Legislature(2005 - 2006)BUTROVICH 205

02/27/2006 03:30 PM RESOURCES


Download Mp3. <- Right click and save file as

Audio Topic
03:49:06 PM Start
03:49:06 PM SB305
03:55:51 PM Conocophillips, Brian Wenzel, Finance and Administration
04:14:03 PM Conocophillips, Marianne Kah, Chief Economist
04:45:50 PM Wenzel - Question and Answer
05:08:27 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 305 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
Stakeholder Presentations
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                       February 27, 2006                                                                                        
                           3:49 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Thomas Wagoner, Chair                                                                                                   
Senator Ralph Seekins, Vice Chair                                                                                               
Senator Ben Stevens                                                                                                             
Senator Fred Dyson                                                                                                              
Senator Kim Elton                                                                                                               
Senator Albert Kookesh                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Bert Stedman                                                                                                            
                                                                                                                                
OTHER MEMBERS PRESENT                                                                                                         
                                                                                                                                
Senator Gretchen Guess                                                                                                          
Senator Gene Therriault                                                                                                         
Senator Hollis French                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 305                                                                                                             
"An Act repealing  the oil production tax and  gas production tax                                                               
and providing  for a production tax  on the net value  of oil and                                                               
gas; relating to the relationship  of the production tax to other                                                               
taxes; relating to the dates  tax payments and surcharges are due                                                               
under AS  43.55; relating  to interest  on overpayments  under AS                                                               
43.55; relating  to the treatment  of oil and gas  production tax                                                               
in a  producer's settlement with  the royalty owner;  relating to                                                               
flared gas, and to  oil and gas used in the  operation of a lease                                                               
or property, under AS 43.55;  relating to the prevailing value of                                                               
oil or gas under AS 43.55;  providing for tax credits against the                                                               
tax  due under  AS 43.55  for certain  expenditures, losses,  and                                                               
surcharges; relating to statements  or other information required                                                               
to be filed  with or furnished to the Department  of Revenue, and                                                               
relating  to the  penalty for  failure to  file certain  reports,                                                               
under  AS 43.55;  relating to  the  powers of  the Department  of                                                               
Revenue, and  to the disclosure  of certain  information required                                                               
to be  furnished to  the Department of  Revenue, under  AS 43.55;                                                               
relating   to  criminal   penalties   for  violating   conditions                                                               
governing access to and use  of confidential information relating                                                               
to the  oil and gas  production tax;  relating to the  deposit of                                                               
money  collected by  the Department  of Revenue  under AS  43.55;                                                               
relating to  the calculation of the  gross value at the  point of                                                               
production of  oil or gas;  relating to the determination  of the                                                               
net value  of taxable oil  and gas  for purposes of  a production                                                               
tax on the net value of  oil and gas; relating to the definitions                                                               
of  'gas,' 'oil,'  and certain  other  terms for  purposes of  AS                                                               
43.55;  making  conforming  amendments;   and  providing  for  an                                                               
effective date."                                                                                                                
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 305                                                                                                                  
SHORT TITLE: OIL AND GAS PRODUCTION TAX                                                                                         
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
02/21/06       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/21/06       (S)       RES, FIN                                                                                               
02/22/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/22/06       (S)       Heard & Held                                                                                           
02/22/06       (S)       MINUTE(RES)                                                                                            
02/23/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/23/06       (S)       Heard & Held                                                                                           
02/23/06       (S)       MINUTE(RES)                                                                                            
02/24/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
02/24/06       (S)       Heard & Held                                                                                           
02/24/06       (S)       MINUTE(RES)                                                                                            
02/25/06       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
02/25/06       (S)       -- Reconvene from 02/24/06 --                                                                          
02/25/06       (H)       RES AT 10:00 AM SENATE FINANCE 532                                                                     
02/25/06       (S)       Heard & Held                                                                                           
02/25/06       (S)       MINUTE(RES)                                                                                            
02/27/06       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRIAN WENZEL, Vice President                                                                                                    
Finance and Administration                                                                                                      
ConocoPhillips Alaska                                                                                                           
POSITION STATEMENT: Presented company position on SB 305.                                                                     
                                                                                                                                
MARIANNE KAH, Chief Economist                                                                                                   
ConocoPhillips Alaska                                                                                                           
POSITION STATEMENT: Presented company position on SB 305.                                                                     
                                                                                                                                
DARREN JONES, Vice President                                                                                                    
Commercial Assets                                                                                                               
ConocoPhillips Alaska                                                                                                           
POSITION STATEMENT: Presented company position on SB 305.                                                                     
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  THOMAS  WAGONER  called   the  Senate  Resources  Standing                                                             
Committee meeting to  order at 3:49:06 PM.  Present were Senators                                                             
Kookesh,  Elton, Dyson,  Seekins,  Ben Stevens  and Chair  Thomas                                                               
Wagoner.                                                                                                                        
                                                                                                                                
                                                                                                                                
               SB 305-OIL AND GAS PRODUCTION TAX                                                                            
                                                                                                                              
3:49:06 PM                                                                                                                    
CHAIR WAGONER  announced SB  305 to be  up for  consideration and                                                               
that the committee would hear stakeholder presentations.                                                                        
^ConocoPhillips, Brian Wenzel, Finance and Administration                                                                       
                                                                                                                                
BRIAN  WENZEL,   Vice  President,  Finance   and  Administration,                                                               
ConocoPhillips Alaska,  said ConocoPhillips  has been  working in                                                               
Alaska for 45  years and it is the state's  leading oil producer,                                                               
its  leading  explorer  and  its leading  champion  for  the  gas                                                               
pipeline. It  also has  been the leading  investor in  Alaska and                                                               
this  year, alone,  is reinvesting  over $700  million in  Alaska                                                               
capital projects on core legacy  fields and new development. Over                                                               
the past  10 years it has  invested over $5.8 billion  in capital                                                               
and another $6.8  billion in expenses in this state.  It is among                                                               
the state's  largest employer of  Alaskans and it pays  more than                                                               
any  other entity,  a  total of  $1.6 billion,  to  the State  of                                                               
Alaska in royalty and taxes.                                                                                                    
                                                                                                                                
