Legislature(2011 - 2012)HOUSE FINANCE 519

04/21/2012 10:00 AM RESOURCES


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10:12:27 AM Start
10:13:42 AM HB3001
12:54:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
In Participation with House ENE
+= HB3001 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Presentation by Dept. of Revenue
Presentation by Division of Oil & Gas
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         April 21, 2012                                                                                         
                           10:12 a.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Eric Feige, Co-Chair                                                                                             
Representative Paul Seaton, Co-Chair                                                                                            
Representative Peggy Wilson, Vice Chair                                                                                         
Representative Alan Dick                                                                                                        
Representative Neal Foster                                                                                                      
Representative Bob Herron                                                                                                       
Representative Cathy Engstrom Munoz                                                                                             
Representative Berta Gardner                                                                                                    
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Bob Lynn                                                                                                         
Representative Kurt Olson                                                                                                       
Representative Pete Petersen                                                                                                    
Representative Don Saddler                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Chris Tuck (via teleconference)                                                                                  
Representative Mike Doogan                                                                                                      
Senator Cathy Giessel                                                                                                           
                                                                                                                                
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 3001                                                                                                             
"An Act  relating to  adjustments to oil  and gas  production tax                                                               
values  based on  a percentage  of gross  value at  the point  of                                                               
production for  oil and  gas produced  from leases  or properties                                                               
north  of   68  degrees  North  latitude;   relating  to  monthly                                                               
installment payments of the oil  and gas production tax; relating                                                               
to  the determinations  of  oil and  gas  production tax  values;                                                               
relating  to  oil  and  gas   production  tax  credits  including                                                               
qualified  capital  credits   for  exploration,  development,  or                                                               
production; making  conforming amendments;  and providing  for an                                                               
effective date."                                                                                                                
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB3001                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
04/18/12       (H)       READ THE FIRST TIME - REFERRALS                                                                        
04/18/12       (H)       RES, FIN                                                                                               
04/20/12       (H)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
04/20/12       (H)       Heard & Held                                                                                           
04/20/12       (H)       MINUTE(RES)                                                                                            
04/21/12       (H)       RES AT 10:00 AM HOUSE FINANCE 519                                                                      
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRYAN BUTCHER, Commissioner                                                                                                     
Department of Revenue (DOR)                                                                                                     
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Testified and answered questions during the                                                              
Power Point presentation during the hearing on HB 3001.                                                                         
                                                                                                                                
WILLIAM BARRON, Director                                                                                                        
Central Office, Division of Oil and Gas                                                                                         
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified and answered questions during the                                                              
Power Point presentation related to increasing production during                                                                
the hearing on HB 3001.                                                                                                         
                                                                                                                                
JOHN NORMAN, Commissioner                                                                                                       
Alaska Oil and Gas Conservation Commission (AOGCC)                                                                              
Department of Administration (DOA)                                                                                              
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Testified during the hearing on HB 3001.                                                                 
                                                                                                                                
JOE BALASH, Deputy Commissioner                                                                                                 
Department of Natural Resources (DNR)                                                                                           
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions during the hearing on HB                                                              
3001.                                                                                                                           
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
10:12:27 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  ERIC   FEIGE  called   the  House   Resources  Standing                                                             
Committee  meeting to  order at  10:12 a.m.   Representatives  P.                                                               
Wilson, Dick,  Foster, Herron, Munoz, Gardner,  Kawasaki, Seaton,                                                               
and Feige were present at the  call to order.  In attendance from                                                               
the House Special Committee on  Energy were Representatives Lynn,                                                               
Olson, Petersen, Saddler, Pruitt,  and Tuck (via teleconference).                                                               
Also  in  attendance  were   Representative  Doogan  and  Senator                                                               
Giessel.                                                                                                                        
                                                                                                                                
               HB 3001-OIL AND GAS PRODUCTION TAX                                                                           
                                                                                                                                
10:13:42 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE  announced that the  only order of  business would                                                               
be HOUSE  BILL NO. 3001, "An  Act relating to adjustments  to oil                                                               
and  gas production  tax values  based on  a percentage  of gross                                                               
value at  the point of production  for oil and gas  produced from                                                               
leases  or  properties  north  of   68  degrees  North  latitude;                                                               
relating  to monthly  installment  payments of  the  oil and  gas                                                               
production tax;  relating to  the determinations  of oil  and gas                                                               
production tax  values; relating  to oil  and gas  production tax                                                               
credits  including  qualified  capital credits  for  exploration,                                                               
development,  or production;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
CO-CHAIR   FEIGE   stated   the  committee   would   begin   with                                                               
presentations  by  the  Department   of  Revenue  (DOR)  and  the                                                               
Division of Oil and Gas (O&G).                                                                                                  
                                                                                                                                
10:14:35 AM                                                                                                                   
                                                                                                                                
BRYAN  BUTCHER,   Commissioner,  Department  of   Revenue  (DOR),                                                               
introduced  himself.     He  began  a   PowerPoint  presentation,                                                               
"Alaska's Production Tax:  Discussing  the issue" dated April 21,                                                               
2012,  which  illustrated  the contrast  between  oil  production                                                               
taxes in  Alaska and other  countries and provided a  context for                                                               
the bill.                                                                                                                       
                                                                                                                                
10:15:14 AM                                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER stated that oil  prices have been at an all-                                                               
time high for several years.   He provided a brief history on oil                                                               
prices, noting  historically prices  would fluctuate from  $10 to                                                               
$40 per  barrel, but at some  point oil prices began  to increase                                                               
to $50 to $60 per barrel.   However, oil prices have been at $100                                                               
or above  $100 per barrel for  several years, to the  extent that                                                               
most experts  consider the current  price as the new  reality and                                                               
they anticipate  prices will  remain in this  range for  the next                                                               
ten  years.   He noted,  however, prices  are subject  to change.                                                               
The  direct result  of the  higher  prices is  that projects  not                                                               
economic at  $30 per barrel would  most likely be viable  at $100                                                               
per barrel.   High prices  and technological booms  have resulted                                                               
in big  advances happening all over  the world.  He  then focused                                                               
on North  America, noting  an oil boom  has happened  in Arizona,                                                               
North Dakota,  and Texas, as  well as Wyoming and  Louisiana, but                                                               
not in Alaska.                                                                                                                  
                                                                                                                                
10:16:36 AM                                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  stated that  according to the  federal U.S.                                                               
Geological  Survey, [oil  pricing]  is certainly  not a  resource                                                               
issue [slide  3].  The  federal government does not  consider the                                                               
North Slope basin a mature basin.   Over 70 percent of state land                                                               
has  been  minimally  explored.    Mr.  Tangeman  touched  on  it                                                               
slightly yesterday, stating that  when Prudhoe Bay was discovered                                                               
all exploration flooded there since  Prudhoe Bay contained such a                                                               
massive volume of oil.  He  said there is no debating that Alaska                                                               
is a  world-class basin.   Cumulative  production from  the North                                                               
Slope through 2010  has been over 16 billion barrels  of oil with                                                               
an  estimated 40  billion barrels  overall,  including the  Outer                                                               
Continental  Shelf  (OCS).   In  addition,  an estimated  to  236                                                               
trillion cubic  feet (TCF)  of conventional  natural gas  is also                                                               
present, in  fact, 8 to  8.5 billion cubic  feet (BCF) of  gas is                                                               
recycled  into  the field  making  Prudhoe  Bay the  largest  gas                                                               
circulating facility in  the world.  This has been  the reason so                                                               
much  focus on  developing  a  big gas  pipeline  for export  has                                                               
occurred,  whether the  destination is  Alberta or  for potential                                                               
export from tidewater to Asian  markets.  He highlighted that the                                                               
North Slope production recirculates about  the same amount of gas                                                               
that  Canada  uses on  a  daily  basis.   Additionally,  tens  of                                                               
billions of heavy  and viscous oil are found  primarily under the                                                               
giant  Prudhoe Bay  field, again,  estimated to  hold 40  billion                                                               
barrels of conventional oil.  However,  he was unsure how much of                                                               
that oil will be economically  recoverable.  He pointed out three                                                               
huge shale  oil and gas  formations exist- similar to  the Bakken                                                               
shale  basin in  North Dakota  - but  little is  known about  the                                                               
formations.   Furthermore, he  was unsure  whether the  shale oil                                                               
can be  developed or if  the technology must first  be developed.                                                               
He  concluded by  stating there  is  reason to  be excited  about                                                               
Alaska and the natural resources on the North Slope.                                                                            
                                                                                                                                
10:19:54 AM                                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  covered "More Important Points"  [slide 4].                                                               
He said  as a  state Alaska is  in a position  that it  has never                                                               
been in  before.  The  state can review  with a higher  degree of                                                               
understanding what has been happening  in the oil industry.  When                                                               
Alaska switched  from a gross tax  - simply taxing the  amount of                                                               
oil being produced at a given oil  price - the state did not know                                                               
as much as  it now does since  the state has moved to  a net tax,                                                               
in which the  operating and capital expenses  of companies factor                                                               
into the  tax equation.   He highlighted  that since  last summer                                                               
the state  has been working  to obtain more  specific information                                                               
and policy makers  will also have that information.   He compared                                                               
what's  been happening  in  Alaska today  with  what happened  in                                                               
previous years  with respect to the  petroleum production profits                                                               
tax  (PPT)  and  Alaska's  Clear   and  Equitable  Share  (ACES).                                                               
Instituting  those  tax processes  required  a  lot of  modeling,                                                               
forecasting,  and   projects,  he  said.     He  reiterated  that                                                               
currently  the department  has a  much  better idea  of what  has                                                               
happened over the  past five years.  The  department has observed                                                               
that  record  high  oil  prices   lead  to  oil  and  employment,                                                               
investment,  and  production  booms  throughout the  world.    He                                                               
reported  that  Russia  and ExxonMobil  Corporation  (ExxonMobil)                                                               
have worked  out an  agreement to potentially  invest up  to $500                                                               
billion in exploration  in Russia's offshore Arctic.   This would                                                               
result  in Russia  having the  ability  to reduce  its taxes  and                                                               
eliminate its  export tax to  a level  below Alaska's taxes.   He                                                               
highlighted  that  this agreement  has  resulted  in a  potential                                                               
explosion  of investment  in Russia.   Subsequently,  the Russian                                                               
government  and  the  Russian   government's  oil  companies  are                                                               
pairing with  ExxonMobil in this development.   Russian companies                                                               
will  be taking  two-thirds of  the work  with ExxonMobil  taking                                                               
one-third, but in  exchange the Russian companies  will also have                                                               
pieces of ExxonMobil's  work in the Gulf of  Mexico, Alberta, and                                                               
in Texas, but not in Alaska.                                                                                                    
                                                                                                                                
10:23:03 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KAWASAKI referred  to slide 2 and  bullet 2, which                                                               
says other  oil producing regions  have been  enjoying production                                                               
and employment booms.   He asked how many  oil producing regions,                                                               
such as Alberta, Texas, North  Dakota are enjoying the employment                                                               
production  booms  due  to   technology  versus  Alaska's  large,                                                               
mature, conventional  oil field.   He pointed  out it  takes more                                                               
people to build a small  hydraulic fracture facility.  He offered                                                               
his  belief that  their  higher  level of  production  is due  to                                                               
technology rather than changes in taxes.                                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER  acknowledged that  technological  advances                                                               
play a  role, especially given  the small cost and  turnaround in                                                               
the  Lower 48.   He  related  that North  Dakota's and  Alberta's                                                               
technological advancements allow them to  be economical at $70 to                                                               
$80 per barrel, which would  not be economical using Alaska's tax                                                               
structure.   The same has been  true in Alberta.   He stated that                                                               
Texas  has had  an explosion  of  shale oil;  however, when  they                                                               
flattened   out  their   decline  it   was  exclusively   due  to                                                               
conventional oil.   It is  much cheaper  to produce oil  in Texas                                                               
and the turnaround  from exploration to production is  one to two                                                               
years as opposed to seven to ten years in Alaska.                                                                               
                                                                                                                                
10:25:39 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  KAWASAKI clarified  his  question  and asked  how                                                               
much of  the oil  in the  new producing  regions in  Texas, Eagle                                                               
Ford,   and  in   North  Dakota's   Bakken  shale   are  due   to                                                               
technological advances versus mature conventional oil fields.                                                                   
                                                                                                                                
COMMISSIONER BUTCHER responded that his  question is not a yes or                                                               
no answer.   He pointed out  that this has not  only happened due                                                               
to prices or technology, but  rather the outcome is a combination                                                               
of all of these things.                                                                                                         
                                                                                                                                
