WEEKS said he hadn't given  such any thought, but would do so                                                               
and share any ideas on that.                                                                                                    
[HB 488 was held over.]                                                                                                         
4:36:12 PM                                                                                                                    
The committee  recessed at 4:36 p.m.  to March 2, 2006,  at 12:00                                                               

Document Name Date/Time Subjects