ConocoPhillips  has approximately  1,000 employees  in the  state                                                               
and approximately 90 percent of  them are Alaskan residents. They                                                               
are  competent, motivated  and active  in  the communities  where                                                               
they live  and operate. They  care about Alaska and  they believe                                                               
that  the work  they  do makes  Alaska a  better  place to  live.                                                               
Through  subcontractors  and  support industries,  employment  is                                                               
generated for thousands of additional Alaskans. He stated:                                                                      
                                                                                                                                
     The past, present and future  of ConocoPhillips and the                                                                    
     State  of Alaska  are inextricably  linked. As  we move                                                                    
     forward  as partners  for perhaps  the next  50 to  100                                                                    
     years, we  believe there must  be a  mutual recognition                                                                    
     of  and respect  for the  interests of  each of  us. We                                                                    
     have to  try together to  answer the question,  'How do                                                                    
         we balance the factors that affect each of our                                                                         
     interests in a way that makes us both successful.'                                                                         
                                                                                                                                
MR.  WENZEL said  that unfortunately  the  balance in  SB 305  is                                                               
decidedly  in  favor   of  the  state  and  at   the  expense  of                                                               
established investors like ConocoPhillips.  It sets an aggressive                                                               
level of state-take  when take is considered  in conjunction with                                                               
other corporate income tax  obligations, property tax obligations                                                               
to the state, the property and  sales tax to the state, and other                                                               
tax   obligations  to   the   state   municipalities  -   royalty                                                               
obligations to the  state and the various oil  and gas surcharges                                                               
imposed by the  state, plus additional fees and  costs that apply                                                               
in the  permitting process whenever a  development moves forward.                                                               
This is  all on top  of its  corporate income tax  obligations to                                                               
the federal  government. It is  no surprise that this  layer upon                                                               
layer of  government take  has a  negative impact  on investment,                                                               
job creation and growth in Alaska.                                                                                              
                                                                                                                                
He said  that ConocoPhillips reluctantly supported  the bill even                                                               
though it  thought the tax increase  was too high to  achieve the                                                               
state's  goal of  increasing  investment.  It punishes  companies                                                               
that have made long-term investments  and are returning dividends                                                               
to the  state in  the form of  jobs, royalties,  corporate income                                                               
taxes and  property taxes.  He  would oppose the bill  except for                                                               
the fact that  it has enabled all the companies  to come together                                                               
with an agreement to advance  the gas pipeline under the Stranded                                                               
Gas Development Act  and advancing the gas pipeline  has been one                                                               
of ConocoPhillips' top priorities.                                                                                              
                                                                                                                                
3:55:51 PM                                                                                                                    
He  began discussing  ConocoPhillips'  long-term investments  and                                                               
its role  in minimizing  North Slope  production decline  and the                                                               
impacts ELF has had on those developments.                                                                                      
                                                                                                                                
He  said   that  ConocoPhillips   has  been  involved   with  the                                                               
exploration and  development of 14 satellites  that have resulted                                                               
in  new  production on  the  North  Slope  (slide 2).  They  were                                                               
predominantly marginal developments, 50  million barrels (MB) per                                                               
day to  150 MB  per day, and  were developed as  a result  of the                                                               
favorable fiscal  treatment given  under the ELF  (economic limit                                                               
factor).  Development of  those satellites  played a  significant                                                               
role in reducing  North Slope decline and enabling 1.9  MB of oil                                                               
to be produced  compared to 1989 predictions.  This is equivalent                                                               
to discovering  a Kuparuk-size field  and has added more  than $5                                                               
billion in revenues to the State of Alaska (slide 3).                                                                           
                                                                                                                                
In  addition   to  the  satellite   developments,  ConocoPhillips                                                               
continues  to explore  and drill  and  has drilled  more than  40                                                               
exploration and appraisal wells in the  last five years and it is                                                               
committed to continuing exploration.                                                                                            
                                                                                                                                
MR. WENZEL said the ELF did what  it was supposed to do - put oil                                                               
in the pipe and grow  Alaska's economy. He understood the state's                                                               
view on  the limitations of  the current ELF-based  severance tax                                                               
system, particularly at high prices.  He believed that a wise and                                                               
enduring tax  policy could be  developed and that  the Governor's                                                               
proposed production tax that is  intended to reflect profits from                                                               
that production  and includes incentives to  encourage investment                                                               
in the future  and fair transition provisions  that recognize the                                                               
cost   of   investments  already   made   was   such  a   policy.                                                               
Nevertheless, he said  that SB 305, as proposed,  would result in                                                               
an  additional  $1 billion  per  year  to  the state  at  today's                                                               
prices. This  unprecedented increase  would more than  double the                                                               
existing severance tax payments for ConocoPhillips.                                                                             
                                                                                                                                
3:58:40 PM                                                                                                                    
MR.  WENZEL displayed  slides that  illustrated different  fiscal                                                               
structures. His  view was  that a  balanced fiscal  structure was                                                               
critical  to future  investment in  both oil  and gas  - and  the                                                               
future  of oil  production in  Alaska is  primarily dependent  on                                                               
existing  fields. He  emphasized that  SB 305  differentially and                                                               
adversely  impacts  ConocoPhillips'  production from  its  legacy                                                               
fields and a  significant transition plan was  necessary to allow                                                               
an equitable  conversion from the old  tax system to the  new tax                                                               
system.  He also  added  that  a new  PPT  would impact  Alaska's                                                               
global competitiveness for investment.                                                                                          
                                                                                                                                
