Legislature(2013 - 2014)BUTROVICH 205

04/09/2014 03:30 PM Senate RESOURCES


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03:33:58 PM Start
03:34:49 PM Presentation: Spring Revenue Sources Book
04:06:02 PM Presentation: Updates from the Field
05:25:54 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Informational Hearing:
Dept. of Revenue Spring Revenue Sources Book
Deputy Commissioner Mike Pawlowski
Deputy Commissioner Bruce Tangeman
+ Informational Hearing: Updates from the Field TELECONFERENCED
Repsol
ConocoPhillips Alaska
BP Exploration (Alaska) Inc.
ExxonMobil Development Company
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         April 9, 2014                                                                                          
                           3:33 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Cathy Giessel, Chair                                                                                                    
Senator Fred Dyson, Vice Chair                                                                                                  
Senator Peter Micciche                                                                                                          
Senator Lesil McGuire                                                                                                           
Senator Anna Fairclough                                                                                                         
Senator Hollis French                                                                                                           
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Click Bishop                                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION: SPRING REVENUE SOURCES BOOK                                                                                       
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PRESENTATION: UPDATES FROM THE FIELD                                                                                            
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner                                                                                             
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Presented Spring Revenue Sources Book                                                                     
update.                                                                                                                         
                                                                                                                                
BILL HARDHAM                                                                                                                    
Alaska Project Manager                                                                                                          
Repsol E&P USA                                                                                                                  
Anchorage, Alaska                                                                                                               
POSITION STATEMENT: Related Repsol's developments on the North                                                                
Slope.                                                                                                                          
                                                                                                                                
SCOTT JEPSEN, Vice President                                                                                                    
External Affairs                                                                                                                
ConocoPhillips Alaska                                                                                                           
POSITION STATEMENT:  Talked about ConocoPhillips's  activities on                                                             
the North Slope fields they operate.                                                                                            
                                                                                                                                
SOPHIA WONG, Manager                                                                                                            
Infrastructure and Pipeline Project                                                                                             
Pt. Thomson Project                                                                                                             
ExxonMobil Development Company                                                                                                  
POSITION  STATEMENT:  Related  ExxonMobil's developments  at  Pt.                                                             
Thomson and the North Slope.                                                                                                    
                                                                                                                                
FRANK PASKVAN                                                                                                                   
Alaska Technology Manager                                                                                                       
BP Exploration Alaska Inc.                                                                                                      
Fairbanks, Alaska                                                                                                               
POSITION   STATEMENT:    Related   BP's   recent    North   Slope                                                             
developments.                                                                                                                   
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:33:58 PM                                                                                                                    
CHAIR  CATHY   GIESSEL  called  the  Senate   Resources  Standing                                                             
Committee meeting  to order at 3:33  p.m. Present at the  call to                                                               
order were Senators French, Dyson, Micciche, and Chair Giessel.                                                                 
                                                                                                                                
3:34:49 PM                                                                                                                    
CHAIR GIESSEL said  she received a letter from  Senator French in                                                               
which  he  made an  interesting  request,  that they  put  people                                                               
speaking to them today under  oath. But this is unprecedented and                                                               
inappropriate.  Springing an  under-oath  requirement on  invited                                                               
citizens   at  the   last  minute   is  not   only  unfair,   but                                                               
unprofessional.  She consulted  other Senators  on the  committee                                                               
and  none  supported  the  criminal   justice  approach  to  this                                                               
meeting. The  people speaking to  them today were asked  to share                                                               
trend lines that  they see based on the economic  climate and the                                                               
work that is  being done on the North Slope  during this just-now                                                               
concluding winter work season.                                                                                                  
                                                                                                                                
SENATOR FRENCH raised a point of personal privilege.                                                                            
                                                                                                                                
CHAIR GIESSEL said he was out of order.                                                                                         
                                                                                                                                
At ease from 3:34 to 3:36 p.m.                                                                                                  
                                                                                                                                
^Presentation: Spring Revenue Sources Book                                                                                      
           Presentation: Spring Revenue Sources Book                                                                        
                                                                                                                              
3:36:42 PM                                                                                                                    
CHAIR  GIESSEL  said today's  agenda  included  hearing from  the                                                               
Department of Revenue  (DOR) and some of  the companies producing                                                               
up on  the North Slope.  She welcomed Deputy  Commissioner, Bruce                                                               
Tangeman.  She asked  committee members  to hold  their questions                                                               
until the end.                                                                                                                  
                                                                                                                                
BRUCE  TANGEMAN,  Deputy   Commissioner,  Department  of  Revenue                                                               
(DOR),  Anchorage,  Alaska,  said their  spring  forecast  update                                                               
concentrates on  the production  side of  the forecast.  He would                                                               
start with some of the changes  they made to it. They saw looking                                                               
back over  the last  20 years that  the previous  methodology was                                                               
overly optimistic.  So, they decided  to put a  more conservative                                                               
forecast  out  for  the  understanding and  the  benefit  of  the                                                               
decision makers, because  this is used for budgeting  and to give                                                               
a  sense of  revenue  streams. His  personal goal  was  to put  a                                                               
prediction out there and beat it, for a change.                                                                                 
                                                                                                                                
3:38:47 PM                                                                                                                    
Historical forecast:  Back when  oil first started  flowing there                                                               
were only  two pockets,  Prudhoe Bay and  Kuparuk, and  they were                                                               
fairly easy to  forecast off of. But then in  the late 1990s more                                                               
production came on,  mostly in smaller quantities,  and that made                                                               
making forecasting more difficult.                                                                                              
                                                                                                                                
3:39:48 PM                                                                                                                    
MR.  TANGEMAN  said  slide  4  speaks to  why  a  change  in  the                                                               
methodology in  production forecasting was required.  He remember                                                               
in 2011  coming out  of House  Finance and  then director  of the                                                               
Division  of Oil  and Gas  Bill Barron  telling him  there was  a                                                               
better way to do it. That  is what started the process of putting                                                               
a more accurate forecast together.                                                                                              
                                                                                                                                
He explained  that in 2005  and 2007  (when it missed  by 150,000                                                               
barrels) the  department used  to project 10  years out;  in 2009                                                               
they missed  by 95,000  barrels. So,  fall of  2011 was  the last                                                               
year the old methodology was  used. They realized that while some                                                               
things do come on at the  projected level, some things don't, and                                                               
not everything  happens as predicted.  And the state  was relying                                                               
on information which led to inaccurate  forecasts to be used as a                                                               
budgeting tool.                                                                                                                 
                                                                                                                                
3:42:10 PM                                                                                                                    
So,  fall  of   2012  was  the  first  year  of   using  the  new                                                               
methodology.  Mr.   Tangeman  explained   that  wells   that  are                                                               
currently  producing  are  much  more  predictable.  Those  under                                                               
development  and under  evaluation  are what  is possible.  Under                                                               
development is a  little more solid; it usually  has some funding                                                               
attached  to it  and a  lot more  analysis, but  still might  get                                                               
kicked out.  For example, Liberty  was once under  development; a                                                               
budget was  attached to  it and everything  was always  two years                                                               
out, but it never came to fruition.                                                                                             
                                                                                                                                
3:43:24 PM                                                                                                                    
SENATOR MCGUIRE joined the committee.                                                                                           
                                                                                                                                
MR. TANGEMAN  explained that  under evaluation  is a  little more                                                               
skeptical. It's known,  but not necessarily on  the budgeted list                                                               
quite yet. Under the old methodology  those would be added to the                                                               
production forecast. The  state would always take  what was hoped                                                               
for, and assumed the upper end.                                                                                                 
                                                                                                                                
3:44:54 PM                                                                                                                    
So, for  the fall 2012  forecast, with  the help of  Bill Barron,                                                               
they put  in a risk factor  for new oil. Currently  producing was                                                               
not risked, because the wells  had been operating and were fairly                                                               
predictable going forward. Under  evaluation was risked not quite                                                               
as aggressively  as under  development, but  the bottom  line was                                                               
they were putting in place a  production forecast that was not as                                                               
rosy as in the  past. It was not responsible to  put out the most                                                               
optimistic  forecast and  know they  were  not going  to hit  it,                                                               
because those figures will affect future budget decisions.                                                                      
                                                                                                                                