10:26:27 AM                                                                                                                   
                                                                                                                                
CO-CHAIR SEATON related  his understanding that the  DOR seems to                                                               
be suggesting  that Alaska is  not enjoying investment  in Alaska                                                               
due to  low prices previously and  a mature basin.   He noted his                                                               
statement that  the federal government  did not  consider Prudhoe                                                               
Bay a mature basin; however in  2004, the state's oil prices were                                                               
at $45  per barrel, which at  the time was the  highest price the                                                               
state had ever had.  Still,  the state did not see exploration or                                                               
development  wells  being  drilled  by  the  existing  producers.                                                               
Therefore, the historic high prices  did not bring development or                                                               
reinvestment in Alaska.   In 2005, again, the oil  prices were at                                                               
an historic high at $60 per  barrel, with a tax rate between zero                                                               
percent  and  five  percent;  however,  investment  still  didn't                                                               
happen.   He emphasized his concern  the DOR is trying  to "paint                                                               
the picture"  that everything  is caused  by ACES;  however, when                                                               
prices  were high  and taxes  were low,  investment still  didn't                                                               
happen.                                                                                                                         
                                                                                                                                
10:28:11 AM                                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER declared a later  slide will show the curves                                                               
for the major oil producing  regions in North America compared to                                                               
the  price  of  oil  that  will  better  demonstrate  his  point.                                                               
Certainly,  he stated,  taxes represent  a  major piece;  however                                                               
taxes are  not the entire  piece.   Additionally, there is  a big                                                               
difference between $100  per barrel oil for a  sustained time and                                                               
$45 per barrel  oil.  Further, Alaska  is one of if  not the most                                                               
expensive  places  to do  business,  which  results in  a  larger                                                               
economic  hurdle  rate than  competitors  in  North America  have                                                               
since they  have a  much shorter turnaround.  He pointed  out the                                                               
cost of an exploration well in  other areas is also much smaller,                                                               
however he  acknowledged that many  other factors  are considered                                                               
when a company makes decisions  on whether to explore or develop.                                                               
Unfortunately, Alaska  does not  have most  of the  advantages as                                                               
compared to other areas.                                                                                                        
                                                                                                                                
10:29:20 AM                                                                                                                   
                                                                                                                                
CO-CHAIR SEATON  asked the  department to  submit details  to the                                                               
committee on Alaska's  higher internal hurdle rates.   He related                                                               
his  understanding that  normally the  hurdle rates  are internal                                                               
rates of  return, which  include expenditures  and the  return on                                                               
capital.   He restated  his request  for the  DOR to  provide any                                                               
data  it has  that  shows  the oil  companies  doing business  in                                                               
Alaska have higher hurdle rates -  internal rates of return - for                                                               
their Alaska operations versus the operations in the Lower 48.                                                                  
                                                                                                                                
COMMISSIONER  BUTCHER responded  that a  company's considerations                                                               
for continuing development in a  mature field such as Prudhoe Bay                                                               
and for new exploration or development would differ.                                                                            
                                                                                                                                
CO-CHAIR  SEATON related  his understanding  Commissioner Butcher                                                               
has indicated that  companies in Alaska have  higher hurdle rates                                                               
- internal rates of return - than  companies in the Lower 48.  He                                                               
asked him to document this for the committee.                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  offered to provide  what he can.   He asked                                                               
to  clarify his  point, which  is that  the cost  and expense  of                                                               
doing business  is certainly more  in Alaska than it  is anywhere                                                               
else in North America.                                                                                                          
                                                                                                                                
10:30:48 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER  asked for examples of  specific locations                                                               
of an  oil boom in  a mature,  conventional basin as  measured by                                                               
increased  investment and  a change  in the  decline curve.   She                                                               
suggested this would get to the heart of the discussion.                                                                        
                                                                                                                                
10:31:27 AM                                                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER   discussed  "Historical   Oil  Production"                                                               
[slide 5].  He pointed  out this graph demonstrates the declining                                                               
curve of  the Alaska  North Slope  (ANS) production  beginning in                                                               
1989  with a  little  over 2  million barrels  per  day to  under                                                               
600,000 barrels per day today.   He highlighted that North Dakota                                                               
may have just passed Alaska as an oil producing state.                                                                          
                                                                                                                                
10:32:21 AM                                                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER  suggested  that  Alaska's  historical  oil                                                               
production  is the  main problem  for the  department [slide  6].                                                               
The goal would  be to have production flatten  out and ultimately                                                               
turnaround.   He pointed  out this slide  compares the  major oil                                                               
producing  jurisdictions  in   North  America,  including  Texas,                                                               
Alaska,   North  Dakota,   and  Alberta   with  the   West  Texas                                                               
Intermediate (WTI)  price layered  in.   He explained  the graph,                                                               
such  that North  Dakota  is  depicted along  the  bottom of  the                                                               
graph.   The  WTI prices  shot  up in  the mid-2000s  due to  the                                                               
technological  advances of  shale and  when the  price point  for                                                               
shale oil  development became  economical.   He reported  that it                                                               
was not  economical below  $70-80 per barrel.   He  noted Alberta                                                               
bounces around, but will be  steepening its incline as oil prices                                                               
rise.   Alaska - depicted  as the blue  line - has  peaked, while                                                               
Texas - depicted as the yellow  line - intersected with Alaska in                                                               
1990.   Alaska's decline  curve was  almost identical  to Texas's                                                               
decline until  mid-2000 when  prices rose.   Texas  flattened out                                                               
and  in  2010,  oil  production -  which  represents  almost  100                                                               
percent conventional  oil - began  to turnaround  Texas's decline                                                               
curve.  In 2010, Texas was  producing about 1,000 barrels per day                                                               
of shale oil, perhaps less.                                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  indicated that once prices  rose, it became                                                               
economical for Texas  to develop fields and  the decline stopped.                                                               
Meanwhile Alaska  continues on  the same  decline curve  as Texas                                                               
previously had.   He found  it interesting to examine  the mature                                                               
basins and the  decline curves - that some people  said could not                                                               
be turned around  - however; that hasn't been the  case in Texas.                                                               
He  predicted in  2011 and  2012, Texas's  Eagle Ford  basin will                                                               
make  a  huge  impact  since  Texas  anticipates  adding  300-500                                                               
thousand  barrels of  oil production  per day,  per year,  as the                                                               
field begins  to produce.   He surmised  that Alaska will  not be                                                               
anywhere near Texas  anytime soon.  He concluded  that this slide                                                               
demonstrates what has occurred in  the major oil producing basins                                                               
as  a  result   of  high  oil  prices.     He  acknowledged  that                                                               
technology, time,  and cost do play  a role, but one  can see the                                                               
effect  it seems  to have  on  every other  oil producing  region                                                               
except for Alaska.                                                                                                              
                                                                                                                                
10:35:35 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE  asked for  the nature of  Texas's tax  system and                                                               
whether it has changed much.                                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER answered that  Texas's taxes haven't changed                                                               
at all.   He acknowledged that Texas's taxes  are relatively high                                                               
compared  to other  oil  producing states,  but  their taxes  are                                                               
relatively  low compared  to Alaska.   He  emphasized that  North                                                               
Dakota has  been working to  reduce its  oil taxes.   He recalled                                                               
when he visited  North Dakota - which has the  highest oil tax in                                                               
the Lower  48 - that he  read a Bismarck newspaper  article which                                                               
compared Alaska to North Dakota.   The article claimed that North                                                               
Dakota would  need to double its  tax rate and add  25 percent in                                                               
order  to equal  Alaska's rate  due to  progressivity in  Alaska.                                                               
Even so,  North Dakota has been  trying to reduce their  tax rate                                                               
based on  an increase in their  oil production.  In  other words,                                                               
North  Dakota will  consider changes  in their  tax structure  so                                                               
that the higher  the production is the lower their  tax rate will                                                               
be.   North  Dakota's  rationale is  that  the state's  operating                                                               
costs are the  same and with higher oil  production the operating                                                               
cost  percentages  decrease.   Further,  North  Dakota  expressed                                                               
concern that  government growth could  not be sustained  by their                                                               
small  population  once  oil  declined.    He  said  he  was  not                                                               
suggesting  Alaska  should move  in  an  opposite direction  from                                                               
progressivity; however, he described  the conversation being held                                                               
in North Dakota  as a much different one than  is being discussed                                                               
in Alaska today.  He  likened North Dakota's circumstance as much                                                               
like the  boom Alaska  encountered in  the 1970s.   As  a result,                                                               
North  Dakota's  housing  has  been  tight  and  some  fast  food                                                               
companies  have offered  signing bonuses  for employees  who will                                                               
commit to managing fast food restaurants for at least a year.                                                                   
                                                                                                                                
10:38:19 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE referred to North  Dakota's oil production in 1979                                                               
or 1980,  noting that  production did not  increase when  the WTI                                                               
price spiked, but it did spike  in about 2002-2003.  He asked for                                                               
an explanation for the increase.                                                                                                
                                                                                                                                
COMMISSIONER  BUTCHER  answered  that advancement  of  technology                                                               
played a big  role.  He offered it is  the difference between oil                                                               
prices and  economic models  of companies.   For example,  if the                                                               
price of  oil rose to $147  per barrel then plummeted  to $40 per                                                               
barrel,  that no  company would  base its  decisions on  $140 per                                                               
barrel oil  even if the oil  prices held for a  number of months.                                                               
He explained it takes  time to get to a point  in which a company                                                               
would  base decisions  on higher  oil  prices -  noting $100  per                                                               
barrel oil is  here to stay -  but six months of  $100 per barrel                                                               
oil  would  change their  initial  models  based on  $30-$50  per                                                               
barrel oil.   He suggested the  oil producers could speak  to how                                                               
long it  takes to  "turn the  ship around;"  however, he  did not                                                               
think a company would move  forward with a project - economically                                                               
-  if oil  prices dropped  to $30  per barrel  for several  years                                                               
since  the company  would operate  at a  deficit once  production                                                               
began.                                                                                                                          
                                                                                                                                
10:39:56 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  SEATON  noted  the oil  production  separation  between                                                               
Texas and Alaska occurs somewhere  between 2001-2007 when oil was                                                               
$20 per barrel;  however oil prices do not correspond.   He asked                                                               
for possible reasons for the changes  in oil production, if it is                                                               
not based on oil prices.                                                                                                        
                                                                                                                                
COMMISSIONER  BUTCHER  answered  that  he   did  not  know.    He                                                               
acknowledged  that the  oil production  between Alaska  and Texas                                                               
fluctuates, but it was not until  the last five to six years that                                                               
Texas increased and Alaska decreased, which has been the focus.                                                                 
                                                                                                                                
10:41:07 AM                                                                                                                   
                                                                                                                                
CO-CHAIR SEATON  pointed out the  commissioner used his  slide to                                                               
illustrate  a point:   that  the separation  occurred in  1999 or                                                               
2000.   However, it  would seem that  the department  could check                                                               
with Texas and  find out whether the production  changes were due                                                               
to  technological advances  or a  change in  investment climates,                                                               
since it  apparently wasn't  due to WTI  pricing.   He questioned                                                               
the commissioner  attributing parts  of the slide  to demonstrate                                                               
factors that are obviously not related to the separation point.                                                                 
                                                                                                                                
COMMISSIONER BUTCHER  responded that  the oil  production between                                                               
Alaska and Texas separates, but  comes together again and by 2005                                                               
it's very  close.  He  agreed the  state dipped and  plateaued in                                                               
early 2001-2002, but  pointed out that ultimately  the gap closes                                                               
up again.                                                                                                                       
                                                                                                                                
10:42:27 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE asked members to hold questions.                                                                                 
                                                                                                                                
REPRESENTATIVE GARDNER remarked that  she felt it was appropriate                                                               
for her to ask questions on this slide since others were.                                                                       
                                                                                                                                
10:42:42 AM                                                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER discussed  Two distinct  elements of  ACES:                                                               
Can't  discuss one  without the  other"  [slide 7].   He  related                                                               
discussions the  department held with companies  that highlighted                                                               
differences  in  their  viewpoints  on  ACES,  depending  on  the                                                               
timeline  for  exploration to  production.    He said  that  ACES                                                               
includes  very generous  tax credits,  which were  made over  the                                                               
past several years  to help spur exploration.  A  new company who                                                               
would   begin  oil   exploration  will   receive  45-60   percent                                                               
reimbursement on  their estimated  tax benefits  on expenditures.                                                               
Once companies  transition to  production, the  smaller companies                                                               
have  experienced difficulties  in  finding  larger companies  to                                                               
assist with development.  He  noted that typically many "wildcat"                                                               
operators buy  leases, find  oil, and then  sell their  leases to                                                               
larger  companies, but  they have  had difficulty  moving forward                                                               
due to  Alaska's much higher tax  rate, which is higher  than any                                                               
place in  North America  or any  other Organization  for Economic                                                               
Cooperation  and   Development  (OECD)   companies  -   with  the                                                               
exception  of  Norway.    He said  the  department  has  observed                                                               
disconnects between  oil development and an  increased production                                                               
in the state due to Alaska's production taxes.                                                                                  
                                                                                                                                