3:59:41 PM                                                                                                                    
MR.  WENZEL  said  there  have  been  many  questions  about  the                                                               
relationship  of  the PPT  to  the  fiscal contract  negotiations                                                               
under the  Stranded Gas  Development Act  (SGDA). The  purpose of                                                               
the  Act was  to encourage  new  investments and  to develop  the                                                               
state's stranded  gas resources  by establishing fiscal  terms in                                                               
advance with as  much certainty as the Constitution  of the State                                                               
of Alaska allowed. However, he said  the line between gas and oil                                                               
production is  not clear-cut. They exist  together in reservoirs;                                                               
the  wells  that are  drilled  produce  them  both. Many  of  the                                                               
investments  necessary  to develop  gas  will  also develop  oil.                                                               
Ultimately this means  that the fiscal certainty  provided by the                                                               
state under the  SGDA will be inadequate if only  applied to gas.                                                               
He elaborated:                                                                                                                  
                                                                                                                                
     The  Administration has  recognized  the  need for  the                                                                    
     Legislature  to  approve  any agreement  that  included                                                                    
     fiscal certainty  for oil, but that  Administration was                                                                    
     unwilling to  consider fiscal  certainty for  oil under                                                                    
     the  terms of  the current  production tax  statute. It                                                                    
     was, instead,  willing to propose to  the Legislature a                                                                    
     new oil tax  that is before you that  could become part                                                                    
     of a  fair and durable  fiscal regime for both  oil and                                                                    
     gas. But the Administration's  position has been clear.                                                                    
     The  new production  tax has  to stand  on its  own. In                                                                    
     other  words, it  had to  represent something  that the                                                                    
     Legislature, itself,  would accept  as wise  tax policy                                                                    
     in the absence of a deal on the natural gas pipeline.                                                                      
                                                                                                                                
     For our part, this oil  tax increase, on the average of                                                                    
     $1 billion for  the industry at today's  prices, is not                                                                    
     something   that   ConocoPhillips  would   have   found                                                                    
     acceptable  if we  didn't think  it would  progress and                                                                    
     ultimately result  in an agreement  to move  forward on                                                                    
     the gas pipeline project.                                                                                                  
                                                                                                                                
     So, once  again, the proposed  oil tax increase  by the                                                                    
     Administration  is  a  balance.  On the  one  hand,  it                                                                    
     provides a foundation for fiscal  stability for the oil                                                                    
     and  gas-related businesses  of  the  producers in  the                                                                    
     Alaska.  This stability  is  essential  for the  future                                                                    
     investment including investment  and the development of                                                                    
     the  gas  pipeline  project. On  the  other  hand,  the                                                                    
     producers  must pay  substantially more  in taxes  than                                                                    
     they would under the current regime.                                                                                       
                                                                                                                                
4:02:03 PM                                                                                                                    
MR. WENZEL moved on to discuss the future of North Slope oil                                                                    
production in Alaska (slides 10 - 13) saying:                                                                                   
                                                                                                                                
     Even   with  the   proposed  incentives,   the  state's                                                                    
     consultant has  acknowledged that  production resulting                                                                    
     from wildcat  exploration will only  play a  small role                                                                    
     in increasing  revenues under the PPT.  The core legacy                                                                    
     fields,  such  as  Prudhoe  and  Kuparuk,  would  still                                                                    
     produce  over  80  percent of  the  total  North  Slope                                                                    
     production  in 2015  providing the  base infrastructure                                                                    
     on [which] these smaller fields will depend.                                                                               
                                                                                                                                
     The already  discovered heavy oil resource  will play a                                                                    
     much more significant  role in the future  of the North                                                                    
     Slope.  However,  the state's  consultant  acknowledged                                                                    
     that technology limitations  and development costs will                                                                    
     constrain heavy  oil in the  near term and it  could be                                                                    
     many   years  before   this   production  reaches   its                                                                    
     potential.  Yet this  heavy oil  resource  base -  it's                                                                    
     huge  -  and  published  data  suggests  that  in-place                                                                    
     volume are greater  than 20 BB. This is  a key resource                                                                    
     for  Alaska  and  the  Legislature  should  consider  a                                                                    
     structure that would best enable its development.                                                                          
                                                                                                                                
MR.  WENZEL said  the bill  has  been designed  to encourage  new                                                               
investors  to come  to Alaska  and ConocoPhillips  fully supports                                                               
that and believe  they would be beneficial to both  the state and                                                               
the  industry.  ConocoPhillips  has   already  made  partners  of                                                               
several  of  them. But,  he  said,  the  terms that  attract  new                                                               
investors  come  with a  cost  and  the Governor's  tax  increase                                                               
mainly  targets   ConocoPhillips'  legacy  production   assets  -                                                               
Prudhoe and Kuparuk. The increase  is unprecedented for those who                                                               
have invested  tens of billions  of dollars to develop  the North                                                               
Slope  and stayed  in Alaska  through difficult  times, including                                                               
periods of very low prices.                                                                                                     
                                                                                                                                
4:07:03 PM                                                                                                                    
He cautioned that any time  the government raises taxes, it takes                                                               
money  away  from the  private  sector  that  could be  used  for                                                               
investment and continued job growth.  He also thought that higher                                                               
rates would not  be in the long-term best interests  of the state                                                               
either. He  explained that  new field sizes  in Alaska  are small                                                               
and   Arctic   operating   and  development   costs   are   high.                                                               
ConocoPhillips  spends a  lot more  time and  resources assessing                                                               
upside potential and downside risks.  Hopefully, it is right more                                                               
than it is wrong.                                                                                                               
                                                                                                                                
     As  we bear  the  greatest  risk, it  is  fair that  we                                                                    
     should be  appropriately rewarded. We  acknowledge that                                                                    
     the presence  of tax credits  reduces downside  for the                                                                    
     investors,   but    conversely,   higher    tax   rates                                                                    
     significantly reduce  the upside potential, which  is a                                                                    
     prime driver in our investment out.                                                                                        
                                                                                                                                
4:08:34 PM                                                                                                                    
HE opined  that hitting  the right balance  between tax  rate and                                                               
the  credits for  reinvestment was  critical  to future  resource                                                               
development in  Alaska. ConocoPhillips reluctantly  supported the                                                               
Governor's   proposal  in   order  to   move  forward,   but  the                                                               
Legislature must  wrestle with  the question  of whether  it will                                                               
attract long-term investment with a tax rate of 20 percent.                                                                     
                                                                                                                                