3:46:32 PM                                                                                                                    
The Revenue Sources Book now  has a high-case/a forecast case/and                                                               
a low  case scenarios.  In the  past, the high  case was  the old                                                               
methodology.  The forecast line is  now similar to the high case,                                                               
because most  of that  is the currently  producing oil.  The risk                                                               
really starts  with production that  is seen as possible  but not                                                               
to  bank on  for budgetary  purposes; the  low case  is just  the                                                               
currently producing oil if no new oil came on line.                                                                             
                                                                                                                                
He pointed  out that  in December they  were forecasting  about a                                                               
4.1  percent decline  in  production for  FY14,  and after  eight                                                               
months  of "actuals,"  they  are  now looking  at  a 1.8  percent                                                               
decline,  so this  was  his first  chance to  say  they beat  the                                                               
forecast.  Basically, he  summarized that  his  job is  to put  a                                                               
conservative number  out there, and  it's industry's job  to beat                                                               
it.                                                                                                                             
                                                                                                                                
3:49:03 PM                                                                                                                    
MR. TANGEMAN  said in  order for  a project to  make it  into the                                                               
forecast  there has  to be  well data  confirming a  reservoir, a                                                               
company has  to be  actively pursuing  development, and  a budget                                                               
should  be in  place. Basically,  he needs  to have  comfort that                                                               
they are  far enough down the  road that they can  start counting                                                               
barrels in anticipation of production.                                                                                          
                                                                                                                                
Projects  are  considered  under  development if  a  company  has                                                               
partner  alignment  and/or  senior management  approval  and  the                                                               
project has  been allocated  funds in  the company  budget. Under                                                               
evaluation is more that the  resource is known and being pursued,                                                               
but financial hurdles  have not been met. So, many  of the recent                                                               
announcements by BP and ConocoPhillips  are included in this, but                                                               
production estimates starting in FY17/18  (some of the lead times                                                               
required) are still being risked.                                                                                               
                                                                                                                                
3:51:17 PM                                                                                                                    
MR. TANGEMAN explained  what is not included in  the forecast are                                                               
undiscovered  resources  (the potential  on  the  North Slope  is                                                               
tremendous), technologically challenged  oil, heavy viscous shale                                                               
(three  times  the  size  of  the  Bakken  but  with  development                                                               
challenges),  and  regulatory  burdened  or  otherwise  difficult                                                               
(federal issues with OCS and ANWR) resources.                                                                                   
                                                                                                                                
3:53:10 PM                                                                                                                    
A five year look at the  December forecast and the Spring updated                                                               
forecast indicates  that in FY14  the barrels were up  to 13,600.                                                               
Based  on company  information, the  summer field  maintenance is                                                               
expected to be  deeper than originally anticipated, but  a lot of                                                               
that  is in  preparation for  the capital  investments they  have                                                               
announced.  So, while  it's more  or  less even  for this  coming                                                               
fiscal year (FY15),  those capital investments do show  up in the                                                               
Fall forecast.                                                                                                                  
                                                                                                                                
3:54:22 PM                                                                                                                    
MR. TANGEMAN said that future  production varies greatly based on                                                               
projects currently  under development  or evaluation.  Today they                                                               
recognized  it but  they  don't  bank on  it.  The potential  for                                                               
significant production  increases exist, but forecasting  it will                                                               
occur is  not prudent. Likelihood  of development  increases with                                                               
better economic  conditions (price,  costs, and taxes).  And many                                                               
things can cause a project to be delayed or abandoned.                                                                          
                                                                                                                                
3:56:14 PM                                                                                                                    
MR.  TANGEMAN  reviewed his  slides  14-16  that illustrated  the                                                               
current tax system  in place and the capex forecast  for the next                                                               
10 years. He explained that  capex is risked just like production                                                               
in the out years.                                                                                                               
                                                                                                                                
He noted that  the change between the two tax  systems took about                                                               
20  percent capital  credit  off the  table,  and questions  were                                                               
raised about  whether expenditures  would be accelerated  to take                                                               
advantage of that. But the forecast  for Spring FY14 was a little                                                               
less. Between  Spring FY14 and  Spring FY15 they  forecasted $800                                                               
million  of additional  investment and  $1.3 billion.  He pointed                                                               
out that  even though  the 20  percent credit  was taken  off the                                                               
table, but there is still an increase in capital investment.                                                                    
                                                                                                                                
3:59:27 PM                                                                                                                    
SENATOR  FRENCH  objected   to  the  chair's  use   of  the  word                                                               
"unprofessional"  to  describe his  letter.  He  then focused  on                                                               
slide 11 that indicated 536,000  barrels will be produced in FY14                                                               
and said that  Mr. Tangeman is claiming that is  an increase. But                                                               
for  him to  believe it  really is  an increase  means he  has to                                                               
ignore the  other two  most recent forecasts  for FY14;  one said                                                               
we'd make  the same  about (536,000 barrels)  and the  other says                                                               
we'd  make  540,000 barrels.  And  that  gets  them back  to  the                                                               
forecast from a year ago, Spring 2013.                                                                                          
                                                                                                                                
MR. TANGEMAN responded  by going back to slide 8  and saying that                                                               
everyone had been using 6 percent  as a decline rate for the past                                                               
several  years, but  it was  really was  7.2, 6.6,  3.4, and  8.2                                                               
percent;  the  decline  was  accelerating   a  lot  quicker  than                                                               
anticipated. So,  to get  back to those  original numbers  in the                                                               
previous forecast was a much  bigger uphill climb for them, which                                                               
really makes getting to 1.8 percent that much more incredible.                                                                  
                                                                                                                                
SENATOR  FRENCH  asked  if  he   was  aware  that  one  year  ago                                                               
ConocoPhillips'  vice president  told a  gathering of  investment                                                               
analysts the company  was planning on a 2-3  percent decline rate                                                               
from its North Slope operations in the next few fiscal years.                                                                   
                                                                                                                                
MR. TANGEMAN replied that he had heard that.                                                                                    
                                                                                                                                
SENATOR  FRENCH  remarked that  so,  they  are seeing  what  they                                                               
predicted: a lower decline rate.                                                                                                
                                                                                                                                
MR. TANGEMAN  replied that  other companies  are involved  on the                                                               
North Slope, but  the bottom line is that no  matter who you talk                                                               
to in  this building, more  production was  the goal. So,  he was                                                               
enthused by the 1.8 percent.                                                                                                    
                                                                                                                                
4:02:10 PM                                                                                                                    
SENATOR MICCICHE  said he used to  run a little city  and recited                                                               
this  parable:  city  managers   historically  give  low  revenue                                                               
predictions  and  are conservative  in  budgeting.  Then when  it                                                               
comes at the  end of the year, everyone is  really happy with the                                                               
higher revenues.  For years, the  state didn't operate  that way,                                                               
and everyone  wasn't excited at  the results. Now they  have more                                                               
accurate  revenue predictions,  which  he  always supported.  But                                                               
spending  should be  matched accordingly.  Now, people  use those                                                               
accurate numbers against  legislators as if it were  a bad thing.                                                               
He asked if he saw other areas for improvement.                                                                                 
                                                                                                                                
MR.  TANGEMAN  responded  that  the  department  relies  on  what                                                               
industry tells  them for their  capex predictions. The  reason it                                                               
is risked  is because the  state is under  a net tax  system. So,                                                               
the  dollars  they  anticipate spending  do  affect  the  revenue                                                               
stream to the state.                                                                                                            
                                                                                                                                
SENATOR  MICCICHE said  they  want to  do the  best  they can  to                                                               
understand future expenditures.                                                                                                 
                                                                                                                                
MR. TANGEMAN said that the  Spring forecast does show an increase                                                               
in about $374 million for FY14, and that is good news.                                                                          
                                                                                                                                
CHAIR  GIESSEL  found  no  further   questions  and  thanked  Mr.                                                               
Tangeman for his presentation.                                                                                                  
                                                                                                                                