10:44:32 AM                                                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER  turned to  "ELF,  PPT  &  ACES:   Did  the                                                               
Pendulum  Swing Too  Far?" [slide  8].   He explained  this slide                                                               
provides  the  history for  the  past  seven  or eight  years  in                                                               
Alaska.  He referred to  a comparison of the estimated production                                                               
tax revenue  from ELF,  PPT, ACES  as Proposed,  and ACES  for FY                                                               
2012-FY  2016.    He  acknowledged that  Alaska  would  not  have                                                               
received its fair share under  ELF, which needed to be overhauled                                                               
and raised,  that was accomplished  by PPT.   He said  the yellow                                                               
bar on  the graph indicates  the revenue under ACES  as Proposed,                                                               
and  the red  bar indicates  the current  taxes.   The difference                                                               
between ACES  as Proposed, and  ACES as passed occurred  near the                                                               
end of  the special  legislative session on  ACES.   He commented                                                               
that progressivity  was made  much more  aggressive in  the final                                                               
version than  in the  original ACES bill.   He  characterized the                                                               
taxes as  a sizable jump  between the  PPT and ACES  as Proposed.                                                               
He said the department thinks the  legislature may have gone up a                                                               
little higher  on taxes than it  should have.  He  concluded that                                                               
the ACES as  Proposed taxation rates make more sense  to the DOR.                                                               
He declared  that he wished  he had  projections on the  graph to                                                               
outline the  effects of the proposed  HB 3001, but he  offered to                                                               
provide the  graph to the committee.   He predicted that  the bar                                                               
would be somewhat comparable to PPT and ACES as Proposed.                                                                       
                                                                                                                                
10:46:43 AM                                                                                                                   
                                                                                                                                
COMMISSIONER BUTCHER  referred to  the "Monthly ANS  Crude Prices                                                               
Under Net  Tax System [slide 9]."   Even though ANS  crude prices                                                               
have  been over  $100  per barrel  for  the past  year  - and  he                                                               
anticipated prices will  hold - the fact remains  that oil prices                                                               
have been  below $100 per barrel  70 percent of the  time from FY                                                               
07  to today.    He  cautioned against  expecting  oil prices  to                                                               
remain  high given  the  history of  oil prices.    In 2008,  oil                                                               
prices jumped to $140 per  barrel, but quickly nosedived to under                                                               
$40 per  barrel.  He acknowledged  there are a number  of reasons                                                               
for the fluctuation,  but primarily he attributed  the price drop                                                               
to the worldwide  contraction in the economy.  At  that point the                                                               
Organization of  Petroleum Exporting Countries  (OPEC) recognized                                                               
$140 per barrel was detrimental to  the world's economy.  He said                                                               
he mentions this as a reminder of  the volatility of oil.  As oil                                                               
prices  rise  and  contribute positively  to  Alaska's  treasury,                                                               
higher  fuel  costs  also  negatively  impact  rural  Alaska  and                                                               
Fairbanks.  Additionally, high oil  prices have had a detrimental                                                               
effect on  the U.S.  and the  world's economy.   Even  though the                                                               
prices have been  fairly constant over the past  year, it doesn't                                                               
mean  factors that  affected oil  prices won't  happen again,  he                                                               
said.                                                                                                                           
                                                                                                                                
10:48:53 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KAWASAKI  referred back to slide  [6], "Historical                                                               
Oil  Production:    How  Did Our  Competition  Fare  When  Prices                                                               
Spiked?"  He  asked how much new incremental oil  is derived from                                                               
technological  advances versus  conventional oil  well drills  in                                                               
oil producing regions of Alberta, North Dakota, and Texas.                                                                      
                                                                                                                                
COMMISSIONER BUTCHER  offered to provide  a breakdown of  what is                                                               
produced from  conventional methods and the  amount produced from                                                               
shale.                                                                                                                          
                                                                                                                                
10:49:56 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER  also referred  to  slide  6, noting  the                                                               
commissioner  stated  that  Texas's  increase  was  derived  from                                                               
almost  entirely  mature basins,  yet  the  Institute for  Energy                                                               
Research (IER)  disagrees.   The IER  cites information  from the                                                               
U.S. Energy  Information Administration  indicated in  2011 Texas                                                               
produced 1,427 thousand barrels of oil  per day - 22 percent more                                                               
than  in 2010  - which  represents the  highest production  since                                                               
1997.  Further, the IER  indicates the increase was primarily due                                                               
to  the Eagle  Ford shale  formation, which  is not  conventional                                                               
oil.  She asked for specific  examples of mature fields that have                                                               
seen a boom.                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER  clarified  that   he  mentioned  that  the                                                               
projections on slide 6 ended in  2010, at which time little shale                                                               
oil production  had occurred.   In  2011, Texas's  oil production                                                               
increased  by a  few  hundred thousand  barrels, which  continues                                                               
into 2012.   He  offered to provide  a year-by-year  breakdown of                                                               
shale oil  production from Eagle  Ford shale, which  produces the                                                               
vast majority of shale oil produced in Texas.                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER  asked whether  it would be  inaccurate to                                                               
say that the increase is due almost entirely from mature basins.                                                                
                                                                                                                                
COMMISSIONER BUTCHER  answered that  it is  accurate to  say that                                                               
the decline  flattened out, turned  around, and began  to incline                                                               
almost  entirely  from  conventional  oil.   He  related  a  huge                                                               
increase in 2011  and 2012 was the result of  shale oil, which he                                                               
previously pointed out.                                                                                                         
                                                                                                                                
10:51:55 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  PRUITT referred  to  North  Dakota's increase  in                                                               
production.  He  understood the tax rate is  considerably less in                                                               
North  Dakota.   He  inquired  as to  North  Dakota's full  take,                                                               
including private royalties.                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER offered  to provide  the information.   The                                                               
department  prepared a  report in  January that  outlines various                                                               
tax regimes  and he  offered to provide  a breakdown  between the                                                               
two.   He suggested North Dakota's  tax is 6.5 percent  up to $50                                                               
per barrel,  and the tax  increases to  11 percent above  $50 per                                                               
barrel.   The royalty rates  vary, but  tend to range  from 10-20                                                               
percent royalty on  mature fields, including a large  part of the                                                               
Bakken field,  since it  had been  producing conventional  oil at                                                               
very  small percentages.   Some  of  the newer  fields have  been                                                               
taxed at  25-30 percent - which  does factor in -  although it is                                                               
necessary to  factor in  other pieces, too.   He  illustrated the                                                               
ease in  getting to  oil sites  in North  Dakota, by  stating his                                                               
brother is currently working in  North Dakota and stays about 500                                                               
yards from  where he  works since it's  possible to  drive there.                                                               
Thus it  gives the  state a  glimpse of  the many  variables that                                                               
must  be  considered when  comparing  states  or provinces.    He                                                               
concluded that  the numerous variables  led the DOR to  produce a                                                               
report  on oil  tax regimes  since the  numerous factors  make it                                                               
difficult to compare taxes.                                                                                                     
                                                                                                                                
10:54:54 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  PETERSEN referred  to  slide  4, "More  Important                                                               
Points."   He  recalled Commissioner  Butcher mentioned  this was                                                               
based  on  actual  information; however,  the  commissioner  also                                                               
mentioned  audits  are not  finished.    He suggested  the  audit                                                               
information  would be  useful to  assess how  well ACES  has been                                                               
working.   He asked the  department to provide  more information,                                                               
acknowledging  he  understood  some  information  is  proprietary                                                               
information.                                                                                                                    
                                                                                                                                
COMMISSIONER  BUTCHER offered  to provide  capital and  operating                                                               
expenditures to the  committee; however, he said that  it is more                                                               
difficult to analyze  how well tax rates have been  working.   He                                                               
explained  that some  companies  claim tax  credits  but have  no                                                               
production  since  they  are  still exploring  for  oil.    Other                                                               
companies  have been  producing  and receive  tax  credits.   The                                                               
companies  that   currently  receive  tax  credits   are  in  the                                                               
exploration  phase, but  will not  provide any  information until                                                               
production occurs.   He offered to  review the past four  to five                                                               
years.  It  is difficult to draw a line  between what exploration                                                               
occurred due to the tax credits  and what would not have occurred                                                               
without the credits.  He suggested  that the oil companies may be                                                               
able to provide these details.                                                                                                  
                                                                                                                                
10:57:27 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE  noted that  production tax  credits have  been in                                                               
effect  since 2007  under  ACES.   He  asked  for  the number  of                                                               
companies that have moved forward with production.                                                                              
                                                                                                                                
COMMISSIONER  BUTCHER  deferred  to  Mr.  Barron,  Department  of                                                               
Natural Resources  (DNR).   He commented that  DOR is  limited to                                                               
what  information it  can release  since  the DOR  has access  to                                                               
confidential taxpayer  information.  He  stated that the  DOR can                                                               
speak generally about tax credits  as a whole, but cannot provide                                                               
information for a specific company.                                                                                             
                                                                                                                                
CO-CHAIR FEIGE asked whether the DOR is restricted by statutes.                                                                 
                                                                                                                                
COMMISSIONER  BUTCHER answered  yes,  the company  can choose  to                                                               
release information, but the department cannot release it.                                                                      
                                                                                                                                
10:58:37 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  PETERSEN  referred  to  slide  7,  "Two  Distinct                                                               
Elements of  ACES:  Can't discuss  one without the other"  and to                                                               
the  previous  comment  about the  difficulty  a  small  "wildcat                                                               
operator"   would  have   in   switching   from  exploration   to                                                               
production.   He  further recalled  the commissioner  thought the                                                               
tax might  be impediment for these  small operators.  He  said he                                                               
has read one  big impediment is access to  facilities, whether it                                                               
would be processing facilities or  the pipeline itself.  He asked                                                               
him to comment.                                                                                                                 
                                                                                                                                
COMMISSIONER BUTCHER stated that access  to facilities is more of                                                               
a DNR issue; however, he recalled  the last two fields to come on                                                               
were  done by  smaller producers.   He  related that  he has  not                                                               
heard   of  any   difficulty  in   the  field   in  his   limited                                                               
conversations about facilities.                                                                                                 
                                                                                                                                
10:59:51 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  OLSON referred  to "ELF,  PPT  & ACES:   Did  the                                                               
Pendulum  Swing   Too  Far?"   [slide  8].     He   recalled  the                                                               
commissioner  previously   offered  to  update  the   slide  with                                                               
projections  under HB  3001.   He asked  whether the  slide could                                                               
also be updated with North Dakota's tax structure.                                                                              
                                                                                                                                
COMMISSIONER BUTCHER  said he  would see  what he  could do.   He                                                               
characterized North Dakota as "a  different beast" but offered to                                                               
try  to show  their structure  and Alaska's  production and  cost                                                               
estimates.                                                                                                                      
                                                                                                                                
11:00:37 AM                                                                                                                   
                                                                                                                                
CO-CHAIR SEATON  related his understanding that  the conversation                                                               
has been discussing  contractor take.  He  suggested only showing                                                               
government  take  and  excluding  private  royalties  to  try  to                                                               
compare competitiveness.   He  asked whether  that could  also be                                                               
included in slide 8.                                                                                                            
                                                                                                                                
COMMISSIONER BUTCHER  agreed.   He said he  had been  thinking of                                                               
that since  if it  is not  included the  outcome would  be pretty                                                               
invalid.  He  pointed out that people in North  Dakota have owned                                                               
farms for  decades and some  family members have  sold subsurface                                                               
rights years  ago, while  others are  now benefitting  from shale                                                               
oil.   He  commented  that  the footprint  for  fracking is  very                                                               
small.   Some people rent  an area without subsurface  rights for                                                               
$30,000 per year, while others  who own the subsurface rights are                                                               
earning  $1  million  plus  the  rent.   He  concluded  this  has                                                               
resulted in animosity among neighbors.                                                                                          
                                                                                                                                
11:02:24 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  FOSTER asked  whether  the  report could  contain                                                               
charts.   He  referred to  slide 6,  "Historical Oil  Production:                                                               
How  Did Our  Competition  Fare When  Prices  Spiked?" and  asked                                                               
whether he could add in Texas, Alaska, North Dakota, and Russia.                                                                
                                                                                                                                
COMMISSIONER  BUTCHER  answered   that  he  previously  mentioned                                                               
Russia since Pedro  van Meurs emailed the  department to indicate                                                               
their tax rates  were lower, so the information will  be based on                                                               
his analysis.                                                                                                                   
                                                                                                                                