4:09:50 PM                                                                                                                    
MR. WENZEL began  to comment on the importance  of the transition                                                               
plan. Under the  bill, a fraction of  the producers' expenditures                                                               
for exploration, appraisal and  development capital incurred over                                                               
the past five  years may be deducted for  purposes of calculating                                                               
a  producer's  monthly   profit  tax  obligation.  ConocoPhillips                                                               
supported that  plan because it provided  an equitable transition                                                               
to the  new tax system and  is an essential piece  of the overall                                                               
balance reflected in this bill.                                                                                                 
                                                                                                                                
He related how  their Fjord Field was developed  as a stand-alone                                                               
satellite (and  wasn't aggregated  with Alpine for  severance tax                                                               
purposes.)  As a  small satellite,  it had  a low  ELF. Once  the                                                               
decision   was  received   from   the   Department  of   Revenue,                                                               
ConocoPhillips and its partners  sanctioned the project and moved                                                               
forward. Fjord will  be an 18-well roadless  satellite with first                                                               
                     rdth                                                                                                       
production in  late 3   or  4  quarter  this year  and production                                                               
would  peak in  2007/08 at  about 17,000  barrels per  day. Total                                                               
capital costs  are expected to  be around $300 million  and while                                                               
oil and  gas prices  have significantly  increased over  the last                                                               
few years, so  have material and labor  costs, and ConocoPhillips                                                               
is  expecting  it  to  cost  $30  million  than  when  originally                                                               
sanctioned. He explained further:                                                                                               
                                                                                                                                
     A  majority of  costs  associated  with developing  the                                                                    
     Fjord  project will  have been  expended  prior to  the                                                                    
     bill  becoming  effective.   Without  the  transitional                                                                    
     investment  expenditure  plan,  only  costs  associated                                                                    
     with 2007  and 2008  winter drilling programs  would be                                                                    
     eligible  for the  PPT.  As  previously discussed,  the                                                                    
     project was  sanctioned on the  letter ruling  from the                                                                    
     Department  of Revenue,  assuming the  field would  pay                                                                    
     full   state  corporate   income  tax,   full  royalty,                                                                    
     property tax, but little or  no severance tax. However,                                                                    
     under  this  new bill,  the  development  would now  be                                                                    
     subject  to   a  20  percent  PPT   rate.  Without  the                                                                    
     transition plan, the increase  in the fiscal terms will                                                                    
     result  in a  reduction of  $100 million  in the  gross                                                                    
     value of this project and  a 6 percent reduction in our                                                                    
     average return at a $40 ANS West Coast price.                                                                              
                                                                                                                                
     ConocoPhillips  is  currently   working  on  two  other                                                                    
     satellites  in addition  to Fjord  - these  are Nanook,                                                                    
     due to  start up in 2006,  and West Sak 1J,  which came                                                                    
     on  line late  2005. All  of these  projects will  have                                                                    
     similar  value-loss  impacts   without  the  transition                                                                    
     plan.  In addition,  there are  several other  projects                                                                    
     undertaken in the last few  years, which are now almost                                                                    
     fully developed and will have  value eroded as a result                                                                    
     of the PPT.  Our view is in order to  insure these past                                                                    
     investments are equitably  treated, the transition plan                                                                    
     is essential.                                                                                                              
                                                                                                                                
     I would now like to  ask Marianne Kah, again, our Chief                                                                    
     Economist from  ConocoPhillips, to spend a  few moments                                                                    
     discussing how  this proposed  tax change  might impact                                                                    
     Alaska's competitiveness and from  the perspective of a                                                                    
     global investment.                                                                                                         
                                                                                                                                
4:12:04 PM                                                                                                                    
^ConocoPhillips, Marianne Kah, Chief Economist                                                                                
                                                                                                                                
MARIANNE KAH,  Chief Economist, ConocoPhillips, said  she is also                                                               
part of the corporate planning  department at its headquarters in                                                               
Houston. She wanted to talk  with them about ConocoPhillips' view                                                               
of Alaska's  competitiveness on a  global basis. She  started out                                                               
saying that she  was sympathetic to the state's  position on this                                                               
issue.                                                                                                                          
                                                                                                                                
4:14:03 PM                                                                                                                    
MS.  KAH turned  to  slide 18  to show  the  average capital  and                                                               
operating costs for  Alaska and other locations  around the world                                                               
over the  last decade (excluding  exploration and  appraisal). It                                                               
included the  TAPS tariff,  but not  additional costs  for Alaska                                                               
that would reflect  the high cost of the Jones  Act tankers. Even                                                               
without  those costs,  Alaska has  higher  capital and  operating                                                               
costs  than   other  regions   ConocoPhillips  invests   in.  She                                                               
explained:                                                                                                                      
                                                                                                                                
     Cost needs  to be  taken into account  when we  set our                                                                    
     tax  take.  The  countries  with the  lowest  cost  can                                                                    
     afford  to  have  higher   tax  rates  while  remaining                                                                    
     competitive and  similarly, higher cost  countries need                                                                    
     to offset these conditions with lower tax takes.                                                                           
                                                                                                                                
4:15:54 PM                                                                                                                    
The  next  slide  showed  a   graph  of  total  costs  and  total                                                               
government  take  of  revenues.  She said  the  most  competitive                                                               
quadrant is  the low cost/low tax  quadrant of the graph  she was                                                               
showing.  Entities in  that quadrant  were not  trying to  offset                                                               
their  lower costs  with higher  tax rates.  They were  trying to                                                               
remain very competitive. The Gulf  of Mexico was in that quadrant                                                               
and the  UK was almost  there. A lot of  U.S. states would  be in                                                               
that quadrant.                                                                                                                  
                                                                                                                                