4:05:49 PM                                                                                                                    
^Presentation: Updates from the Field                                                                                           
              Presentation: Updates from the Field                                                                          
                                                                                                                              
4:06:02 PM                                                                                                                    
CHAIR GIESSEL invited Mr. Hardham to present Repsol's update.                                                                   
                                                                                                                                
BILL HARDHAM, Alaska Project Manager,  Repsol E&P USA, Anchorage,                                                               
Alaska,  said they  are  a  relatively new  player  on the  North                                                               
Slope.  They  are  currently  engaged   in  the  exploration  and                                                               
appraisal  phase. Repsol  E&P USA  is the  US upstream  operating                                                               
subsidiary of Repsol SA, an  integrated international oil and gas                                                               
company  headquartered in  Madrid, Spain,  with 25,000  employees                                                               
worldwide,  and  exploration  and  production  activities  in  31                                                               
countries. Repsol  is ranked  the 112th on  the 2013  Fortune 500                                                               
List. It  has a history  with high political risk  countries, and                                                               
has  suffered  several  examples   of  contracts  being  changed,                                                               
expropriation  of  assets,  and  civil  unrest  leading  to  lost                                                               
business  opportunities  and  erosion  of  value.  As  a  result,                                                               
several years ago,  Repsol decided to rebalance  its portfolio in                                                               
favor of  lower risk opportunities  such as those found  in OECD-                                                               
type of countries.                                                                                                              
                                                                                                                                
Repsol has been  looking at the Alaska North Slope  for some time                                                               
and  took  leases in  the  federal  waters  of the  Beaufort  and                                                               
Chuckchi Seas, but due to  the uncompetitive fiscal terms for the                                                               
Alaska North  Slope, the economics  were not attractive  and they                                                               
did not enter.                                                                                                                  
                                                                                                                                
In 2011, when  oil tax reform was introduced,  it became apparent                                                               
that  Alaska  was  serious  about making  the  North  Slope  more                                                               
competitive and that  is when Armstrong Oil and  Gas presented an                                                               
opportunity  for  Repsol  to establish  a  material  North  Slope                                                               
position.  There were  risks associated  with coming  in at  this                                                               
time before  the certainty of oil  tax reform, but it  was a good                                                               
opportunity   that  was   a  good   fit   for  Repsol   strategy.                                                               
Additionally, if Repsol  would have waited for  more certainty in                                                               
regards  to oil  taxes, the  opportunity would  likely have  been                                                               
lost or  the price of  entrance would have  gone up. So,  at that                                                               
time, Repsol took  a bit of a calculated risk  in counting on oil                                                               
tax reform and came to Alaska  in March 2011 acquiring 70 percent                                                               
interest in approximately 500,000 acres on the North Slope.                                                                     
                                                                                                                                
So,  Repsol  immediately  set out  to  aggressively  explore  and                                                               
appraise the  acreage, all the  while keeping  an eye on  oil tax                                                               
reform.  They are  now completing  their third  winter season  of                                                               
activity and  as the map shows,  they have drilled nine  wells on                                                               
the  North Slope  and have  acquired a  significant amount  of 3D                                                               
seismic   data   and   increased  their   acreage   position   to                                                               
approximately 750,000 gross acres.   They have invested more than                                                               
$500 million  in their  Alaska project  and have  announced three                                                               
discoveries from last year's campaign.                                                                                          
                                                                                                                                
4:10:49 PM                                                                                                                    
MR. HARDHAM  said the passage of  the new tax law  last year gave                                                               
Repsol  the  confidence  to  move   forward  with  an  aggressive                                                               
campaign this  winter, including  three wells drilled  with three                                                               
drilling  rigs and  two large  3D  seismic acquisition  projects.                                                               
They put  a significant number  of people  to work and  have more                                                               
than 600  positions and $250  million in investment on  the North                                                               
Slope associated with this program.                                                                                             
                                                                                                                                
He  noted   that  the  DOR  forecast   doesn't  include  Repsol's                                                               
production.  This  is  because   the  appraisal  of  last  year's                                                               
discoveries  needs to  be completed  before making  a development                                                               
decision. If  they appraise well, and  if the tax law  stands, he                                                               
was  optimistic  that a  project  will  get approved  internally.                                                               
Hopefully,  this  will  be  the  first  of  several  North  Slope                                                               
development projects for  them. He emphasized that  the state oil                                                               
tax  structure   is  vitally  important  to   Repsol's  continued                                                               
activity on  the North Slope, and  that under SB 21,  the current                                                               
tax  structure is  competitive. That  increases the  chances that                                                               
moderately-sized  opportunities and  marginal  fields, ones  that                                                               
weren't  commercial under  ACES,  have a  much  better chance  of                                                               
being developed under the new tax law.                                                                                          
                                                                                                                                
4:13:47 PM                                                                                                                    
SENATOR FRENCH  said that Mr.  Hardham had made  statements about                                                               
how Repsol was  encouraged by the tax reduction and  that it gave                                                               
them the confidence  to go forward. He wanted to  know what their                                                               
internal rate  of return  is on  their investments,  their hurdle                                                               
rate, and  how the tax  structure, which  they have been  told is                                                               
taking  in  more   now  (than  under  ACES),   plays  into  their                                                               
decisions.                                                                                                                      
                                                                                                                                
4:14:18 PM                                                                                                                    
MR. HARDHAM answered that Repsol  doesn't operate under a minimum                                                               
rate  of return  per se;  it's more  about an  evaluation of  the                                                               
investment  opportunities they  have  in front  of  them, and  it                                                               
would  have  to be  positive.  They  have  a limited  budget  for                                                               
investments around  the world,  so any  North Slope  projects are                                                               
going to  have to compete  against the opportunities  that Repsol                                                               
has in  the rest  of the  United States  and the  30 or  so other                                                               
countries around the world that they are in.                                                                                    
                                                                                                                                
SENATOR FRENCH  asked what projects they  are considering pursing                                                               
now that  are economic under SB  21 that were not  economic under                                                               
ACES  and  then  asked  him to  explain  the  economic  rationale                                                               
between the two.                                                                                                                
                                                                                                                                
MR. HARDHAM  explained that  it's still  early in  the evaluation                                                               
process  to make  those decisions.  Their  opportunities are  not                                                               
fully characterized from a  geoscience or engineering perspective                                                               
right now to where they are ready to make those decisions.                                                                      
                                                                                                                                
However, that being said, the  first opportunity they are pursing                                                               
is  one in  the Coleville  River Delta  where they  announced the                                                               
discoveries;   he  called   it  a   collective  opportunity   for                                                               
development. The  two wells  there will  be finished  this winter                                                               
and it  will take a number  of months to analyze  the results. At                                                               
that  time,  they hope  to  have  enough  information to  make  a                                                               
decision.                                                                                                                       
                                                                                                                                
SENATOR  FRENCH asked  if the  current high  tax rate  is hurting                                                               
Repsol's ability to invest in Alaska.                                                                                           
                                                                                                                                
MR. HARDHAM answered that looking at a full cycle of economics,                                                                 
SB 21 is more favorable.                                                                                                        
                                                                                                                                
4:18:02 PM                                                                                                                    
SENATOR MICCICHE  thanked him  for being  here and  remarked that                                                               
Repsol - and  smaller companies - were sort of  a targeted fan of                                                               
ACES, and  asked what changed  their minds specifically  with the                                                               
current tax regime that made them  come up here, and what kind of                                                               
success will  keep them around  and draw more investors  of their                                                               
market cap size.                                                                                                                
                                                                                                                                
MR. HARDHAM  explained that when  Repsol looked  at opportunities                                                               
in Alaska under that tax  structure, it was not advantageous. One                                                               
of the benefits of that tax  structure was getting tax credits to                                                               
offset  initial investments,  but that,  while important  to some                                                               
companies  that might  have constraints  on acquiring  financing,                                                               
wasn't the  case with Repsol. It  had more to do  with the basics                                                               
of  full-cycle economics,  which just  didn't compete.  SB 21  is                                                               
much more competitive in their view.                                                                                            
                                                                                                                                