11:03:28 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  P.  WILSON  asked  him to  update  the  slide  to                                                               
indicate when PPT  and ACES went into effect  since the effective                                                               
date is not always the same date as passage.                                                                                    
                                                                                                                                
COMMISSIONER BUTCHER agreed to do.                                                                                              
                                                                                                                                
11:04:01 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SADDLER asked  how precisely  the department  can                                                               
tease out the effects of any one factor on production.                                                                          
                                                                                                                                
COMMISSIONER BUTCHER  offered his  belief that  differences exist                                                               
between  companies.   He said  that Repsol  has had  leases taken                                                               
away  in other  countries.   He  suggested that  when Repsol  was                                                               
interested  in Alaska,  they may  have  considered other  factors                                                               
than a company based in the Lower 48 would consider.                                                                            
                                                                                                                                
11:05:08 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE HERRON  referred to slide 7,  titled "Two Distinct                                                               
Elements  of ACES:   Can't  discuss  one without  the other"  and                                                               
asked  for   clarification  on   whether  the   commissioner  had                                                               
testified that tax credit should be reduced, as well.                                                                           
                                                                                                                                
COMMISSIONER BUTCHER  responded that the department  believes the                                                               
tax  credit  element of  ACES  is  working  since it  brings  new                                                               
companies and potential  investment into the state.   The DOR has                                                               
been working to  separate out the effects, but it  may take a few                                                               
years to sort out the positive and negative aspects.                                                                            
                                                                                                                                
11:06:15 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE HERRON  referred to  slide 9, titled  "Monthly ANS                                                               
Crude  Prices  Under  Net  Tax  System."    He  recalled  hearing                                                               
testimony that  oil prices  will stay  relatively stable  and may                                                               
bounce slightly.   He asked for confirmation  the DOR anticipates                                                               
oil prices will be holding at $100 per barrel                                                                                   
                                                                                                                                
COMMISSIONER   BUTCHER  answered   the  DOR   and  most   experts                                                               
anticipate oil prices at $100 to $110 per barrel.                                                                               
                                                                                                                                
11:06:51 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HERRON  related  his  understanding  the  decline                                                               
curve is at six percent  with private sector investment estimated                                                               
at $1  billion per year.  He asked  whether HB 3001  would reduce                                                               
the  decline  curve  to  three percent,  and  for  the  estimated                                                               
figures.                                                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER  answered that  question is a  difficult one                                                               
to  answer.   He  anticipated  that  DOR  and  DNR would  try  to                                                               
determine the  ballpark figure of what  would be needed.   He was                                                               
unsure  a  chart would  be  possible  given  the variables.    He                                                               
suggested  that a  new  exploration company  will  spend more  in                                                               
billions than  an existing producing  company who was  working to                                                               
extract  more oil  from  a field  to a  certain  percentage.   He                                                               
offered that the DOR would work on developing a ballpark figure.                                                                
                                                                                                                                
11:07:53 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE   HERRON  related   his  understanding   that  the                                                               
governor  would  like  to increase  production  from  .5  million                                                               
barrels  per day  to 1  million barrels  per day.   He  suggested                                                               
incremental  investments  of  $2-$4  billion  would  flatten  the                                                               
decline  curve out.   He  asked  whether HB  3001 would  increase                                                               
production to 1 million barrels per day.                                                                                        
                                                                                                                                
COMMISSIONER BUTCHER  characterized 1 million barrels  per day as                                                               
a goal  that would be  great to attain.   He predicted  DNR would                                                               
agree that  to one  day to  hit 1 million  barrels per  day would                                                               
require  "shale   [oil],  potentially  heavy  [oil],   and  other                                                               
things."   He suggested that he  would be thrilled if  the state,                                                               
over the  next five  years, could flatten  the decline  curve out                                                               
and begin to turn it around as Texas has done.                                                                                  
                                                                                                                                
11:08:47 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE asked  for the effect on the state  to flatten out                                                               
the curve.                                                                                                                      
                                                                                                                                
COMMISSIONER BUTCHER answered  that to do so  would help solidify                                                               
and make for rosier fiscal future  for the state.  He pointed out                                                               
that  the high  oil  prices have  muddied the  fact  that oil  is                                                               
declining since the  state is bringing in more  revenues than the                                                               
state expends.   He recalled policy discussions held  a few years                                                               
ago  about  instituting  a  state   income  tax  and  eliminating                                                               
permanent fund dividend checks,  besides making deep budget cuts.                                                               
However,  as the  state's oil  continues  to decline  and if  oil                                                               
prices dropped, the state's taxes  would drop below the mid-1990s                                                               
level, which  is about what it  needs to balance the  budget.  He                                                               
concluded that  if the oil prices  in the state drops  to $90 per                                                               
barrel Alaska will be in a deficit.                                                                                             
                                                                                                                                
11:10:33 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  SEATON  referred  to  slide  7,  titled  "Two  Distinct                                                               
Elements of  ACES:   Can't discuss  one without  the other."   He                                                               
recalled  testimony  that  small  producers could  not  bring  in                                                               
capital  due to  the  tax rate.   He  asked  whether the  smaller                                                               
producers in Cook Inlet are  having trouble obtaining capital for                                                               
their operations due to the zero tax rates in Cook Inlet.                                                                       
                                                                                                                                
COMMISSIONER BUTCHER agreed  the Cook Inlet taxes  are much lower                                                               
than  those on  the  North  Slope basin,  but  the estimates  for                                                               
potential  oil  is  much  smaller.   He  characterized  it  as  a                                                               
different situation, although  he suggested that DNR  may be able                                                               
to enlighten  him on  the potential  for different  finds between                                                               
the two regions.                                                                                                                
                                                                                                                                
CO-CHAIR SEATON  wanted to establish  that tax rates  are driving                                                               
small  producers to  not have  access to  capital.   He recalled,                                                               
historically, the  committee has heard that  the small producer's                                                               
tax credit  is ineffective in  obtaining capital and  he presumed                                                               
bringing capital in is the function  of the new oil portion of HB                                                               
3001.   He further recalled  testimony that the  small producer's                                                               
tax credit expiring in 2016 does  not allow them to bring capital                                                               
in since the  tax credit will be gone before  the small producers                                                               
are in production.  He  asked whether the administration supports                                                               
extending that credit until 2022  to allow small producers to get                                                               
capital  invested, anticipating  the tax  credit once  production                                                               
begins.                                                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER  answered, "Yes,  that's something  we would                                                               
be happy to work with the committee on."                                                                                        
                                                                                                                                
11:13:06 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  SEATON referred  to  access to  facilities.   He  asked                                                               
whether  capital underground  is one  thing and  above ground  is                                                               
another.   He  related a  scenario  in which  one small  producer                                                               
found oil  and tested the flow.   The producer came  to the state                                                               
asking for a loan for production  to get past the bottleneck.  He                                                               
asked whether the administration  is supportive of incentives for                                                               
capital for production facilities to ease the access problem.                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER   deferred  to  the  DNR   to  answer  that                                                               
question.                                                                                                                       
                                                                                                                                
11:14:00 AM                                                                                                                   
                                                                                                                                
CO-CHAIR  SEATON  explained that  if  the  crux  of the  new  oil                                                               
portion  is to  bring  capital to  Alaska,  noting that  facility                                                               
access has  been identified in numerous  publications by numerous                                                               
individual  companies, he  would like  the DOR  to review  making                                                               
loans  at  10 percent  interest  in  terms  of whether  it  would                                                               
facilitate getting  oil in the pipeline  by 2014.  He  noted this                                                               
would be two  years sooner than Point  Thomson's projected 10,000                                                               
barrels per day production.                                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  answered absolutely;  that the  governor is                                                               
focused on getting more oil production  in the pipeline.  He said                                                               
he is open to discussion.                                                                                                       
                                                                                                                                
11:15:13 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  PRUITT recalled  testimony  that several  regimes                                                               
peaked at  the perfect time,  when prices  were high and  the DOR                                                               
often refers  to their success.   He asked how confident  the DOR                                                               
is that  if the  legislature makes tax  changes that  Alaska will                                                               
not be  "Johnny come  lately."  He  further asked  whether prices                                                               
could drop and Alaska would find  itself short in the future.  He                                                               
suggested Alaska  would be  trying to react  to the  success that                                                               
other areas and regimes have had.                                                                                               
                                                                                                                                
COMMISSIONER  BUTCHER  responded  that  there would  never  be  a                                                               
definitive answer  to the question.   He pointed to  estimates on                                                               
oil pricing and on the  world economy; however, the general sense                                                               
is the U.S.  and world economy will expand and  need for oil will                                                               
be greater  than it is today.   He suggested that  it appears the                                                               
world will need oil.                                                                                                            
                                                                                                                                
REPRESENTATIVE PRUITT  asked for the  impact of new regimes.   He                                                               
referred to the  Falkland and to Iceland.  He  said he understood                                                               
the dynamics, but asked for  the impact that new regimes bringing                                                               
new oil into the market will  have on the marketplace and whether                                                               
the value of oil will benefit Alaskans.                                                                                         
                                                                                                                                
COMMISSIONER BUTCHER  answered the  biggest advantage  Alaska has                                                               
is  it is  politically stable.    He said  it  is a  goal of  the                                                               
Congress and U.S. to become  less energy dependent.  He suggested                                                               
that becoming less  reliant on other volatile parts  of the world                                                               
will always make sense.                                                                                                         
                                                                                                                                
11:17:48 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KAWASAKI referred  to slide 8, titled  " ELF, PPT,                                                               
& ACES:  Did  the Pendulum Swing Too Far."    He recalled earlier                                                               
testimony that under the ELF  system Alaska was not receiving its                                                               
fair share.                                                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER agreed the state  did not receive the levels                                                               
of revenue it should have received.                                                                                             
                                                                                                                                
11:18:26 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE KAWASAKI  suggested that under ELF,  the companies                                                               
and  corporations, specifically  in  the two  big legacy  fields,                                                               
were taking  the money.   He then  referred to the  decline curve                                                               
[in slides 5-6]  and stated that in the  most precipitate decline                                                               
from 1983  to 2003, the state's  production kept going down.   He                                                               
suggested the whole  assumption has been that if  taxes are lower                                                               
the  state will  get  more  production, but  the  state has  seen                                                               
historically -  with high prices and  low taxes - that  the state                                                               
has not seen an increase in the  two legacy fields.  He asked how                                                               
the DOR  intends to change that  with HB 3001.   He recapped that                                                               
under ELF the state received little in taxes.                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER  answered  that  in  reviewing  oil  prices                                                               
during those  times the relatively  high level  of oil at  $40 to                                                               
$45 per barrel  was not nearly what  it would be today.   He said                                                               
he  has had  companies state  that they  don't base  decisions on                                                               
$100-$120  per  barrel.    He  also  said  the  state  makes  its                                                               
estimates on  the forecast,  but the oil  producers will  be more                                                               
conservative.   He characterized  the view  today as  a different                                                               
world view than it was at that time.                                                                                            
                                                                                                                                
11:20:42 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  KAWASAKI   said  he  didn't  really   answer  the                                                               
question.  He  stated that when taxes were  exceedingly low under                                                               
Prudhoe Bay  and Kuparuk,  the decline  curves were  even greater                                                               
than now.  The entire assumption  has been that if Alaska changes                                                               
its taxes to  give oil companies more profit,  the companies will                                                               
reinvest in declining  legacy fields; however, the  state has not                                                               
previously  seen  that  so  why  would  the  state  experience  a                                                               
different outcome now.                                                                                                          
                                                                                                                                
COMMISSIONER  BUTCHER answered  that  companies will  be able  to                                                               
give insight into  this.  He related a scenario  in which a model                                                               
includes  taxes and  capital at  $20 per  barrel oil  and another                                                               
model  is run  at $80  per barrel  oil.   He indicated  that some                                                               
projects  that  were  not  economical   at  $20  per  barrel  are                                                               
economical at  $80 per  barrel.   He said  that nothing  would be                                                               
economic on the North Slope if oil was at $9 or $10 per barrel.                                                                 
                                                                                                                                
11:22:02 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE PRUITT  asked what impact  the fall of  the Berlin                                                               
Wall, in  1989, had on the  opening of significant amount  of oil                                                               
basins  not previously  available.   He pointed  out the  capital                                                               
could be  spread to other  areas.  He  asked him to  describe the                                                               
impact  on Alaska,  which  had been  the  subject of  substantial                                                               
focus.                                                                                                                          
                                                                                                                                
COMMISSIONER BUTCHER  related that Pedro  van Meurs laid  out the                                                               
number  of  countries  which  would be  stable  and  friendly  to                                                               
American companies 20  years ago and compared it  to today, which                                                               
is radically different.  He  acknowledged the number of companies                                                               
available  to multi-national  companies has  changed the  overall                                                               
investment landscape.                                                                                                           
                                                                                                                                