4:16:09 PM                                                                                                                    
CHAIR WAGONER  asked what  taxes the Gulf  of Mexico  has. "Isn't                                                               
the reason the  Gulf of Mexico is so profitable  is because there                                                               
are hardly any federal taxes; there  are no state taxes. So, that                                                               
in all reality, that should be in the low cost/low tax."                                                                        
                                                                                                                                
MS. KAH  agreed and said that  was the intent -  to get investors                                                               
to the Gulf.                                                                                                                    
                                                                                                                                
CHAIR WAGONER  asked if  the feds  were seriously  thinking about                                                               
raising taxes in that area.                                                                                                     
                                                                                                                                
MS. KAH replied that the only  reason the feds were thinking that                                                               
way is because prices are high  now, but that discussion would go                                                               
away if prices went down.                                                                                                       
                                                                                                                                
4:17:28 PM                                                                                                                    
SENATOR DYSON  asked if  her chart  says that  under the  ELF the                                                               
government take is 60 percent of revenues.                                                                                      
                                                                                                                                
MS. KAH replied yes, including state and federal.                                                                               
                                                                                                                                
SENATOR  DYSON asked  if  under the  PPT  it would  go  up to  67                                                               
percent and change.                                                                                                             
                                                                                                                                
MS.  KAH replied  yes. The  state's consultant  said it  was a  6                                                               
percent increase, but ConocoPhillips  number was slightly higher.                                                               
She surmised that  was because the consultant had  used the wrong                                                               
royalty number.                                                                                                                 
                                                                                                                                
Back  to  the  quadrant,  Ms.  Kah, said  that  clearly  the  low                                                               
cost/low  tax   places  are  trying   to  make   themselves  very                                                               
competitive. The low cost/high tax  countries are still trying to                                                               
attract investment.  The high cost/low  tax countries  have lower                                                               
tax rates  because they offset  higher costs. The  high cost/high                                                               
tax areas on the graph don't  get as much investment because they                                                               
are not  trying to  offset their  higher costs  with a  lower tax                                                               
rate. Norway is an example of a country in that category.                                                                       
                                                                                                                                
4:19:23 PM                                                                                                                    
SENATOR ELTON asked  if she was including royalty as  part of the                                                               
tax structure  and, if so,  why. The  royalty is the  state's oil                                                               
and is part of the lease condition.                                                                                             
                                                                                                                                
MS. KAH  replied that royalties  were in  her number and  she was                                                               
trying to  show the  numbers the  way an  investor would  look at                                                               
them. "And, you know, the dollars are dollars."                                                                                 
                                                                                                                                
SENATOR ELTON  said he understood  her point, but one  thing that                                                               
has consistently bothered him is that  it is very easy for her to                                                               
chart what  the costs may  be for ConocoPhillips, but  it doesn't                                                               
show  him anything  about what  the risk  might be.  For example,                                                               
ConocoPhillips  doesn't have  to  worry  about employees  because                                                               
they are working in Alaska, but  if they were working Nigeria, it                                                               
would. Likewise, if they were  working in Saudi Arabia, compounds                                                               
would have  to be built,  but not in  Alaska. "How do  you factor                                                               
those risks into an investment scenario?"                                                                                       
                                                                                                                                
MS. KAH  replied that he was  beating her to the  punch and those                                                               
costs were considered.                                                                                                          
                                                                                                                                
     When it  comes to political  risk, we view  Alaska very                                                                    
     favorably, which is why we've  been here so many years.                                                                    
     Yes,  we definitely  take that  into account.  What I'm                                                                    
     saying is you  need to take into account  the cost, the                                                                    
     prospectivity and  the political  risk and look  at all                                                                    
     of these factors, not several in isolation....                                                                             
                                                                                                                                
SENATOR ELTON asked if she had a chart for that.                                                                                
                                                                                                                                
MS. KAH  answered that she didn't  have a chart for  that because                                                               
there  were no  numbers  to  show. Although  some  people can  do                                                               
political risk ratings,  her concern would be that  their view of                                                               
political risk,  even in the  United States, is going  up because                                                               
they are  hearing talk  about things  like windfall  profits tax.                                                               
"That  is actually  changing our  view of  the political  risk in                                                               
what  traditionally we  have  thought as  an  extremely low  risk                                                               
country."                                                                                                                       
                                                                                                                                
4:22:07 PM                                                                                                                    
SENATOR SEEKINS  asked if  she was  talking about  all government                                                               
taxes  in trying  to  illustrate  what was  being  left over  for                                                               
ConocoPhillips.                                                                                                                 
                                                                                                                                
MS. KAH replied that was correct.                                                                                               
                                                                                                                                
SENATOR  SEEKINS asked  why she  chose 1994  through 2003  as the                                                               
"slice of time" to chart.                                                                                                       
                                                                                                                                
MS. KAH  replied that Wood  Mackenzie did  a study in  2004 where                                                               
they looked  at every tax regime  in the world and  they had very                                                               
good data.                                                                                                                      
                                                                                                                                
SENATOR SEEKINS  asked if it  reflected accurate data  other than                                                               
for the PPT.                                                                                                                    
                                                                                                                                
MS. KAH replied yes.                                                                                                            
                                                                                                                                
4:23:18 PM                                                                                                                    
SENATOR THERRIAULT explained the  pressures government in general                                                               
was getting to  raise taxes and the difficulty in  trying to come                                                               
up with a  tax structure that was stable. Other  countries with a                                                               
progressive system  of taxation were  not having to  change their                                                               
structure right now - and that was a form of stability.                                                                         
                                                                                                                                
     So,  we should  be moving  to  a system  that has  some                                                                    
     progressivity to  it with  regard to  price so  that we                                                                    
     can get that long-term stability  or a better chance at                                                                    
     long-term stability  even if  it's not locked  in under                                                                    
     the terms of a contract.  I'm wondering if you can make                                                                    
     some comments  on that and  it's my  understanding that                                                                    
     in the  back and  forth between the  Administration and                                                                    
     the  companies there  was a  proposal by  the companies                                                                    
     that did  have a degree  of progressivity to  it.... It                                                                    
     did  reflect an  upward take  for government  as prices                                                                    
     moved up.                                                                                                                  
                                                                                                                                