SENATOR  MICCICHE asked  what  sustainable  economics would  draw                                                               
other smaller  companies - no  matter what  the size, as  long as                                                               
they can operate in a safe manner - to Alaska.                                                                                  
                                                                                                                                
MR.  HARDHAM   answered  that  the   current  tax   structure  is                                                               
competitive  and should  attract other  investments to  the North                                                               
Slope. Stability is also important.                                                                                             
                                                                                                                                
SENATOR MICCICHE  asked if  they are seeing  good things  in test                                                               
wells.                                                                                                                          
                                                                                                                                
4:21:48 PM                                                                                                                    
MR. HARDHAM replied that they  are very encouraged with what they                                                               
have seen so far and that they had discovered good quality oil.                                                                 
                                                                                                                                
CHAIR   GIESSEL  observed   that  Repsol   would  qualify   under                                                               
exploration  and   possible  development  for  the   gross  value                                                               
reduction credit.                                                                                                               
                                                                                                                                
4:22:34 PM                                                                                                                    
SENATOR MCGUIRE  said she wanted  to see increased  production in                                                               
Alaska  and asked  if  the  repeal of  SB  21  would alter  their                                                               
investment decisions in Alaska.                                                                                                 
                                                                                                                                
MR.  HARDHAM answered  that a  repeal of  SB 21  would negatively                                                               
affect Repsol's  investment decisions going forward.  SB 21 makes                                                               
Alaska  more competitive  and a  moderately-sized opportunity  on                                                               
the North Slope more competitive, as well.                                                                                      
                                                                                                                                
SENATOR  MCGUIRE  asked how  paying  higher  taxes on  production                                                               
affects future development plans.                                                                                               
                                                                                                                                
4:25:37 PM                                                                                                                    
MR. HARDHAM answered  Repsol doesn't compartmentalize exploration                                                               
and development in looking at  investments; it looks at the whole                                                               
picture.   The  current   tax  structure   is   just  much   more                                                               
competitive.                                                                                                                    
                                                                                                                                
4:26:20 PM                                                                                                                    
SENATOR FAIRCLOUGH joined the committee.                                                                                        
                                                                                                                                
CHAIR  GIESSEL  thanked  Mr. Hardham  for  his  presentation  and                                                               
invited Mr. Jepsen to give his presentation.                                                                                    
                                                                                                                                
4:26:58 PM                                                                                                                    
SCOTT  JEPSEN, Vice  President, External  Affairs, ConocoPhillips                                                               
Alaska,  said   he  would   talk  today   about  ConocoPhillips's                                                               
activities on the  North Slope fields they  operate. He cautioned                                                               
that their  future performance could  differ materially  from the                                                               
expectations outlined today, and  the risk and uncertainties that                                                               
affect their performance were outlined  in "legalese" that he had                                                               
provided them.                                                                                                                  
                                                                                                                                
4:27:52 PM                                                                                                                    
MR. JEPSEN said that first he  would talk about what is happening                                                               
in  2014; second,  he would  give them  an exploration  update on                                                               
what happened  last winter with  their exploration  drilling, and                                                               
lastly, he would touch upon the  plans to spend $2 billion in new                                                               
investments  that ConocoPhillips  had announced  since SB  21 was                                                               
passed.                                                                                                                         
                                                                                                                                
He said ConocoPhillips's 2014 budget  is $1.7 billion, about $600                                                               
million more than it was in 2013  and about double what it was in                                                               
2012. In  2014, their net  capital budget covered  all activities                                                               
for  Kuparuk,  Alpine,  Prudhoe  Bay,  Pt.  Thomson,  Alaska  Gas                                                               
Project, and  Cook Inlet.  All  the rest of the  numbers he would                                                               
talk about are gross numbers.                                                                                                   
                                                                                                                                
MR. JEPSEN said that CD5 is a  big part of the budget. They spent                                                               
about six  years trying to  get it  permitted and once  they did,                                                               
they spent  a lot of time  and effort going through  the process,                                                               
and  decided  to go  ahead  and  proceed  regardless of  the  tax                                                               
framework. It is  a $1-billion gross project.  About $400 million                                                               
will be spent this year; they  are now in the process of building                                                               
the  bridges and  laying down  the gravel.  About 600  people are                                                               
employed on  the project. First  production will be seen  in 2015                                                               
at  a peak  rate  of about  16,000 barrels/day,  if  all goes  as                                                               
planned.                                                                                                                        
                                                                                                                                
4:29:24 PM                                                                                                                    
He said  the other  big chunk  they are  spending in  2014, about                                                               
$400  million,  is  on  renewal projects;  probably  one  of  the                                                               
biggest  one  is replacing  14  miles  of 30-inch  pipeline  that                                                               
brings water  from their seawater  plant back into the  middle of                                                               
the field  for pressure  maintenance in  the Kuparuk  field. They                                                               
also  are installing  additional pigging  facilities, which  will                                                               
allow them to maintain their pipelines.                                                                                         
                                                                                                                                
With the exception  of CD5, these projects  are representative of                                                               
the type  of projects ConocoPhillips  has done over the  last six                                                               
or  seven years  when ACES  was in  place. Now,  since SB  21 was                                                               
passed, they are starting to see  the tip of the iceberg of newer                                                               
projects that  are going  before the board  for approval.  One of                                                               
those is Drill  Site 2S in Kuparuk where they  are spending about                                                               
$70 million  this year to put  gravel down for a  new drill site.                                                               
They  have also  brought in  two  additional rigs;  one is  doing                                                               
mostly workovers that has added  about 2,000 to 3,000 barrels/day                                                               
of production  in 2013. The other  rig started up in  January and                                                               
will be doing new drilling.                                                                                                     
                                                                                                                                
4:31:02 PM                                                                                                                    
MR. JEPSEN  said in terms of  jobs, this means bringing  in 1,750                                                               
new people  to the North  Slope; about  1,100 are working  on CD5                                                               
and  the seawater  pipeline  and  about 275  are  working on  the                                                               
projects they  have announced since  SB 21 was passed.  About 480                                                               
are coming from the union halls  in Fairbanks and there are about                                                               
900 non-union jobs. Another 350  engineering and fabrication jobs                                                               
are going on in both Anchorage  and Fairbanks. He provided a list                                                               
of about 40 of the bigger  companies they are doing business with                                                               
saying  that their  work has  a big  impact on  the whole  Alaska                                                               
business community.                                                                                                             
                                                                                                                                
4:32:29 PM                                                                                                                    
Slide  6 mapped  ConocoPhillips's exploration  wells. Mr.  Jepsen                                                               
said  this  last  year  they  drilled two  wells:  Flat  Top  and                                                               
Rendezvous 3. They  are planning a new drill site  in NPRA called                                                               
Greater  Moose's Tooth  1  (GMT  1), which  he  would talk  about                                                               
later. The  Flat Top well  is an accumulation different  than the                                                               
GMT 1  accumulation, but it  could potentially be  developed from                                                               
the GMT 1 pad.                                                                                                                  
                                                                                                                                
The Rendezvous  3 well is  the third in  a series, the  first two                                                               
having been drilled in 2000 and  2001. This is the follow-up well                                                               
to  get more  data, and  if  that looks  good, it  could lead  to                                                               
another drill site  to the southwest. If GMT 2  is successful, it                                                               
would be sequential after GMT 1.  The idea is to level-load their                                                               
resources, because stacking  them all on top of  each other would                                                               
put  a  big  strain  on   manpower,  equipment,  and  engineering                                                               
resources  in the  state. Hopefully,  using this  business model,                                                               
they can  do more in the  long term in Alaska  than if everything                                                               
was stacked together.                                                                                                           
                                                                                                                                
4:34:51 PM                                                                                                                    
Since SB 21  passed, he said that ConocoPhillips  had brought two                                                               
rigs into the Kuparuk field. The  workover rig is doing about 25-                                                               
30 workovers a year and the  drilling rig is drilling 10 per-year                                                               
grass roots wells, a lot slower process.                                                                                        
                                                                                                                                