11:23:21 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER  referred to slide 9,  titled "Monthly ANS                                                               
Crude Prices  Under Net Tax System"  and to the decline  curve in                                                               
investment.    She  asked  what  would be  needed  to  bring  the                                                               
governor's production  goal to  1 million barrels  per day.   She                                                               
recalled  he indicated  that would  likely  include shale,  heavy                                                               
oil,  and legacy  field production.   She  further asked  for the                                                               
various proportions of oil  production sources the administration                                                               
anticipates with  passage of  HB 3001.   She  recalled ExxonMobil                                                               
had  previously  testified  that   it  would  take  $3-5  billion                                                               
annually  to  stem or  reverse  the  oil  decline in  the  legacy                                                               
fields.   She  was  unsure  if the  testimony  indicated stem  or                                                               
reverse the decline,  but either way, she  wondered would passage                                                               
of HB  3001 result in  that type of  investment and what  type of                                                               
data could the department provide to support it.                                                                                
                                                                                                                                
COMMISSIONER  BUTCHER answered  that he  would discuss  this with                                                               
DNR.  He  pointed out the difficulty in  determining the economic                                                               
viability of  heavy oil  or shale oil  production.   He predicted                                                               
either one could  come into production in five years  or else not                                                               
happen at all.  He said he did  not know enough to figure it out,                                                               
but he offered to attempt to do so.                                                                                             
                                                                                                                                
11:25:08 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER suggested  with  the  magnitude of  state                                                               
participation needed  that the state  must have estimates  on the                                                               
types of  fields, particularly since  the tax structure  could be                                                               
designed to support heavy oil, shale  oil, or legacy fields.  She                                                               
questioned how  the legislature could effectively  make decisions                                                               
if the legislature doesn't know the target.                                                                                     
                                                                                                                                
COMMISSIONER BUTCHER  answered that the DOR  holds discussions on                                                               
these matters  with oil companies.   He declared that if  a lever                                                               
can  be moved  the  parties, including  the  legislature and  the                                                               
governor, will  have conversations.   He offered his  belief that                                                               
improving  the investment  climate and  tax regime  for companies                                                               
will   improve  the   economic   situation.     He  related   his                                                               
understanding that  it would be a  company-by-company discussion.                                                               
He  asserted  that everything  becomes  more  economic under  the                                                               
bill.                                                                                                                           
                                                                                                                                
11:26:24 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER  agreed  to   the  necessity  of  holding                                                               
company-by-company    discussions;    however   this    is    the                                                               
administration's  proposal and  she  expected the  administration                                                               
would have  held those discussions  at the time the  proposal was                                                               
developed.  She also indicated  that yesterday the Senate posed a                                                               
series of questions.   She expressed interest in  the answers and                                                               
asked for a timeline.                                                                                                           
                                                                                                                                
11:27:08 AM                                                                                                                   
                                                                                                                                
COMMISSIONER  BUTCHER   answered  that   he  hopes  to   get  the                                                               
information to the  Senate and the committee  sometime next week.                                                               
He spoke of the constraints  posed by being in committee hearings                                                               
the entire day.                                                                                                                 
                                                                                                                                
11:27:31 AM                                                                                                                   
                                                                                                                                
The committee took an at-ease from 11:27 a.m. to 11:31 a.m.                                                                     
                                                                                                                                
11:31:55 AM                                                                                                                   
                                                                                                                                
WILLIAM  BARRON, Director,  Central Office,  Division of  Oil and                                                               
Gas, Department of Natural Resources (DNR) introduced himself.                                                                  
                                                                                                                                
11:32:33 AM                                                                                                                   
                                                                                                                                
JOHN  NORMAN,  Commissioner,  Alaska  Oil  and  Gas  Conservation                                                               
Commission (AOGCC),  Department of Administration  (DOA), offered                                                               
to characterize  some of the  potential sources of  increased oil                                                               
and gas production  in Alaska. He stated he  would discuss legacy                                                               
fields,  new  discoveries,  heavy  oil, shale  oil,  natural  gas                                                               
condensate  from  Point  Thomson, outer  continental  shelf  oil,                                                               
Arctic  National  Wildlife  Refuge (ANWR),  production  from  the                                                               
Beaufort   Sea,  and   North   Slope  natural   gas  during   his                                                               
presentation.                                                                                                                   
                                                                                                                                
11:33:31 AM                                                                                                                   
                                                                                                                                
MR. NORMAN characterized  the legacy fields as  Alaska's "bird in                                                               
the hand."  He said Alaska  counts on the legacy fields daily and                                                               
should not  take them for  granted.  During the  regular session,                                                               
Commissioner Foerster  testified that  the health  of all  of the                                                               
fields on the  North Slope depends on the health  of Prudhoe Bay.                                                               
He compared  it to the anchor  tenant at a shopping  mall since a                                                               
good tenant  helps everyone.   The state's  anchor tenant  is the                                                               
Prudhoe  Bay field.   He  recalled that  years ago,  the original                                                               
estimate for the Prudhoe Bay field  was 9 billion barrels of oil;                                                               
however, thus  far the state  has recovered more than  11 billion                                                               
barrels  of oil  with an  anticipated  2 billion  barrels of  oil                                                               
remaining  to be  recovered.   Except for  North Dakota's  Bakken                                                               
basin,  the  remaining  asset [in  Prudhoe  Bay]  represents  the                                                               
largest discovery  in the  U.S. in  many years.   In fact,  it is                                                               
currently one of the largest  conventional oil fields in the U.S.                                                               
Prudhoe  Bay owners  have been  spending  substantial amounts  of                                                               
money  to  finesse  the  additional oil.    Negative  impacts  on                                                               
profitability, such as  a drop in the price of  oil, increases in                                                               
taxation  or increases  in  regulatory burden  will  put some  of                                                               
these  2 billion  barrels of  oil at  risk. Conversely,  there is                                                               
increased potential  for greater  ultimate recovery  from Prudhoe                                                               
Bay, depending on technological advances  and other things in the                                                               
future that may positively impact  profitability.  "We don't have                                                               
control  over technology  or advances  or oil  price, but  we can                                                               
certainly caution in increasing the  burden on an operator either                                                               
through taxation or regulation," he  stated.  He then stated that                                                               
this  characterization is  also valid  for Alaska's  other legacy                                                               
fields.    New  discoveries   positively  impact  the  production                                                               
profile in  Alaska and the  state must continue to  encourage new                                                               
operators  to take  risks for  new exploration.   He  offered his                                                               
belief it  is not likely that  another Prudhoe Bay will  be found                                                               
in currently  allowed areas.   He  said that it  is easy  to find                                                               
fields in  the upper Cook  Inlet region  and some in  the central                                                               
North Slope have  been found.  However, he said  nothing is wrong                                                               
with Alpine, North Star or other  smaller fields.  He referred to                                                               
these  fields as  ones that  would be  considered huge  fields in                                                               
other places.   He  noted that  the cost  and remote  location of                                                               
Alaska works against Alaska.                                                                                                    
                                                                                                                                
11:38:28 AM                                                                                                                   
                                                                                                                                
MR.  NORMAN  stated that  the  fields  are  viable due  to  their                                                               
proximity  to  the infrastructure  of  the  legacy fields.    One                                                               
factor to keep in mind is  that as exploration moves farther from                                                               
the   legacy   fields  and   Prudhoe   Bay   the  challenges   of                                                               
commercializing these fields  increase.  He then  turned to heavy                                                               
and viscous oil,  which is the subject of  attention currently by                                                               
industry.  Although the resource  estimates for heavy and viscous                                                               
oil vary  depending upon  with whom  one speaks,  almost everyone                                                               
would agree there are potentially  at least 20 billion barrels on                                                               
the  North  Slope.   However,  it  is  not  an easy  resource  to                                                               
commercialize as  the challenge to  extract viscous oil  would be                                                               
similar to filling  a sandbox with molasses and  using a drinking                                                               
straw to recover  only the molasses.  Mr. Norman  stated that the                                                               
key to  developing "this"  will be advances  in technology.   The                                                               
AOGCC  understands that  research is  actively ongoing  in Alaska                                                               
and  other jurisdictions,  including  internationally.   However,                                                               
this development is not  a given.  He then moved  on to shale oil                                                               
development, which  has created a boom  in the Lower 48  that now                                                               
extends from  New York, Pennsylvania,  and through  North Dakota.                                                               
He noted  shale is  often the  normal source  for oil  which then                                                               
migrates into the conventional reservoirs.   He characterized the                                                               
geological risk  as low  since geologists  can predict  where the                                                               
source rock  is located.   The  risk lies  in whether  enough oil                                                               
exists and  if it can  be extracted from  the rock, but  the only                                                               
real way to find out is to drill.   He pointed out that the state                                                               
has  exploration  incentives  in   place  that  have  piqued  the                                                               
interest  of  at  least  one  shale oil  explorer  -  Great  Bear                                                               
Petroleum, LLC  - and this  will be  subject the Mr.  Barron will                                                               
comment on later.                                                                                                               
                                                                                                                                
11:41:19 AM                                                                                                                   
                                                                                                                                
MR. NORMAN turned to the  estimates of condensate associated with                                                               
gas at the Point Thomson field.   He suggested that it is safe to                                                               
estimate at  least 200  to 400  million barrels  of oil  exist at                                                               
Point  Thomson.   He said  that the  settlement of  Point Thomson                                                               
litigation was  good news.   He explained  this was  worrisome to                                                               
the commission  since there is a  significant conservation issue.                                                               
He explained anytime  liquid is associated with gas  it creates a                                                               
tradeoff, such  that one might  want to blow-down the  field, but                                                               
each time  that happens  some liquids  are lost  so it  is really                                                               
just a matter  of calculating how much will be  lost.  He related                                                               
the goal is  to optimize and develop the field  first and ideally                                                               
try to  produce every  single drop of  liquid and  then blow-down                                                               
the field; however, that is  often not possible.  Point Thomson's                                                               
operator has  been working  on a cycling  project to  recover the                                                               
liquids, which  will be transported by  the Trans-Alaska Pipeline                                                               
System (TAPS).  He pointed out  that this is another example of a                                                               
known resource  with an  uncertain outcome.   He stated  that the                                                               
condensate is  present, but  it is  uncertain whether  cycling to                                                               
recover  it will  be commercially  viable.   The  outcome of  the                                                               
current pilot project will provide valuable answers, he said.                                                                   
                                                                                                                                
MR. NORMAN turned  briefly to the outer  continental shelf (OCS),                                                               
noting Alaska's jurisdiction runs seaward  for three miles and by                                                               
law  Alaska has  some revenue  sharing  between 3-6  miles.   The                                                               
legacy fields  are Alaska's "bird in  the hand" but the  OCS is a                                                               
"bird in the bush."   He indicated there is significant potential                                                               
for  Alaska's  OCS  to  offer   opportunities  for  a  large  oil                                                               
discovery.   He  surmised that  Shell Western  E&P Inc.  has been                                                               
patient in  its attempts for  exploration, which is  an indicator                                                               
of  a  potentially large  oil  discovery.    He declared  that  a                                                               
discovery, even  in federal waters,  will have  enormous benefits                                                               
to  Alaska -  from jobs  to extending  TAPS.   He identified  the                                                               
greatest  obstacle  to  developing  the OCS  off  Alaska  is  the                                                               
federal government's policies.   Alaskans should try to influence                                                               
these policies.   He stated  the commission is often  asked about                                                               
the recent Gulf  of Mexico events and if time  permitted he would                                                               
offer  contrasts; however,  Alaska's  situation is  significantly                                                               
different.    The  AOGCC's jurisdiction  runs  statewide  and  it                                                               
exercises  the police  power  of  the state  since  it  is not  a                                                               
property management  agency.  He  opined that the  AOGCC believes                                                               
resource  development can  occur responsibly  and carefully.   He                                                               
said, "We all live here and we want  to be sure that's the way it                                                               
does proceed."                                                                                                                  
                                                                                                                                
11:44:50 AM                                                                                                                   
                                                                                                                                
MR. NORMAN mentioned the Arctic  National Wildlife Refuge (ANWR).                                                               
He  stated that  the AOGCC  is  not certain  of ANWR's  potential                                                               
until  drilling occurs;  however, his  belief is  that it  can be                                                               
done responsibly and it is not  an either-or situation.  The area                                                               
necessary  for  drilling  would   be  relatively  small  and  the                                                               
obstacle is  political -  a giant obstacle  - but  conditions can                                                               
change  and  the  nation  could realize  the  necessity  for  the                                                               
resource development.   Currently, the state is  being denied the                                                               
opportunity  to  assess  and  quantify  the  resource,  which  is                                                               
somewhat irresponsible, he said.                                                                                                
                                                                                                                                