MS. KAH replied:                                                                                                                
                                                                                                                                
     We really  would be perfectly happy  with a progressive                                                                    
     price structure.  Our issue really is  the overall take                                                                    
     level  and the  fairness  in terms  of the  investments                                                                    
     we've made over the last  five to ten years expecting a                                                                    
     certain risk payout that would  suddenly be taken away.                                                                    
     But  in terms  of moving  to a  better system,  we'd be                                                                    
     happy to  have Alaska move  to what they thought  was a                                                                    
     fairer and better  system - as long as  we were treated                                                                    
     fairly in the process.                                                                                                     
                                                                                                                                
4:25:34 PM                                                                                                                    
SENATOR BEN  STEVENS remarked that  regardless of  the difference                                                               
between  ELF and  PPT, he  noticed  that only  three other  areas                                                               
under the Wood Mackenzie study  have a higher cost structure than                                                               
Alaska and  nothing has changed  in terms of the  cost structure.                                                               
One is the Canadian Arctic and he asked what the others were.                                                                   
                                                                                                                                
MS.  KAH replied  Eastern Canada  and Morocco.  Only three  areas                                                               
have  a higher  cost structure  than Alaska.  She said  the slide                                                               
includes arctic conditions and transportation  costs, but it does                                                               
not include  Russia. Arctic  Russia, in  particular, would  be an                                                               
equally high cost.                                                                                                              
                                                                                                                                
4:27:46 PM                                                                                                                    
Her point  in slide 20  was to show that  Alaska under ELF  is in                                                               
sort of a middle  of the road position and has  moved up into the                                                               
high cost/high  tax quadrant with  the overall tax take  level of                                                               
the PPT.  She noted that peer  areas, such as the  Gulf of Mexico                                                               
and the  UK North Sea,  even if  recent tax increases  were taken                                                               
into account,  were still  significantly more  favorable regimes.                                                               
"The high  cost in the  Arctic and the  types of fields  that are                                                               
likely  to be  found  suggest that  the  proposed fiscal  regimes                                                               
could detract rather than encourage significant investment."                                                                    
                                                                                                                                
She said commercial discovery size  is what ConocoPhillips thinks                                                               
of  as  prospectivity and  she  illustrated  those areas  with  a                                                               
graph. Areas with high prospectivity  can generally assess higher                                                               
tax rates  while maintaining investment. The  Alaska North Slope,                                                               
however, has limited prospectivity as  compared to other parts of                                                               
the   world  ConocoPhillips   is  exploring   in.  ConocoPhillips                                                               
believes tax rates should reflect that.                                                                                         
                                                                                                                                
MS. KAH said the state's  consultant assessed the competitiveness                                                               
of Alaska's tax  rates by comparing the  different regimes around                                                               
the world based on similar field  sizes, but she pointed out that                                                               
that is  not the way investors  look at it. When  they compare an                                                               
investment in  Russia, for example,  versus Alaska,  they compare                                                               
the prospects of  a 750 MB field  versus a 50 MB to  100 MB field                                                               
that they might find in Alaska.                                                                                                 
                                                                                                                                
     So, you really  can't compare fields of  the same size.                                                                    
     You have to take  into account the higher prospectivity                                                                    
     in terms  of the  tax rates that  that project  will be                                                                    
     able to support.                                                                                                           
                                                                                                                                
     Any greater prospectivity in  Russia may compensate for                                                                    
     the higher tax  rates. When you add  political risk in,                                                                    
     you know, it  may change that picture, but  I think you                                                                    
     need to take that  higher prospectivity into account. I                                                                    
     also want to point out  that it's not really meaningful                                                                    
     to  compare the  competitiveness of  Alaskan tax  terms                                                                    
     with  Russia, Azerbaijan  and Angola  at similar  field                                                                    
     sizes. It's just not a meaningful comparison.                                                                              
                                                                                                                                
4:29:29 PM                                                                                                                    
MS. KAH  talked about Norway,  specifically, because  the state's                                                               
consultant stated that  it was comparable to Alaska,  both in its                                                               
wealth of natural resources and  its cost structure. But, she did                                                               
not believe  it was  a good comparison,  because Norway  does, in                                                               
fact,  have  a lower  cost  structure  and better  prospectivity.                                                               
However, she pointed  out that it has  significantly higher taxes                                                               
than  Alaska. Another  reason  she didn't  think  that model  was                                                               
helpful  to  them  was  because true  production  in  Norway  has                                                               
declined  by  17  percent  since  2001 in  a  fairly  high  price                                                               
environment.  In   her  view,  Norway  was   not  getting  enough                                                               
investment, because  its tax structure  was not in line  with its                                                               
cost and prospectivity position.                                                                                                
                                                                                                                                
4:30:26 PM                                                                                                                    
Slide  22 looked  at petroleum  industry reinvestment  rates. MS.                                                               
KAH  said that  investors  needed stable  fiscal  terms with  tax                                                               
rates that are commensurate with  the cost structure and the size                                                               
of the opportunity.  Alaska's tax regime has offered  that in the                                                               
past and  that is why  ConocoPhillips has found it  an attractive                                                               
place  to invest.  But  with recent  tax  increases in  locations                                                               
around  the world,  she was  becoming concerned  that global  tax                                                               
takes were reaching a point  where private companies were finding                                                               
it challenging  to invest.  She thought one  of the  main reasons                                                               
the reinvestment  rates in the  green bars  of the graph  had not                                                               
moved with the oil price was  because the tax rates were reaching                                                               
a point where  companies are not finding  enough investments that                                                               
were attractive and  meet shareholder returns -  along with other                                                               
considerations. Prices were expected to  cycle down to lower more                                                               
normal  levels,  so companies  are  not  anxious to  invest  with                                                               
prices this  high. She  also noted  that there is  a lag  time in                                                               
developing projects creating a delay in supply response.                                                                        
                                                                                                                                