Drill  site  2S,   the  Shark  Tooth  well,  is   the  result  of                                                               
exploration  work  ConocoPhillips  did   in  2012.  If  they  are                                                               
successful  in getting  funding,  that would  be  a $600  million                                                               
project employing 240 people during  construction, and with about                                                               
8,000  barrels/day  peak  production   in  2016.  He  said  these                                                               
projects  will be  taken to  the board  and executive  management                                                               
late in 2014 for approval.                                                                                                      
                                                                                                                                
The next  one, GMT 1, is  an interesting prospect. It's  going to                                                               
be fairly substantial in terms  of volume, potentially as much as                                                               
30,000 barrels/day when  it comes on line in 2018.  It is similar                                                               
in scope  to CD5, except the  bridges don't have to  be built. It                                                               
will cost about $900 million, and  500-600 people will work on it                                                               
during construction.                                                                                                            
                                                                                                                                
Lastly,  they have  recently announced  additional investment  in                                                               
the viscous oil  field in the Kuparuk River Unit  called the West                                                               
Sak  and  they are  drilling  some  additional  wells off  of  an                                                               
existing 1 H  drill site in Kuparuk where  additional gravel will                                                               
be put down and then they will move  out of the core area of West                                                               
Sak  into an  area called  the  Northeast West  Sak. They  expect                                                               
about 9,000 barrels/day  from that investment in  2018; about 150                                                               
people will construct it for about $450 million.                                                                                
                                                                                                                                
MR. JEPSEN  explained that these  developments represent  the tip                                                               
of  the iceberg:  ConocoPhillips is  to  a point  where they  are                                                               
ready to  submit permits  and start  talking actively  with their                                                               
partners about funding  and putting the process in  place to take                                                               
them to  executive management for  funding later this  year. They                                                               
are working on more projects, but  those have not been matured to                                                               
the point where they can be talked about publicly.                                                                              
                                                                                                                                
4:37:16 PM                                                                                                                    
The  production profiles  for the  three projects  are more  than                                                               
40,000 barrels/day  of new production  in 2018; if CD5  is added,                                                               
that  is  another  10,000  barrels/day.  So,  the  investment  is                                                               
significant in terms of billions  of dollars and more employment.                                                               
In retrospect, some  good things have been announced  since SB 21                                                               
passed  and he  thanked  them  for passing  it.  However, if  the                                                               
referendum passes,  they will  have to  go back  and take  a much                                                               
harder  look at  all  of these  projects. It  would  have a  very                                                               
negative impact.                                                                                                                
                                                                                                                                
4:40:08 PM                                                                                                                    
SENATOR FRENCH reminisced about CPF  1 at Kuparuk (slide 4) where                                                               
he had worked  for eight years, and said that  he viewed the $400                                                               
million  worth  of  renewal  projects  Mr.  Jepsen  talked  about                                                               
spending in 2014  to replace the seawater line,  the pigging, and                                                               
other  renewal   projects  as  maintenance  projects,   which  he                                                               
supported. He  was glad they  could talk  about them in  the open                                                               
this year, because last year  maintenance was a horrible thing to                                                               
be spending  money on. Now, it's  okay, because SB 21  passed. He                                                               
asked Mr. Jepsen to comment  on future maintenance-style projects                                                               
ConocoPhillips will be  doing, not only at Kuparuk,  but at other                                                               
investments.                                                                                                                    
                                                                                                                                
MR. JEPSEN responded that ConocoPhillips  has always talked about                                                               
how much money they spend  on renewal or maintenance projects, so                                                               
he disagreed  that they  were coming  out of  the closet,  but he                                                               
just didn't  know what was coming  down the road. To  some extent                                                               
it depends  upon what kind of  issues are uncovered, as  they saw                                                               
some corrosion  in this line  and it  became time to  replace it.                                                               
This is  a replacement  of a  big piece of  pipeline, not  just a                                                               
repair.                                                                                                                         
                                                                                                                                
He added  that these  oil fields are  beyond what  their expected                                                               
lives were.  They have  been here about  40 years  and hopefully,                                                               
they will be  here another 30-40 years, and he  thought over time                                                               
bigger equipment  will be  replaced on  the North  Slope, because                                                               
they  have outlived  their  useful life.  He  thought they  would                                                               
continue  to  see a  fair  amount  of investment  on  maintenance                                                               
projects on the North Slope, as well as more employment.                                                                        
                                                                                                                                
SENATOR FRENCH  clarified that he  wasn't aiming  his maintenance                                                               
remark at Mr. Jepsen or anyone  in the industry, but it was aimed                                                               
mainly the debate  heard in the building last  year about passing                                                               
the bill  and how somehow  maintenance was bad. He  apologized if                                                               
it came out wrong. He turned  to a more substantive point on page                                                               
7 where  "the rubber  meets the  road" and  asked which  of those                                                               
projects were not economic under ACES.                                                                                          
                                                                                                                                
MR. JEPSEN responded  by asking to go back  to their conversation                                                               
from last  year in  which he  described how  ConocoPhillips makes                                                               
investment decisions. They look at  a number of economic metrics:                                                               
MPV, ROR,  and cash  flow, and  one of  the biggest  issues under                                                               
ACES was  that it really  captured cash flow.  When you get  to a                                                               
certain point, basically  all the upside went to  the state. That                                                               
put  investment  in Alaska  at  a  serious disadvantage,  because                                                               
other  places had  better investment  climates.  That's what  the                                                               
debate over ACES  was all about: progressivity  really killed the                                                               
investment climate in Alaska. There  was no price sensitivity; as                                                               
the price goes up they didn't  make any more money. SB 21 changed                                                               
that.                                                                                                                           
                                                                                                                                
SENATOR MCGUIRE stated  her concern wasn't that  the industry was                                                               
spending money on  maintenance, but rather that  the state wanted                                                               
them  to spend  more on  drilling  and production.  That was  the                                                               
point of SB 21 for her; but maintenance is important, too.                                                                      
                                                                                                                                
4:46:02 PM                                                                                                                    
SENATOR  MICCICHE related  how some  of his  constituents enjoyed                                                               
the  benefits of  SB 21,  which  was manifested  by keeping  more                                                               
employees working in  the winter. He asked if the  job numbers on                                                               
page  5 and  the  projects  number on  page  7 was  significantly                                                               
higher since  passing of the  new tax  regime, and would  they be                                                               
adversely affected significantly by going back.                                                                                 
                                                                                                                                
MR. JEPSEN  answered that ConocoPhillips will  have a substantial                                                               
maintenance and  renewal program for the  foreseeable future. The                                                               
thing that's  different is CD5  has 600 jobs,  and it is  a proxy                                                               
for all the other projects he  talked about. The difference is in                                                               
those 600  or so  jobs because  of the  projects that  are moving                                                               
forward  since  SB  21  was  passed. He  thought  a  decrease  in                                                               
employment on  the North Slope  would be seen  if SB 21  would be                                                               
repealed.                                                                                                                       
                                                                                                                                
CHAIR GIESSEL thanked  him for his comments and  invited Ms. Wong                                                               
to testify for ExxonMobil.                                                                                                      
                                                                                                                                
4:48:44 PM                                                                                                                    
SOPHIA WONG,  Manager, Infrastructure  and Pipeline  Project, Pt.                                                               
Thomson  Project, ExxonMobil  Development Company,  said she  had                                                               
been  working  on the  project  since  2009. They  are  currently                                                               
wrapping up their  second winter season of  construction and have                                                               
completed a number of  infrastructure milestones that demonstrate                                                               
their ongoing commitment to Alaska's energy future.                                                                             
                                                                                                                                
She said  although Pt. Thomson  is an initial  production system,                                                               
the  estimated   cost  for  the   infrastructure,  for   the  gas                                                               
processing  facility and  the wells,  is  expected to  be in  the                                                               
range of $4 billion. To  date, ExxonMobil has invested about half                                                               
of that, of which about 70 percent has been spent in Alaska.                                                                    
                                                                                                                                
ExxonMobil is excited  about what the project  is contributing to                                                               
Alaska. First,  it is  opening new portions  of the  North Slope,                                                               
second   they   are   establishing  infrastructure   for   future                                                               
development, and they are investing in Alaska's human resources.                                                                
                                                                                                                                