MR. NORMAN turned  to the Beaufort Sea.  Currently,  oil is being                                                               
produced offshore in  the Beaufort Sea, including  North Star and                                                               
Endicott  production.   He  pointed out  there  are likely  other                                                               
discoveries and at least one  exploration effort is being planned                                                               
with  [BP  Exploration  (Alaska)  Inc.'s] Liberty  project.    He                                                               
pointed out the  Liberty project lies in federal  waters, but can                                                               
reap benefits for Alaska; however,  it is not without risks since                                                               
it will  consist of an  ultra-extended reach well.   He explained                                                               
it will  begin and  travel from  Endicott Island  underground for                                                               
several miles.  The technology necessary for  the Liberty project                                                               
will push the limits of  current drilling technology.  Therefore,                                                               
the  operator has  kept the  commission closely  advised and  the                                                               
commission  is   also  keeping  informed  by   federal  oversight                                                               
agencies.  He said the  AOGCC believes the operator is proceeding                                                               
diligently  and  cautiously to  assure  the  technical risks  and                                                               
challenges are assessed and addressed before work begins.                                                                       
                                                                                                                                
11:47:21 AM                                                                                                                   
                                                                                                                                
MR. NORMAN  turned to North  Slope gas.   He cautioned  that from                                                               
the AOGCC's  perspective the natural  gas must be  used properly.                                                               
Still,  the AOGCC's  opinion is  that  every bit  of known  North                                                               
Slope  gas  associated  with  an  oil reservoir  is  or  will  be                                                               
beneficially used  to obtain more oil  from the ground.   He said                                                               
there is  a way to  orchestrate this and  time it such  that when                                                               
the time and  conditions are right for a major  natural gas sale,                                                               
there  are procedures  for adjusting  and setting  a new  offtake                                                               
rate so  gas can  be removed.   However,  currently the  AOGCC is                                                               
satisfied that  industry is proceeding  properly and  natural gas                                                               
is being cycled  in a beneficial manner.  He  made an observation                                                               
that until 2005-2006, oil and gas  were in tandem, but since that                                                               
time oil  and gas have  been decoupled and  valued independently.                                                               
He pointed  out that  the nation  is awash in  gas, and  thus the                                                               
relative values  [of oil  and gas]  are no longer  the same.   He                                                               
suggested that legislators, property  managers, and Alaskans must                                                               
ensure that the  state underscores the importance  of not selling                                                               
gas if it means sacrificing oil development to do so.                                                                           
                                                                                                                                
MR.  NORMAN  turned  to  gas to  liquids  (GTL)  technology,  and                                                               
related that currently  GTL is a very inefficient  way to develop                                                               
a product since  about 40 percent of the resource  is lost in the                                                               
process  of going  from gas  to gas  liquids.   Additionally, GTL                                                               
plants  are very  expensive to  build.   He previously  mentioned                                                               
Shell Western E&P Inc. has  been constructing some of the largest                                                               
plants in the  world.  The AOGCC has been  optimistic that in the                                                               
future  there may  be some  promise for  GTL, bur  currently "the                                                               
jury is out."                                                                                                                   
                                                                                                                                
11:51:02 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE  recalled him mentioning  the offtake rate  on the                                                               
North Slope,  which he believed  was 2.7 BCF.   He asked  how the                                                               
number was arrived at and how has it changed over the years.                                                                    
                                                                                                                                
MR. NORMAN answered that the  number was arrived at approximately                                                               
25-30  years  ago  when  the  commission  hired  consultants  who                                                               
determined without  harming the ability  to produce oil,  that at                                                               
the time  it was possible  to take off 2  BCF of natural  gas per                                                               
day.  He  recalled that about .7 BCF would  be necessary for fuel                                                               
and consumption  as part  of the  process.   He said  that number                                                               
still  remains  in existence  as  part  of  the AOGCC's  rule  in                                                               
setting  the   ground  rules  for   producing  the   Prudhoe  Bay                                                               
reservoir.  He  explained that a few years back,  during the time                                                               
of the  Stranded Gas  Act and the  Alaska Gasline  Inducement Act                                                               
(AGIA), the AOGCC  became concerned since an  application had not                                                               
yet been made.   The process is such that a  company comes to the                                                               
commission  and  applies to  amend  and  change the  Prudhoe  Bay                                                               
offtake rate.   The  company would  suggest an  [offtake] number,                                                               
document  it, and  the AOGCC  would undertake  a public  process,                                                               
including  publishing it,  and providing  an opportunity  for the                                                               
public  and  legislature  to  weigh  in  on  the  proposal.    He                                                               
concluded that  an administrative record  would be made  and this                                                               
is not something the AOGCC  arbitrarily does.  He emphasized that                                                               
the number is carefully examined.                                                                                               
                                                                                                                                
11:53:09 AM                                                                                                                   
                                                                                                                                
MR.  NORMAN explained  that the  AOGCC went  through the  process                                                               
because the commission  did not want to delay any  major gas sale                                                               
or pipeline.   Further, the  AOGCC entered into  some cooperative                                                               
agreements with  the operators at  Prudhoe Bay and  Point Thomson                                                               
to gain information  and not cause delays.  However,  as a result                                                               
of their  inquiry, the  AOGCC determined it  did not  have enough                                                               
information to adjust the offtake upward.   No one had come in to                                                               
request 4, 4.5,  or 5 BCF per  day.  He said  the AOGCC concluded                                                               
that there was  insufficient information in the record  to do so.                                                               
He  acknowledged that  the commission  recognizes that  the AOGCC                                                               
will revisit  this as  part of  a public  process and  adjust the                                                               
figure when a  company or consortium is ready to  move forward on                                                               
a project.   He offered that  with each passing day  as oil flows                                                               
in TAPS, the conservation issue  and the AOGCC's worry is reduced                                                               
since the oil in  the field is reduced and at  some point it will                                                               
be a  matter of "blowing down  the field."  He  cautioned that is                                                               
not  necessarily the  case  at Point  Thomson  since 2-4  million                                                               
barrels  of oil  liquid exists,  which is  about the  size of  an                                                               
Alpine field.   He identified this as what is  at risk if someone                                                               
simply went straight into blowing  down the Point Thomson field -                                                               
simply because of the characteristics of that field.                                                                            
                                                                                                                                
11:55:02 AM                                                                                                                   
                                                                                                                                
CO-CHAIR FEIGE  asked, with respect  to ANWR, what  knowledge the                                                               
state has that leads us to believe ANWR contains so much oil.                                                                   
                                                                                                                                
MR.  NORMAN  answered  that  the   AOGCC  is  the  repository  of                                                               
confidential information entrusted  to the state.   The AOGCC has                                                               
certain  information that  has been  the  subject of  litigation,                                                               
which  has been  afforded extended  confidentiality.   He related                                                               
that by law,  when unleashed acreage exists and  one operator has                                                               
made  a significant,  proprietary investment  to drill,  that the                                                               
operator should get the benefit before it is made public.                                                                       
                                                                                                                                
MR. NORMAN said  the AOGCC has one or two  people who could begin                                                               
to answer  that question.   The AOGCC's access to  information is                                                               
on a "need to know basis."  He  said he does not want to know the                                                               
answer.  He emphasized that  this is proprietary information, but                                                               
estimates could  be made since the  USGS has made estimates.   He                                                               
concluded it is  reasonable to think the potential  is there, but                                                               
he could not speak to any specifics.                                                                                            
                                                                                                                                
11:57:08 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  KAWASAKI said  that  the state  has been  blessed                                                               
with Prudhoe  Bay as one  of the largest fields  with recoverable                                                               
oil equals to double the East  Texas oil field.  He asked whether                                                               
any other  examples of  fields the  size of  the Prudhoe  Bay and                                                               
Kuparuk  -  legacy  or  conventional  fields  -  ramping  up  and                                                               
dropping  down.   He  related  the  discussion surrounds  whether                                                               
there a way to change the production curve in a mature field.                                                                   
                                                                                                                                
MR.  NORMAN  answered  that  the  AOGCC  does  not  know  how  to                                                               
interrupt  the field;  however lots  of innovation  is occurring.                                                               
People  have been  experimenting with  microbes to  break up  the                                                               
oil.   When Prudhoe Bay  began the  estimates were for  9 billion                                                               
barrels and the operators have  greatly exceeded that figure.  He                                                               
recalled some years back an  operator proposed injecting water in                                                               
the gas  cap to  improve the  reservoir.   He offered  his belief                                                               
that he was skeptical, but it  has been beneficial.  He suggested                                                               
that something  will happen but he  does not see anything  on the                                                               
horizon that will interrupt the decline at this point.                                                                          
                                                                                                                                
11:59:50 AM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  KAWASAKI  recalled learning  about  re-pressuring                                                               
fields during his  time in the legislature.   The legislature has                                                               
been considering  monetizing natural  gas and transporting  it to                                                               
communities  such as  Fairbanks.   He asked  how the  AOGCC would                                                               
suggest the state monetize gas for in state use.                                                                                
                                                                                                                                
MR. NORMAN  responded that the  AOGCC has written a  letter which                                                               
indicates it  would not see any  problem with drawing down  up to                                                               
2.7  BCF  of natural  gas  per  day,  which  would be  more  than                                                               
adequate  for in  state use.   He  did not  want to  suggest that                                                               
taking off  any gas is problematic  since it is not;  however, to                                                               
launch  into major  gas sales  ranging from  4-5 BCF  or greater,                                                               
would require  careful analysis  to ensure that  oil is  not left                                                               
behind.  He likened the  natural gas projections as being similar                                                               
to asking a  real estate appraiser to give an  owner an appraisal                                                               
on a  house now, but to  also to predict the  property's value in                                                               
2018.   He offered his intuitive  feeling that the state  can get                                                               
there with  Prudhoe Bay, that  Point Thomson is  problematic, but                                                               
certainly for  gas for in  state use the  AOGCC does not  see any                                                               
difficulty.                                                                                                                     
                                                                                                                                
12:02:14 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER said she liked  the analogy of Prudhoe Bay                                                               
being the  anchor tenant in  a shopping  mall.  She  offered from                                                               
the legislature's  perspective it  is as  though the  tenant also                                                               
controls  the   elevators  and  doors.     She  recalled  earlier                                                               
testimony on remaining oil and barrels  that could at risk due to                                                               
low prices  or from  tax burden.   She related  the legislature's                                                               
consultants  have discussed  decision-making  and  the impact  of                                                               
taxes.   She  related  her understanding  that prospectivity  and                                                               
price  are the  two biggest  determinants -  far and  away -  and                                                               
beyond that  are other considerations, including  the tax burden,                                                               
which does  not stand separate  from the credits,  incentives and                                                               
other   terms.      She    related   the   AOGCC's   commissioner                                                               
qualifications are  set by statute.   She inquired as  to whether                                                               
anyone  on the  AOGCC is  an expert  in tax  structure, petroleum                                                               
economics, or anything similar.                                                                                                 
                                                                                                                                
12:03:45 PM                                                                                                                   
                                                                                                                                
MR. NORMAN answered no; that  the AOGCC exists to provide factual                                                               
information to the  DOR and others.  The  AOGCC's jurisdiction is                                                               
statewide  so  if   oil  is  produced  on   federal  lands  their                                                               
jurisdiction  would extend  to  the  National Petroleum  Reserve-                                                               
Alaska  (NPR-A),  and  to the  Native  corporation's  44  million                                                               
acres.   He suggested that it  has been interesting to  listen to                                                               
the  testimony.    He  explained his  background,  such  that  he                                                               
started his  career in Texas,  and he understands the  history of                                                               
Alaska's statehood -  which was due to oil  discovered at Swanson                                                               
River.   Further, he  understands the  hopes and  expectations of                                                               
Alaskans.  He  held up a publication that he  said is the history                                                               
of how  Prudhoe Bay was  selected by the  state.  He  referred to                                                               
numerous  basins and  early state  development.   He said,  "With                                                               
respect to taxation, that production  will not increase by taxing                                                               
it higher.  It's just not going  to occur."  He offered that from                                                               
his perspective it is all part  of a total climate.  The industry                                                               
wants  access, infrastructure,  but  "the  herd mentality"  still                                                               
exists, and  industry has oil  plays and hot areas  and companies                                                               
don't want to be left out of  hot areas - if the Falkland Islands                                                               
is hot, or  off the coast of  Brazil - so they will  move in that                                                               
direction.   He offered his  belief that Alaska's time  will come                                                               
around again,  but right now Alaska  does not have the  cachet it                                                               
once had.  He says this  because he interacts with regulators and                                                               
officials  and he  understands their  mindset.   He related  that                                                               
Texans has a greater understanding  of the industry than Alaskans                                                               
do -  noting he speaks as  a 50-year Alaskan.   He suggested that                                                               
Texans are  less hostile to  industry and Alaskans  are sometimes                                                               
unnecessarily hostile  to an  industry that  has provided  and is                                                               
providing tremendous  benefits; however,  it should  be carefully                                                               
regulated.                                                                                                                      
                                                                                                                                