MS. KAH  said she believed that  tax rates around the  world were                                                               
playing  a  key  role  in  lagging  reinvestment  rates,  because                                                               
companies   were  worried   they  would   make  investments   and                                                               
governments  would change  their  tax  rates afterwards.  Longer-                                                               
term, she  was concerned  that private  oil companies  were being                                                               
pushed out of  the conventional oil business and  being forced to                                                               
invest in alternative  energy supplies and things  that have more                                                               
favorable tax terms.                                                                                                            
                                                                                                                                
4:32:04 PM                                                                                                                    
CHAIR  WAGONER asked  how conservative  companies  would stay  if                                                               
crude oil prices remain high.                                                                                                   
                                                                                                                                
MR. KAH  responded that  she has  long since  given up  trying to                                                               
forecast  oil prices.  Several factors  suggest  that prices  are                                                               
exaggerated  today. The  first is  that  there was  extraordinary                                                               
global economic  and demand  growth in 2004,  which is  not being                                                               
repeated. China had unusual factors  that year - a power shortage                                                               
during  which it  used  diesel generators  and  an extra  300,000                                                               
barrels per day temporary need - and that is now gone.                                                                          
                                                                                                                                
They are  now seeing a price  response to higher prices  in terms                                                               
of demand  growth. The year  2005 had  a demand growth  rate that                                                               
was  under the  10-year  average,  about 1  MB  per day.  Another                                                               
reason  prices  are staying  where  they  are is  that  financial                                                               
investors were  moving money out  of equities and bonds  and into                                                               
commodities, including oil.                                                                                                     
                                                                                                                                
     I believe  that money  is overwhelming our  oil markets                                                                    
     now  and keeping  the  forward price  curve  at a  very                                                                    
     elevated level - out five  years. We've never seen them                                                                    
     invest five years out in the curve before.                                                                                 
                                                                                                                                
4:34:24 PM                                                                                                                    
CHAIR  WAGONER replied  that he  understood what  she said  about                                                               
China, be he was just in China  and saw that they were building a                                                               
tremendous number of new roads  and were getting ready to produce                                                               
their own cars.                                                                                                                 
                                                                                                                                
     They're back  where we were  probably in the  1920s and                                                                    
     they  are  getting  ready  to  get  rid  of  all  their                                                                    
     bicycles and everybody with an  income that allows them                                                                    
     will have  a car. So if  that does take a  dip, I would                                                                    
     say it's not going to dip very long.                                                                                       
                                                                                                                                
MS. KAH agreed  and said that she also thought  prices would come                                                               
down, but to a higher number.                                                                                                   
                                                                                                                                
4:35:03 PM                                                                                                                    
SENATOR  ELTON referenced  slide 6  that indicated  Alaska's take                                                               
was $60 a barrel,  but Ms. Kah was saying to  not count on prices                                                               
staying and  that they are  artificially being held up.  He asked                                                               
where she thought prices would cycle  down to and why that wasn't                                                               
reflected in slide 6.                                                                                                           
                                                                                                                                
MS. KAH  reiterated that she  doesn't try to forecast  oil prices                                                               
any more. They look at their  projects through a range of prices.                                                               
The  financial community  consensus  seems to  be  $40 a  barrel.                                                               
Industry has to have the  most conservative view on this, because                                                               
it takes the risks.                                                                                                             
                                                                                                                                
She emphasized  that when people  talk about price, they  need to                                                               
talk about cost structure, too.  It is really high today. Goldman                                                               
Sacks believes  replacement costs today  are $50 per  barrel. The                                                               
service industry has  not kept pace with the  spending level, but                                                               
eventually  it would  make the  investment and  costs would  come                                                               
down. People think a big windfall  is taking place when, in fact,                                                               
a lot of money is being absorbed by higher costs.                                                                               
                                                                                                                                
4:37:13 PM                                                                                                                    
SENATOR ELTON  asked for  the same graph  of the  state's nominal                                                               
take out  to 2025 at $60  oil (shown on  slide 6) to be  done for                                                               
$40 a  barrel oil  - if  that was  what ConocoPhillips  based its                                                               
decisions on.                                                                                                                   
                                                                                                                                
MS. KAH replied  that she did not say that  was how its decisions                                                               
were made.                                                                                                                      
                                                                                                                                
     I  said  we're  more conservative  than  the  financial                                                                    
     community  and that's  all I  can say.  This is  really                                                                    
     competitively  sensitive  information and  we  wouldn't                                                                    
     want our competitors hearing how  we base our decisions                                                                    
     because  we bid  against  them in  auctions around  the                                                                    
     world.                                                                                                                     
                                                                                                                                
SENATOR ELTON  asked to  have the  Department of  Revenue prepare                                                               
that chart.                                                                                                                     
                                                                                                                                
4:38:10 PM                                                                                                                    
MS.  KAH said  another concern  from a  major company's  point of                                                               
view was  that she sensed  a bias in  the proposed tax  regime in                                                               
favor of the new versus the legacy investors.                                                                                   
                                                                                                                                
     I believe  there's a common misperception  that smaller                                                                    
     and medium sized petroleum  companies have lower return                                                                    
     requirements  than the  majors.  As  an economist,  I'd                                                                    
     like  to point  out that  they  have a  higher cost  of                                                                    
     capital  than   we  do.   It's  because   they're  less                                                                    
     diversified and,  therefore, they  are viewed  as being                                                                    
     more risky - both by  the bond community and the equity                                                                    
     investors. So they  have a higher cost  of capital and,                                                                    
     therefore, should have  higher return requirements than                                                                    
     we do.                                                                                                                     
                                                                                                                                