4:51:22 PM                                                                                                                    
MS. WONG  said one of the  things that makes Pt.  Thomson unique,                                                               
even on  the North Slope, is  its location. It is  about 60 miles                                                               
to the east  of Prudhoe Bay and the  TransAlaska Pipeline (TAPS),                                                               
and right next  to the Arctic National Wildlife  Refuge (ANWR). A                                                               
challenge they face  is producing this large resource  space in a                                                               
safe and  environmentally sound manner. However,  they have taken                                                               
steps  to ensure  a minimal  environmental footprint  with summer                                                               
coastal barging,  winter ice roads, and  comprehensive mitigation                                                               
measures  to minimize  impact on  the tundra,  wildlife, acquatic                                                               
resources, and subsistence activities.                                                                                          
                                                                                                                                
She said that the Pt. Thomson  project will provide access to the                                                               
Thomson  Sand Reservoir,  which contains  an estimated  8 tcf/gas                                                               
and 200 million  barrels of condensate, which  is premium liquids                                                               
like diesel  (about 25 percent  of the  known reserves of  gas on                                                               
the  North  Slope).  Pt.  Thomson builds  on  the  expertise  and                                                               
success of other North Slope  developments, like Prudhoe Bay, and                                                               
ExxonMobil's Arctic  experience from around the  world is helping                                                               
to execute the project.                                                                                                         
                                                                                                                                
The initial production facility  consists of three primary wells:                                                               
one  producer and  two injection  wells, which  are directionally                                                               
drilled from  shore to minimize the  environmental footprint. The                                                               
gas processing  facility is going  to have the capacity  to cycle                                                               
200 million  cubic feet of gas  and produce up to  10,000 million                                                               
barrels per day  of condensate. They are also  building a 12-inch                                                               
export pipeline linking Pt. Thomson  to the Badami common carrier                                                               
pipeline.                                                                                                                       
                                                                                                                                
MS. WONG  stressed that the  10,000 barrels  per day is  only the                                                               
initial  amount of  condensate. When  completed the  pipeline has                                                               
the capacity to  transport 70,000 barrels per  day; so ultimately                                                               
Pt. Thomson  is a double  win. It's gas  for the LNG  project and                                                               
increased throughput for the TAPS.  Additionally, the Pt. Thomson                                                               
project  establishes  the   critical  infrastructure  for  future                                                               
expansion   that    is   essential   to   Alaska    natural   gas                                                               
commercialization.                                                                                                              
                                                                                                                                
4:54:00 PM                                                                                                                    
She showed them  a picture of the site back  in October 2012 when                                                               
the Corps of Engineers issued their  main 404 permit; it was just                                                               
a  photo of  a  13-acre "rig  matts," a  small  helipad, and  two                                                               
orange wellhead covers  for the PTU 15 and 16  wells they drilled                                                               
in  2010. She  showed them  another  picture taken  a few  months                                                               
later  when  they  were  barging   in  two  sealift  modules  for                                                               
permanent fuel storage.  One year later another  picture showed a                                                               
little village there.  She pointed out the key  components of the                                                               
service pier where they offloaded  the four diesel storage tanks,                                                               
and   a   permanent   operations   camp,   as   well   as   their                                                               
telecommunications  tower.   To  the  left  were   the  temporary                                                               
construction camps.                                                                                                             
                                                                                                                                
A photo  taken a couple of  weeks ago showed the  ice road right-                                                               
of-way to the export pipeline and  the west gathering line to the                                                               
central pad facilities. Another photo  was of the central pad and                                                               
its  continued expansion  of additional  camps  for the  pipeline                                                               
scope of  work, two cold  storage tents, and foundations  for two                                                               
buildings: one a warehouse and the other for ACS maintenance.                                                                   
                                                                                                                                
MS. WONG  said they  had laid  about 750,000  cubic yards  of the                                                               
million yards  that they are doing  the next season, so  they are                                                               
in  good shape.  They just  started the  foundation work  for the                                                               
warehouse and ACS buildings and the sealift bulkhead.                                                                           
                                                                                                                                
In  the 2015  winter season,  she said  ExxonMobil will  have the                                                               
drill rig  come back to the  central pad recompleting the  PTU 15                                                               
and PTU  16 wells, as well  as drilling the disposal  well. Piles                                                               
will be installed for all the process modules.                                                                                  
                                                                                                                                
MS. WONG  said one of  the significant milestones coming  up will                                                               
be  in the  summer 2015  when they  barge in  four large  sealift                                                               
modules  about  the size  of  a  football  field. Those  will  be                                                               
connected like legos in what is  called "plug and play." By 2016,                                                               
they plan  to produce through  the initial production  system and                                                               
into TAPS.  She remarked that  the picture makes it  look simple,                                                               
but it will take strong contractors  and a strong team to execute                                                               
the  project, and  including their  permanent operations  camp at                                                               
the  end of  the project,  they will  have leveraged  the skilled                                                               
workforce and  available facilities  to build over  130 truckable                                                               
modules in Alaska.                                                                                                              
                                                                                                                                
4:58:41 PM                                                                                                                    
The  Pt. Thomson  "contractor tree"  indicated that  92 companies                                                               
were involved with the project, 73 companies were Alaskan.                                                                      
                                                                                                                                
4:59:39 PM                                                                                                                    
MS. WONG  highlighted a few  of the contractors:  Alaska Frontier                                                               
Constructors (AFC) built a 48-mile  ice road from Endicott to Pt.                                                               
Thomson.  This   ice  road  was  used   to  transport  equipment,                                                               
personnel, and materials  to the Pt. Thomson  site. Fifteen miles                                                               
of  ice  roads were  built  around  the  central pad  to  support                                                               
construction.  AFC is  an Alaskan  company  that constructed  and                                                               
maintains   ExxonMobil's  ice   road  infrastructure,   which  is                                                               
critical  to supporting  construction  during the  winter. It  is                                                               
also extending the  central pad to about 50 acres  and expects to                                                               
haul  an additional  1 million  cubic yards  of gravel.  They are                                                               
going to help them finish the  sealift bulkhead that will be used                                                               
to offload  the facility modules in  the summer of 2015,  as well                                                               
as helping install the foundations for the other buildings.                                                                     
                                                                                                                                
MS. WONG recapped  that one of the things  AFC recently concluded                                                               
was the construction of their west  pad and they are now close to                                                               
finishing the road  to the west pad including  the three bridges.                                                               
At peak, just a few weeks ago,  AFC had 240 people at the central                                                               
pad; they are a key player  in all fronts of their infrastructure                                                               
development.                                                                                                                    
                                                                                                                                
5:01:33 PM                                                                                                                    
MS. WONG  highlighted a second contractor,  Doyon Associated that                                                               
is  helping ExxonMobil  build their  pipeline. They  are building                                                               
upon  the  work  they  did   in  installing  approximately  2,300                                                               
vertical support members  between Badami and Pt.  Thomson. Just a                                                               
couple of weeks  ago at peak, Doyon had about  315 people working                                                               
on the pipeline  scope. ExxonMobil is anticipating by  the end of                                                               
this  month that  the  22-mile 12-inch  export  pipeline will  be                                                               
completed; that includes 27 miles  of ice pads along the pipeline                                                               
route.  All  the  double  joining  work  for  this  pipeline  was                                                               
completed  in the  last few  months  in Fairbanks  by Flow  Line,                                                               
another Alaskan company.                                                                                                        
                                                                                                                                
MS.  WONG  highlighted a  third  company,  Pacific Rim  Logistics                                                               
(PRL) that is their main  logistics provider at Pt. Thomson; they                                                               
manage the flow of people,  material, and equipment. PRL has seen                                                               
tremendous growth over  the last few years and has  120 people at                                                               
site and 200 more working  for their sub-contractors, of which 95                                                               
percent are Alaskan.                                                                                                            
                                                                                                                                