12:07:36 PM                                                                                                                   
                                                                                                                                
MR. NORMAN turned to oil taxation.   He said he hears a statement                                                               
in  Alaska: "Let's  get our  fair share."   The  fair share  is a                                                               
concept that comes from the oil  and gas lease sale process.  The                                                               
state obtains royalty, bonus money,  promotes the sale, make best                                                               
deal  and  encourage  development  through  unit  agreements  and                                                               
exploration  licenses.   He acknowledged  that  the state  should                                                               
promote  production, but  he has  always viewed  tax differently.                                                               
He  cautioned  against government  taking  "another  bite of  the                                                               
apple"  through its  taxing powers.    He related  a scenario  to                                                               
emphasis  this.   He stated  if he  operated a  car wash  and the                                                               
state discovered  he was successful  they would want  the state's                                                               
fair  share of  his  profits.   He  regarded  the  tax policy  as                                                               
starting from the  premise of funding government  and taking care                                                               
of the  needs of  the citizens  instead of  getting right  to the                                                               
point of  pressing someone.   He has  held many  discussions with                                                               
the prior governor  of North Dakota.  The governor's  goal was to                                                               
get people  trained for jobs  in 2004.   He initially  thought he                                                               
was  nuts since  shale  oil technology  was  lacking; however  he                                                               
realized later  that the governor  had vision.   He characterized                                                               
North  Dakota's business  climate as  positive and  one in  which                                                               
industry is  welcome, although they  must obey the law,  and hire                                                               
local  people.   Alaska does  not have  a broad  base of  private                                                               
property ownership like  North Dakota has so there  isn't a broad                                                               
base of Alaskans who understand  the industry.  Although Alaskans                                                               
receive a  permanent fund dividend  check, the connection  to oil                                                               
is indirect.   In other states  the royalty checks are  mailed to                                                               
people  so they  take an  active interest  in the  industry.   He                                                               
reiterated he  recommends that the  state be less  hostile, watch                                                               
industry carefully and expect them to  pay.  He surmised that the                                                               
hostility  stems  from  a  lack   of  understanding  of  the  oil                                                               
business.                                                                                                                       
                                                                                                                                
12:11:23 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE GARDNER  responded that  his point is  well taken.                                                               
She stated  that the  AOGCC's responsibility  is to  regulate the                                                               
industry,  but   she  suspected  the  AOGCC   has  the  necessary                                                               
information to  do so.   However, the  legislature does  not have                                                               
enough  information to  know the  full impact  of the  decisions,                                                               
while at  the same  time the legislature  has been  admonished by                                                               
the  courts as  being  too  trusting.   She  acknowledged she  is                                                               
sometimes troubled  that the  severance tax  is considered  a tax                                                               
rather than  a sales price.   Alaska has a limited  resource that                                                               
may or  may not be  developed, but the state's  responsibility is                                                               
to assure  that it obtains the  value of the resource  for future                                                               
generations.    She said  to  allow  the  resource to  flow  away                                                               
without understanding  the value  of oil makes  these discussions                                                               
difficult.     She  pointed  out  that   the  decisions  surround                                                               
unimaginable  amounts of  money  yet the  legislature must  still                                                               
vote  on  them  and  be   diligent  without  possessing  adequate                                                               
information.   She agreed confidentiality  is important,  but she                                                               
said she  is reluctant to  sign confidentiality  agreements since                                                               
she wants  to be able  to tell  constituents the reasons  for her                                                               
vote.                                                                                                                           
                                                                                                                                
12:13:28 PM                                                                                                                   
                                                                                                                                
CO-CHAIR  FEIGE  recalled  hearing  testimony that  no  one  ever                                                               
increased production by increasing taxes.                                                                                       
                                                                                                                                
MR. NORMAN answered that is a broad law of economics.                                                                           
                                                                                                                                
12:14:08 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE SADDLER asked whether  any false assumptions exist                                                               
with respect to the health of the North Slope resources.                                                                        
                                                                                                                                
MR. NORMAN  answered that  none come  to mind.   He  clarified he                                                               
assumed  that  by health  he  meant  ensuring the  best  possible                                                               
recovery from the oil fields.   He stated that the AOGCC's job is                                                               
to keep an eye over the  fields.  He characterized the first line                                                               
of defense  as the DNR's Division  of Oil and Gas.   He described                                                               
their working  relationship as a  good relationship.   He pointed                                                               
out that the AOGCC also watches  Native lands.  He indicated that                                                               
the AOGCC  will fine a company  millions of dollars if  a company                                                               
is out  of compliance with  Alaska's regulations.   Additionally,                                                               
the AOGCC  issues conservation orders,  which are all  located on                                                               
their website.   He reiterated that  he did not know  of anything                                                               
that legislators should have in the front of their minds.                                                                       
                                                                                                                                
12:16:01 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  HERRON recalled  that  8 BCF  of  natural gas  is                                                               
produced and reinjected; however, he  wondered if Mr. Norman said                                                               
that to maintain  the maximum recovery of the oil  basin that the                                                               
state could  siphon off 2.7 BCF  of natural gas for  a future gas                                                               
line.                                                                                                                           
                                                                                                                                
MR. NORMAN  answered yes,  for a  future line.   He  recalled the                                                               
conversation has generally been  considered in 2017-2018 or 2019.                                                               
He agreed with  those dates.  He said  that Commissioner Foerster                                                               
is always  quick to  say if someone  wanted to  immediately today                                                               
start pulling gas  off the AOGCC would need to  have an emergency                                                               
meeting to consider it.                                                                                                         
                                                                                                                                
12:17:19 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  PETERSEN referred  to shale  oil technology.   He                                                               
asked what type of oil is produced using this process.                                                                          
                                                                                                                                
MR. BARRON  described the typical  crude produced from  the shale                                                               
oil process as a very nice  crude oil, particularly in Eagle Ford                                                               
and the  Bakken areas.   He agreed that  the state does  not know                                                               
what type of  crude will be extracted from  the potential Shublik                                                               
production.  He  explained that Eagle Ford is unique.   He stated                                                               
that  the  terminology is  different.    The Eagle  Ford  project                                                               
consists   of  three   areas  of   development:  gas   component,                                                               
condensate  component, and  an oil  component.   The industry  is                                                               
chasing each  one of those relative  to product price.   If there                                                               
is a high  gas demand and high  gas price the rigs  will shift to                                                               
gas development  in the Eagle Ford  shale gas zone and  when they                                                               
want to chase oil they will move back to the oil zone.                                                                          
                                                                                                                                
12:19:24 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE   PETERSEN  referred   to  a   map  of   potential                                                               
production areas not on the North  Slope.  He asked what types of                                                               
tax regimes the legislature could  develop to promote development                                                               
in other  areas sooner.  He  highlighted that there are  areas of                                                               
the state  that would like  to have  local access to  natural gas                                                               
not currently available.                                                                                                        
                                                                                                                                
MR. NORMAN said  he did not know of anything.   He suggested that                                                               
the  best  thing  is  to  have someone  drill  and  discover  the                                                               
resources; however  it is  difficult to  make something  occur if                                                               
the industry  is not  interested in  the area.   He  related that                                                               
anecdotally,  the AOGCC  has observed  positive  response to  the                                                               
incentives  in Cook  Inlet.    He reiterated  the  best thing  to                                                               
encourage  development is  to  allow  access, provide  stability,                                                               
predictability, and hope for discovery.                                                                                         
                                                                                                                                
12:21:47 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE PETERSEN  asked whether the  geological formations                                                               
on the  map he referenced  earlier have the potential  to produce                                                               
oil, gas, or condensates.                                                                                                       
                                                                                                                                
MR.  NORMAN  answered that  he  identified  geologic basins  with                                                               
production  potential,  but  by  no  means  is  it  assured  that                                                               
production will occur.                                                                                                          
                                                                                                                                
12:22:20 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  MUNOZ said  the legislature  understood companies                                                               
are thinking of  investing up to $14 billion  with more favorable                                                               
fiscal  terms in  Alaska in  legacy and  new fields.   She  asked                                                               
whether he  could estimate what  $14 billion in  investment might                                                               
correlate to in terms of  recoverable barrels; that is benefit to                                                               
the state.                                                                                                                      
                                                                                                                                
MR. BARRON said he was not able to  do so.  He pointed out that a                                                               
certain  amount of  the investment  is required  to maintain  the                                                               
current infrastructure,  which is  aging across the  North Slope.                                                               
He further  pointed out that  while some  things will need  to be                                                               
replaced, it may not  improve the flow.  In terms  of how much of                                                               
is  ordinary maintenance  and how  much would  be an  incremental                                                               
increase, Mr. Barron said he did not know.                                                                                      
                                                                                                                                
12:23:42 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SADDLER asked  for  the relative  ranking of  the                                                               
effects  on oil  production on  some of  the elements,  including                                                               
resource, commodity price, the technology, taxes, and access.                                                                   
                                                                                                                                
MR.  BARRON  answered  that  the   industry  is  dealing  with  a                                                               
multivariable  component, including  the  product price,  lifting                                                               
cost,  corporate   overhead,  facility  cost,   taxation,  fiscal                                                               
regime,  the environment,  and the  stability of  the government.                                                               
These  variables come  into  play  and any  one  could shift  the                                                               
balance.  He suggested that  a dramatic product price swing would                                                               
make a  difference.  A  new tax or a  tax reduction would  make a                                                               
difference.   He  was  unsure how  to balance  those  and give  a                                                               
weight to  that is difficult.   He  offered his belief  that most                                                               
companies  run   hundreds  of  economic  simulations   to  value,                                                               
estimate,  and solve  that  problem.   He  offered  that the  oil                                                               
companies'  assessments are  different.   In some  cases taxation                                                               
and political stability are equal.   He referred to product price                                                               
and  questioned if  it would  be stable  for 5-10  years.   Every                                                               
company has their own escalation  factors and forecasting branch.                                                               
He  concluded  that most  companies  run  economics in  a  static                                                               
position assuming a low product  price to see what element drives                                                               
the cost.   He characterized  it as a  very dynamic model  to run                                                               
and he could not answer the question specifically.                                                                              
                                                                                                                                
12:26:26 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  SADDLER   said  the  legislature's   mission  and                                                               
challenge  is to  reverse  engineer those  variables  and try  to                                                               
figure  out what  impact Alaska's  taxes will  have on  different                                                               
producers, price points, technology, and access.                                                                                
                                                                                                                                
MR.  BARRON  said he  really  does  not  want  to step  into  the                                                               
legislature's seat.  He echoed  the commissioner's comments.  The                                                               
state needs  to understand  and try to  identify the  things that                                                               
the  state   can  control  and   influence.    He   related  that                                                               
Representative Petersen asked a good  question, in asking what is                                                               
impacting the ability to get to  new basins.  He pointed out that                                                               
Alaska has  its own  set of  unique problems,  some of  which are                                                               
self-imposed.  He acknowledged that  some of the barriers are for                                                               
protection  of  the  state's  assets,  but  the  state  needs  to                                                               
recognize  they  are barriers.    He  turned to  his  PowerPoint,                                                               
"Potential of increasing production"  and pointed out that winter                                                               
exploration season is good for  exploration in some areas, but in                                                               
others, such  as in Cook Inlet  it doesn't make sense  to use ice                                                               
roads since  the road  cannot be  maintained with  any assurances                                                               
[slide  2].   He  suggested  that  the legislature  should  think                                                               
through and  be cognizant of such  [barriers].  He said  the cost                                                               
of development  creates a barrier  as a  cost of production.   He                                                               
recalled  the commissioner  of DNR  commented on  some of  these,                                                               
trying to  capture the  threshold and  hurdle rate;  however, not                                                               
economic hurdles, but  the hurdles necessary to jump  to get into                                                               
business,  such   as  cost  of   production,  lack   of  physical                                                               
infrastructure, and roads.                                                                                                      
                                                                                                                                