She  said that  last Saturday  she  attended the  open house  for                                                               
PRL's new facility  in Kenai that combined with  remarks from the                                                               
Ketchikan Visitor's  Bureau, showed how  their work on  the North                                                               
Slope is impacting the whole state.                                                                                             
                                                                                                                                
As  ExxonMobil  completes  the infrastructure  and  the  pipeline                                                               
work,  they  will  transition  to focus  on  installing  the  gas                                                               
processing facilities.  Another Alaskan  company, CH2M  Hill will                                                               
begin to mobilize  and install the flow lines  from the wellheads                                                               
to  the  facility.   They  will  also  do   the  facility  module                                                               
installation in 2015 (in previous graphics).                                                                                    
                                                                                                                                
Morris  Engineering  based  in Juneau  provided  the  design  and                                                               
construction  oversight  services  for all  the  construction  of                                                               
their airstrip,  Ms. Wong said, and  Builders Choice Incorporated                                                               
out  of  the  Matanuska  Susitna  Valley  constructed  their  Pt.                                                               
Thomson  permanent operations  camp, which  currently houses  200                                                               
people  and will  be the  long  term housing  for the  operations                                                               
team. Builders  Choice has  expanded to  over 300  employees with                                                               
operations in the Dakotas, as well.                                                                                             
                                                                                                                                
5:04:29 PM                                                                                                                    
At peak  manpower, that happened  just a  couple of weeks  ago at                                                               
central  pad  on  the  North   Slope,  they  had  more  than  729                                                               
positions;  a lot  of those  positions are  rotational. Statewide                                                               
they  have  about  1,200  positions   of  which  85  percent  are                                                               
Alaskans; they use 92 companies of which 73 are Alaskan.                                                                        
                                                                                                                                
In summary, Ms. Wong said, she  had showed them the progress made                                                               
at Pt.  Thomson to complete the  infrastructure milestones needed                                                               
for   first  oil   into  TAPS   by  early   2016.  Through   this                                                               
infrastructure,    they    are     making    investment    toward                                                               
commercialization of  the gas, and  through the support  and hard                                                               
work of all of their contractors  it is clear that Pt. Thomson is                                                               
an  Alaskan  project,  built  by Alaskans,  for  the  benefit  of                                                               
Alaska.                                                                                                                         
                                                                                                                                
SENATOR FRENCH commented that his tour  of Pt. Thomson was one of                                                               
the  highlights  of  2013.  The  money that  is  being  spent  is                                                               
impressive and the attention to safety  is as high as he has seen                                                               
in his time on the North Slope.                                                                                                 
                                                                                                                                
SENATOR  MICCICHE  asked what  the  ultimate  hopes are  for  Pt.                                                               
Thomson.                                                                                                                        
                                                                                                                                
MS. WONG  answered that because  SB 21 passed it  provides fiscal                                                               
stability the  industry needs  for future  phases at  Pt. Thomson                                                               
and other Alaskan opportunities. ExxonMobil  has done some of the                                                               
pre-investment  as the  pipeline  is designed  for  up to  70,000                                                               
barrels per day (BPD),  and that is the hope. The  prize is to be                                                               
able to produce 8 tcf of gas,  enough energy to heat all homes in                                                               
Alaska for more than 88 years.                                                                                                  
                                                                                                                                
SENATOR MICCICHE said he appreciated her testimony.                                                                             
                                                                                                                                
CHAIR  GIESSEL thanked  her and  then welcomed  Frank Paskvan  to                                                               
comment for BP Alaska.                                                                                                          
                                                                                                                                
5:07:39 PM                                                                                                                    
FRANK PASKVAN,  Alaska Technology Manager, BP  Exploration Alaska                                                               
Inc.,  Fairbanks,   Alaska,  related  that  he   had  been  doing                                                               
reservoir engineering  and oil field development  planning for 29                                                               
years.  He was  born  and raised  in Fairbanks  and  went to  the                                                               
University of  Alaska for a  petroleum engineering degree  and is                                                               
on the  University Foundation Board  of Trustees and  the College                                                               
of Engineering and Mines Advisory  Board. His report was based on                                                               
a snapshot of their plans, which  are subject to change from time                                                               
to time.                                                                                                                        
                                                                                                                                
BP is actively investing on the  North Slope oil fields; they are                                                               
acquiring new seismic data in  the Northern Prudhoe Bay field and                                                               
are adding  2 new rigs  which will bring on  200 new jobs  and $1                                                               
billion over 5 years. They  are currently operating seven rigs on                                                               
the North Slope  and that will bring  it up to 9.  In addition to                                                               
the  rigs,   BP  is  investing  in   new  development  technology                                                               
completions, which  will help advance  their developments  in the                                                               
challenging oil fields like the Sag River resource.                                                                             
                                                                                                                                
MR. PASKVAN  said BP  had started  development drilling  in Milne                                                               
Point  in 2014  and  are  in the  appraise  and  select phase  of                                                               
engineering for  the West End  of Prudhoe Bay with  has potential                                                               
startup in  2018, a $3  billion investment, with  peak production                                                               
estimated at 40,000 BPD. In  addition to the new facilities, they                                                               
are also making major facility  investments committed to safe and                                                               
sustainable operations. For example,  the turnarounds in 2014 are                                                               
a substantial  piece of  work; they are  employing 700  people on                                                               
the North  Slope to deliver  that work,  which took two  years to                                                               
plan for.  An example of  that would be  the GC2 module  built at                                                               
Nana's  Big  Lake facility  (79  jobs  at  $13.5 million  with  a                                                               
potential of 2,000 BPD).                                                                                                        
                                                                                                                                
5:10:50 PM                                                                                                                    
All  in all  BP's  capital  investment increased  in  2014 by  25                                                               
percent to $1.2  billion. This includes a 40  percent increase in                                                               
capital  spend  for  activities  that  increase  oil  production,                                                               
namely drilling well work and major projects.                                                                                   
                                                                                                                                
Slide 3 showed  the Prudhoe Bay and Milne Point  Units where most                                                               
of  his discussions  today centered.  They are  acquiring seismic                                                               
data  in  the Northern  Prudhoe  Bay  offshore area  this  summer                                                               
followed by an  onshore program this winter. He  said BP operates                                                               
over  1,600 wells  within  the Prudhoe  Bay  footprint and  keeps                                                               
seven drilling  rigs running  there 24/7/365.  He said  they also                                                               
have a drilling rig restarting the development at Milne Point.                                                                  
                                                                                                                                
5:11:59 PM                                                                                                                    
MR.  PASKVAN explained  that  seismic  data is  kind  of like  an                                                               
ultrasound  image; it  lets them  image and  remotely assess  the                                                               
potential oil field  drilling locations. It takes a  few years to                                                               
go   from   the   data  acquisition   through   the   processing,                                                               
interpretation, and  development planning stages  before actually                                                               
starting the development drilling that follows from that.                                                                       
                                                                                                                                
The  first well  based on  the  2014/15 data  acquisition may  be                                                               
starting  in 2017.  The seismic  acquisition  should involve  150                                                               
jobs  and around  $178 million  in spend,  and image  across four                                                               
different  production  horizons,  which  have  about  55  million                                                               
barrels of resource potential.                                                                                                  
                                                                                                                                
He  explained  that the  Prudhoe  Bay  fields  are close  to  the                                                               
shoreline;  some  are onshore  and  extend  into the  near  shore                                                               
region. So,  the seismic survey  acquisition plan,  therefore, is                                                               
both an onshore  and an offshore program. The  offshore part uses                                                               
boats for deeper water and  an "Arctos vehicle" for the shallower                                                               
water. BP  will acquire  190 square miles  of offshore  data this                                                               
summer and  around 220 square  miles during the winter  season to                                                               
image the area accurately enough  to enable precise well planning                                                               
and development assessments.                                                                                                    
                                                                                                                                