12:28:59 PM                                                                                                                   
                                                                                                                                
MR. BARRON  brought up  other barriers  to new  production [slide                                                               
2].  He recalled substantial  discussion this legislative session                                                               
on the  roads to resources,  which is  critical.  He  pointed out                                                               
that there  is not any  road to Badami oil  field or on  the west                                                               
side of  Cook Inlet.   The industry and  state must build  a road                                                               
each year.   He  offered his belief  that some  exploration areas                                                               
could  be   less  challenging  if   a  road  had  existed.     He                                                               
characterized the  Cook Inlet  region as  a challenging  area for                                                               
exploration and development, but  the potential exists for world-                                                               
class gas  production.   He pointed  out that  power distribution                                                               
systems  are limited.   Considerable  dialogue has  been held  on                                                               
access  to   facilities.     He  described   the  process   as  a                                                               
complicated,  economic development  process that  must be  worked                                                               
out  integrally between  two  companies.   The  company with  the                                                               
assets has also  been challenged to do more each  day, so if they                                                               
try  to negotiate  an  agreement for  excess  capacity, it  might                                                               
limit  their  ability to  do  work  on  their current  assets  to                                                               
satisfy the  commission, but also  satisfy their  obligations and                                                               
plan of development.  He asked  who is at risk or responsible for                                                               
the  loss  of  reserves  when  the  facility  goes  down  due  to                                                               
equipment failure  or for routine maintenance.   He characterized                                                               
these   as   complicated   negotiations   and   every   company's                                                               
negotiations will be  a little different.  Some  companies do not                                                               
want to be  part of a shared facility since  they want to control                                                               
their own destiny and have access  to the pipelines.  He reported                                                               
that  Brooks  Range  Petroleum is  struggling  to  finance  their                                                               
facilities.    He  said  they  have  publically  indicated  their                                                               
facility  will now  be a  stand-alone facility.   He  wished them                                                               
luck and noted  that their oil could help fill  the pipeline.  He                                                               
turned  to  environmental,  subsistence, and  permitting  issues,                                                               
some of which are unique to Alaska.                                                                                             
                                                                                                                                
12:32:15 PM                                                                                                                   
                                                                                                                                
MR. BARRON surmised  the environmental impact in  North Dakota is                                                               
not  there since  it is  mostly  North Dakota  farming and  ranch                                                               
land.   Most  of the  North Dakota  and Texas  lands are  private                                                               
lands -  subsurface and  surface.   He said  the fear  of ongoing                                                               
litigation risks  exists.   He concluded  by discussing  the last                                                               
item on  this slide:  fiscal  certainly.  Companies want  to know                                                               
what will  be in  place for  a long time.   He  agreed this  is a                                                               
legacy  for kids,  but the  dialogue must  include a  fundamental                                                               
understanding on whether  to capture everything today  in a basin                                                               
that is still a world class  basin.  He questioned how to develop                                                               
a  tax and  royalty system  that  establishes a  protocol and  is                                                               
robust  for all  kinds of  fields  and what  type of  development                                                               
scenarios can be contemplated.                                                                                                  
                                                                                                                                
12:33:42 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE DICK  referred to GTL  and to what he  thought was                                                               
the  Fischer-Tropsch process,  which is  over 60  years old.   He                                                               
recalled  hearing   alternative  and  newer  GTL   methods.    He                                                               
suggested that  the legislature  needs to keep  its mind  open to                                                               
all options and not narrow the options.                                                                                         
                                                                                                                                
REPRESENTATIVE PRUITT  recalled him mentioning the  offshore area                                                               
from three  to six  miles.   He asked  whether concerns  exist in                                                               
tapping an area that extends beyond  six miles offshore.  He also                                                               
asked whether  the state can still  extract oil if part  of it is                                                               
on state land and some of it is on federal land.                                                                                
                                                                                                                                
MR. NORMAN  answered that the  problem doesn't exist since  it is                                                               
carefully worked out  as the reservoir is developed.   He pointed                                                               
out that  the state currently  has differential ownership  and in                                                               
this  case  there  would  be revenue  sharing  with  the  federal                                                               
government.     He  said  the  legal   framework  and  technology                                                               
currently exist.                                                                                                                
                                                                                                                                
12:36:36 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE PRUITT asked whether  the state has opportunity to                                                               
"stick a straw over" into ANWR and have a "federal milkshake."                                                                  
                                                                                                                                
MR. NORMAN recalled a law  article written on that subject, which                                                               
he  offered  to provide.    He  answered  that the  state  cannot                                                               
invade; however  the state can drill  right to the line  and rely                                                               
on  drainage.   Still,  the  federal  government could  drill  an                                                               
offset well  to prevent against  drainage.  He  acknowledged that                                                               
Alaska  boarders  ANWR  on  one   side.    He  recalled  Governor                                                               
Murkowski had  considered drilling  an offshore well  on Alaska's                                                               
tide and  submerged lands.   He further  recalled the  matter was                                                               
discussed in the U.S. Senate  and U.S. Senator Lisa Murkowski was                                                               
working  on a  bill to  say that  if the  federal government  has                                                               
permanently  put  ANWR off  limits  to  drilling that  in  effect                                                               
Alaska's subsurface  has no value.   He wondered if  Alaska could                                                               
directionally  drill, as  Representative  Pruitt  suggested.   He                                                               
recalled the  Liberty well is  looking at a  lateral displacement                                                               
of  at least  eight miles,  so arguably  there would  be no  harm                                                               
since the  state would be producing  oil that is not  going to be                                                               
produced.  Additionally, it would  benefit the nation by reducing                                                               
the balance  of payments and  reducing dependence on  foreign oil                                                               
imports.                                                                                                                        
                                                                                                                                
12:38:59 PM                                                                                                                   
                                                                                                                                
MR.  BARRON  interjected  this   is  what  the  commissioner  has                                                               
referred to as the right of  capture.  He offered his belief that                                                               
this has been  done, tried, and proven.  It  is possible to drill                                                               
on   land  and   remove  product   from  an   adjacent  property.                                                               
Technically, from  an engineering and drilling  standpoint it can                                                               
be done.   He segued  into Representative Petersen's  question of                                                               
what to  do to incentivize  remote areas.   The state  has worked                                                               
with the federal  government and put up adjacent  lands for lease                                                               
in  recent lease  sales.   The  state lands  had more  reasonable                                                               
entry  rates   for  leasing  to  encourage   participation.    He                                                               
summarized  that the  cooperative effort  between the  two groups                                                               
encourages the desired action.                                                                                                  
                                                                                                                                
12:40:38 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE PRUITT  encouraged them to  drill the hole  and if                                                               
the  federal government  also drilled  that it  would provide  an                                                               
argument for the state's actions.                                                                                               
                                                                                                                                
12:40:51 PM                                                                                                                   
                                                                                                                                
CO-CHAIR SEATON  related the  House Resources  Standing Committee                                                               
held an interim  meeting on barriers to oil  and gas development.                                                               
He  said the  committee was  disappointed  that at  the time  the                                                               
industry did  not identify the barriers,  such as ice roads.   He                                                               
hoped the industry would come  forth to collectively try to solve                                                               
the  problem.    He  related his  understanding  that  the  owner                                                               
agreement allows any  of the three companies to  veto the project                                                               
so if the  terms were not acceptable to one  it could get vetoed.                                                               
He asked  whether that specific concern  is real and any  way the                                                               
legislature can solve that problem.                                                                                             
                                                                                                                                
MR. BARRON  answered yes;  he related  his understanding  that is                                                               
part of  the agreement on  the North Slope.   He did not  know if                                                               
the state  can get  around that,  nor does he  know what  type of                                                               
impact this has had on the  development of Prudhoe Bay, which has                                                               
been robustly developed.  Additionally,  the three companies work                                                               
on a broader  portfolio of international projects.   He said that                                                               
Representative Hawker  said it best  when he said that  the state                                                               
must be competitive not just economic.   He stated that the lease                                                               
sales,  rental sales,  rates,  and severance  taxes  must be  set                                                               
competitively  so when  the companies  run the  economics, Alaska                                                               
rise higher  on their international  list rather than lower.   He                                                               
was unsure of the overall impact.                                                                                               
                                                                                                                                
12:45:04 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER stated  that  besides  Badami, the  shale                                                               
lease areas  Great Bear  Petroleum, LLC, has  taken up  also need                                                               
roads and not ice roads.   She asked whether any statutory change                                                               
or regulatory changes  are necessary to allow roads,  and not ice                                                               
roads, to be built.                                                                                                             
                                                                                                                                
MR. BARRON answered  it falls under self-barriers.   He explained                                                               
in the best-interest findings, that  one of the historic findings                                                               
is that  exploration should be done  on ice roads and  ice paths.                                                               
The state and  companies don't necessarily want  a permanent road                                                               
for dry hole and  then need to pull the road up.   That has begun                                                               
to  be  a problem  due  to  shortened  drilling season,  and  the                                                               
distance  requires  longer  roads.    The  state  has  encouraged                                                               
industry  to  identify  ways  to  avoid  an  ice  road  in  their                                                               
exploration  mitigation  plans.    He recalled  that  Great  Bear                                                               
Petroleum,  LLC   has  worked   very  closely  with   the  Alaska                                                               
Department of  Fish &  Game and  the Division of  Oil and  Gas to                                                               
identify sites along the haul  road on previously disturbed paths                                                               
so the  company can move its  rig in early next  month to explore                                                               
by  using existing  disturbed  soil.   He  characterized this  as                                                               
creative and  preferable.   The division would  like to  have ice                                                               
roads as a preferred option rather than a requirement, he said.                                                                 
                                                                                                                                
12:48:20 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER asked  whether  any  statutory change  is                                                               
necessary or if they currently have the authority.                                                                              
                                                                                                                                
MR. BARRON offered  to get back to the committee  since it may be                                                               
possible to  craft something  beneficial to  the state  and still                                                               
protect the other parties.                                                                                                      
                                                                                                                                
12:48:47 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER  asked  whether  any  other  area  has  a                                                               
reserves tax as Texas does and if there is value to do so.                                                                      
                                                                                                                                
MR. BARRON answered that he would defer to the DOR.                                                                             
                                                                                                                                
12:49:21 PM                                                                                                                   
                                                                                                                                
CO-CHAIR  SEATON   said  it  seemed   like  he  would   like  the                                                               
legislature to mandate the department  to do something it has the                                                               
authority to do,  with respect to the best interest  finding.  He                                                               
asked for clarification.                                                                                                        
                                                                                                                                
MR.  BARRON agreed  it is  within  the purview  of the  division;                                                               
however, the  way the standings  are changed is  from information                                                               
and requests from  citizens and the industry.  He  said that when                                                               
the division receives  a request or an option to  look at another                                                               
alternative,  then the  division can  go into  the best  interest                                                               
finding and  make a  determination that it  is not  necessary for                                                               
this specific project.   He agreed it would be  a clear decision;                                                               
and under  the purview of division  on whether to require  or not                                                               
require an ice road.                                                                                                            
                                                                                                                                
12:51:01 PM                                                                                                                   
                                                                                                                                
CO-CHAIR   SEATON  said   it  wouldn't   be  necessary   for  the                                                               
legislature  to have  a  finding that  it  requests the  producer                                                               
build an exploration road instead of  an ice road and to consider                                                               
it in the  best interest finding since the division  has the full                                                               
ability to do so now.                                                                                                           
                                                                                                                                
MR.  BARRON clarified  that what  he  was referring  to were  the                                                               
roads to  Badami, Umiat, and  west Cook  Inlet.  The  state could                                                               
help fund or  work with the federal government  on permitting for                                                               
wetlands to  gain access,  which is one  of the  biggest hurdles.                                                               
He  pointed  out  other  states  are  scattered  with  roads  for                                                               
industry to use.                                                                                                                
                                                                                                                                
12:52:25 PM                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER pointed  out the  federal government  has                                                               
been working on  creating a federal coordinator  position to help                                                               
with  permitting and  to share  information.   She asked  whether                                                               
that  has happened  and whether  this  will be  helpful on  these                                                               
types of projects.                                                                                                              
                                                                                                                                
12:52:47 PM                                                                                                                   
                                                                                                                                
JOE BALASH, Deputy Commissioner,  Department of Natural Resources                                                               
(DNR),  answered  that  it  is   true  the  president  issued  an                                                               
executive  order last  year  creating a  lead  person for  permit                                                               
coordination.    He  characterized   this  action  as  two  steps                                                               
forward, but  one step back,  since some things are  being dumped                                                               
into groups or  subgroups on individual topics  that are spinning                                                               
out.   He reported that the  DNR has meetings in  Washington D.C.                                                               
next week to try to get things back on track.                                                                                   
                                                                                                                                
[HB 3001 was held over.]                                                                                                        
                                                                                                                                
12:54:21 PM                                                                                                                   
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 12:54 p.m.                                                                

Document Name Date/Time Subjects
HRES Testimony of John Norman - AOGCC 4.21.12.pdf HRES 4/21/2012 10:00:00 AM
HRES 4.21.12 DOR Production Tax - Discussing the Issue.pdf HRES 4/21/2012 10:00:00 AM
HRES 4.21.12 Div. of Oil and Gas Presentation.pdf HRES 4/21/2012 10:00:00 AM