5:13:47 PM                                                                                                                    
MR. PASKVAN said the drilling and  well operations are one of the                                                               
most  visible and  significant areas  of investment  and that  BP                                                               
operates  a  fleet  of well-service  equipment  with  which  they                                                               
perform  over 500  rate-improving jobs  per year  in those  1,600                                                               
wells. Two of their seven rigs  are workover rigs, which are used                                                               
to  repair  and maintain  existing  wells,  and two  coil  tubing                                                               
drilling wells,  an Alaska developed and  matured technology that                                                               
consists of a  continuous coil of steel tubing which  can be more                                                               
than  15,000  feet  long  that goes  down  through  the  existing                                                               
wellbore and  drills to  a new target  that can be  up to  a half                                                               
mile away from the parent wellbore.  It's a very efficient way of                                                               
accessing targets and  improving oil rate from  within the legacy                                                               
field.                                                                                                                          
                                                                                                                                
BP has  three rotary  drilling rigs, which  drill new  wells from                                                               
the surface,  or they can drill  side tracks similar to  the coil                                                               
tube  drilling process.  With this  fleet  in 2014,  BP plans  to                                                               
drill up to 61 new targets and  work over 61 new wells. They have                                                               
started  up three  new rotary  rigs  since 2011,  rigs that  were                                                               
built specifically  to meet the  North Slope needs, and  they are                                                               
planning  for another  two big  rotary wells,  which would  bring                                                               
them up to  nine rigs. These new rigs would  involve 200 jobs and                                                               
$1 billion  of investment  over five years,  and will  take their                                                               
rig level from the five rigs in 2012 to nine.                                                                                   
                                                                                                                                
MR. PASKVAN  said the logistics  of this operation  are enormous.                                                               
One example  of this is  that the  roads have to  be specifically                                                               
built for the  size and weight of the  drilling rigs. Substantial                                                               
investments are  being made  in road upgrades  this year  to more                                                               
easily and efficiently move rigs around both summer and winter.                                                                 
                                                                                                                                
5:15:51 PM                                                                                                                    
He said  BP had started  development drilling at Milne  Point and                                                               
has finished four wells, is going  on the fifth, and has two more                                                               
planned.  They  plan similar  levels  of  drilling for  the  next                                                               
several years. He  noted that the last new wells  were drilled in                                                               
2011, so that activity is picking up there.                                                                                     
                                                                                                                                
5:16:40 PM                                                                                                                    
In the West  End of the Prudhoe  Bay field BP is  working hard on                                                               
the select stage phase of the  project. This means they are doing                                                               
the  engineering  that is  needed  to  make the  best  investment                                                               
choices that will  enable them to manage production  for the long                                                               
term on the West End. He showed  on slide 6 an image of iPad, the                                                               
first new pad in Prudhoe Bay in  more than a decade. It would add                                                               
production to  two other  existing well pads  that were  shown in                                                               
the upper right hand side of  the image. Plus they are optimizing                                                               
their  facilities by  increasing  flow line  capacity and  adding                                                               
other  surface facility  equipment. This  would collectively  add                                                               
over 100 new wells  in the West End of Prudhoe  Bay and about 200                                                               
million more  BPO. West End's  potential startup in 2018  with $3                                                               
billion  of  investment  would   bring  on  an  estimated  40,000                                                               
BPO/day.                                                                                                                        
                                                                                                                                
5:17:50 PM                                                                                                                    
Another  very big  activity in  Prudhoe  Bay this  year is  their                                                               
planned facility  shut downs (turnarounds),  which start  in July                                                               
and are expected  to last between 30 to 50  days depending on the                                                               
facility. These  are maintenance  and system upgrade  projects in                                                               
three  major  facilities:  the  biggest  being  the  Central  Gas                                                               
Facility, Flow Station 3 and Gathering Center 2.                                                                                
                                                                                                                                
MR.   PASKVAN   explained   that  these   operations   are   well                                                               
choreographed  and took  over two  years of  planning. They  will                                                               
have 700 people in the field  in and around those facilities; the                                                               
operation is managed  so to get the work executed  in the minimum                                                               
amount  of time  to minimize  the production  impacts and  get it                                                               
done  safely.  The kinds  of  work  they  are doing  during  this                                                               
operation are refurbishing aging  compressors, making process and                                                               
safety improvements, repairing  heating exchangers, and replacing                                                               
old  valves to  set these  facilities up  for long-term,  smooth-                                                               
running operations.                                                                                                             
                                                                                                                                
He explained  how laser  point cloud is  used to  generate images                                                               
for super  accurate measurements. The facility  is scanned before                                                               
doing  any design  work to  very accurately  position all  of the                                                               
equipment.   Before  cutting   into  any   pipes  or   doing  any                                                               
fabrication  or design  work,  they get  that  accurate scan  and                                                               
ensure a perfect fit for the new replacement equipment.                                                                         
                                                                                                                                
MR.  PASKVAN   summarized  that  taken  together,   BP's  capital                                                               
investment has  increased 25  percent for  2014 to  $1.2 billion;                                                               
this includes  a 40 percent  increase in capital  for rate-adding                                                               
activities.                                                                                                                     
                                                                                                                                
SENATOR DYSON  asked if  they are getting  into some  heavier oil                                                               
the farther west they go.                                                                                                       
                                                                                                                                
MR.  PASKVAN  answered  yes,  and   those  are  being  evaluated;                                                               
engineering  analysis  is  being  done  for  the  heavy  oil.  In                                                               
particular,  they learned  the  heavy oil  Chops  Pilot at  Milne                                                               
Point  S  Pad  is  definitely   ongoing  to  have  technical  and                                                               
commercial  challenges, mostly  because of  the artificial  lift.                                                               
This is  when a rotating  rod runs  from a surface  drive through                                                               
the well.  However, that  abrasive movement  with metal  on metal                                                               
rapidly wore  holes in  the side  of the  tubing, which  was very                                                               
expensive to  replace. So studies  are being done to  improve the                                                               
run life.                                                                                                                       
                                                                                                                                
SENATOR DYSON remarked that he was encouraged.                                                                                  
                                                                                                                                
MR. PASKVAN added, "So are we."                                                                                                 
                                                                                                                                
5:21:53 PM                                                                                                                    
SENATOR FRENCH went to slide  5 and asked which investments would                                                               
not be economical to make under ACES.                                                                                           
                                                                                                                                
MR. PASKVAN said that really  sits within a different wheelhouse,                                                               
but  as an  observer, he  could say  they are  moving ahead  with                                                               
those developments now.                                                                                                         
                                                                                                                                
5:22:59 PM                                                                                                                    
SENATOR  MICCICHE asked  if their  increased investment  happened                                                               
because  of SB  21,  and will  it be  somewhat  retracted if  the                                                               
investment climate is less favorable.                                                                                           
                                                                                                                                
MR.  PASKVAN responded  that the  increased  investment is  real.                                                               
They are actively  planning on getting ready  for this equipment.                                                               
But a change  in the business climate would cause  them and their                                                               
co-owners in  the ventures  to go back  and relook  at everything                                                               
under whatever the changes might be.                                                                                            
                                                                                                                                
SENATOR MICCICHE  asked how  he would compare  this rig  count to                                                               
the days when Alaska had very healthy exploration.                                                                              
                                                                                                                                
MR.  PASKVAN replied  that  it's on  a par,  at  least within  BP                                                               
operated assets, with running 11 rigs in 2006.                                                                                  
                                                                                                                                
5:25:54 PM                                                                                                                    
CHAIR  GIESSEL, finding  no further  questions, thanked  everyone                                                               
for  their  presentations  and  adjourned  the  Senate  Resources                                                               
Committee meeting at 5:25 p.m.                                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
Spring 2014 Revenue Forecast.pdf SRES 4/9/2014 3:30:00 PM
SRES Press Release Spring 2014 Forecast 20140407.pdf SRES 4/9/2014 3:30:00 PM
SRES Spring RSB Update DOR 20140409.pdf SRES 4/9/2014 3:30:00 PM
SRES Repsol-Hardham 20140409.pdf SRES 4/9/2014 3:30:00 PM
SRES ConocoPhillips-Jepsen 20140409.pdf SRES 4/9/2014 3:30:00 PM
SRES ExxonMobil-Wang 201400409.pdf SRES 4/9/2014 3:30:00 PM
SRES BP-Paskvan 20140409.pdf SRES 4/9/2014 3:30:00 PM