     Companies  that   don't  invest  and   return  adequate                                                                    
     returns  to their  shareholders are  no longer  with us                                                                    
     today. So, I don't think  you want companies to come in                                                                    
     here  who aren't  going  to  invest conservatively  and                                                                    
     return sufficient money to  their shareholders. I would                                                                    
     imagine  -   and  I  don't   want  to  speak   for  the                                                                    
     independents - but  I would imagine that  they would be                                                                    
     comparing Alaska's  tax regime  to the Gulf  of Mexico,                                                                    
     the  United  Kingdom,  Canadian oil  sands.  Those  are                                                                    
     common areas  where they  would be  frequent investors.                                                                    
     But the state's consultant  concluded that tax rates in                                                                    
     these  locations were  more  competitive than  existing                                                                    
     and proposed rates in Alaska.                                                                                              
                                                                                                                                
     What I  worry about if  countries decide that  they are                                                                    
     going  to have  high  taxes today,  it's possible  that                                                                    
     only   government   controlled   oil   companies   with                                                                    
     different objectives like energy  security are going to                                                                    
     be  willing to  invest  in conventional  oil -  getting                                                                    
     back to  the point I  said before.  I fear that  we are                                                                    
     all collectively  being pushed out of  conventional oil                                                                    
     into LNG projects or into  coal to liquids or something                                                                    
     that is  not conventional oil  - because tax  rates are                                                                    
     getting  too  high  in  several  locations  around  the                                                                    
     world.                                                                                                                     
                                                                                                                                
     And there's another concern created  by the high tax in                                                                    
     favor of  new versus legacy investors.  As partners, we                                                                    
     think  about what  will  it  be like  to  have a  large                                                                    
     number of  small players active in  the environmentally                                                                    
     sensitive  North  Slope.   The  costs  associated  with                                                                    
     environmental  protection are  really high  and I  know                                                                    
     ConocoPhillips    has    very   high    standards    on                                                                    
     environmental  protection  and  as well  as  state  and                                                                    
     federal governments  and local  governments -  have the                                                                    
     same  standards.   And  this  level   of  environmental                                                                    
     sensitivity  may  be  new to  many  of  these  players.                                                                    
     That's something that we worry about.                                                                                      
                                                                                                                                
4:40:35 PM                                                                                                                    
MS. KAH made a case for  why the state should want ConocoPhillips                                                               
to stay  and what it has  to offer the state.  ConocoPhillips has                                                               
been  a long-term  investor  in  Alaska -  it  has  the size  and                                                               
financial strength to  carry out project of any size.  It has the                                                               
skills to manage  large and complex projects  and has substantial                                                               
experience  in  both  developing  and  operating  in  the  Arctic                                                               
region.   ConocoPhillips,   in    particular,   has   substantial                                                               
experience  in  heavy  oil  production,  both  in  Venezuela  and                                                               
Canada,  and has  leading technology  that processes  the heavier                                                               
crudes. It has  the second largest refinery in  the United States                                                               
that can  be upgraded to handle  heavy crude. It also  has strong                                                               
commercial acumen  and access to  markets, which  allows projects                                                               
to be designed to maximize the full value of the resource.                                                                      
                                                                                                                                
ConocoPhillips is the  second largest gas marketer  in the United                                                               
States.  It has  strong risk  management skills  and a  long-term                                                               
investment horizon.  This means they invest  year-in and year-out                                                               
and won't leave when market conditions get tough.                                                                               
                                                                                                                                
The last point  Ms. Kah wanted to make was  why the majors should                                                               
be viewed as  desirable investors by showing  the committee their                                                               
three-year  average  upstream  spending in  billions  of  dollars                                                               
versus the  spending of various independent  petroleum companies.                                                               
Majors  can bring  a lot  of  investment dollars  into the  state                                                               
provide the terms were competitive. She concluded saying:                                                                       
                                                                                                                                
     The tax  proposal as introduced  is the upper  bound of                                                                    
     what  we believe  is reasonable  given the  totality of                                                                    
     the deal. I thank you  very much for your attention and                                                                    
     I'm going to turn it back to Brian to finish.                                                                              
                                                                                                                                
4:42:23 PM                                                                                                                    
^Wenzel - question and answer                                                                                                 
                                                                                                                                
MR.  WENZEL  said he  had  identified  some language  changes  to                                                               
clarify and  improve the  bill. Among  other things,  the changes                                                               
concern how  eligible deductions  and credits are  identified and                                                               
the value  at point of  production and  how that value  should be                                                               
calculated. He hoped to be able to offer that language shortly.                                                                 
                                                                                                                                
He said he wanted to  summarize several key messages from today's                                                               
discussion. One was  that the proposed production  tax results in                                                               
a more than  doubling of the effective tax rate  over the current                                                               
system.                                                                                                                         
                                                                                                                                
     In  isolation,  we  would  not   view  this  change  as                                                                    
     reasonable,  fair  or appropriate,  particularly  given                                                                    
     the  state's  current  budget surplus.  However,  as  a                                                                    
     foundation  for  oil  and  gas  fiscal  stability  that                                                                    
     facilitates  future investment  in Alaska,  the balance                                                                    
     proposed in this bill  is something that ConocoPhillips                                                                    
     will reluctantly support.                                                                                                  
                                                                                                                                
     Second, the North  Slope has a huge  heavy oil resource                                                                    
     that  is  already  significantly disadvantaged  from  a                                                                    
     technology,     quality    and     cost    perspective.                                                                    
     Incentivizing this  resource will be key  to increasing                                                                    
     production levels in Alaska.                                                                                               
                                                                                                                                
     Third, a  transition plan  from the  current production                                                                    
     tax system  to the  new system  is essential  to insure                                                                    
     equitable treatment of our  legacy investments. Many of                                                                    
     these investments were  associated with the development                                                                    
     of marginal assets that were  justified on the basis of                                                                    
     the   prior  ELF   system.   Qualifying  these   legacy                                                                    
     investments  for  deduction  against   the  PPT  is  an                                                                    
     essential part of the balance reflected in this bill.                                                                      
                                                                                                                                
     Finally, the tax rate associated  with this bill pushes                                                                    
     Alaska into  a high-cost, high-tax bracket  as compared                                                                    
     to  many  other regimes  around  the  world. This  will                                                                    
     affect  the  risk/reward  balance  the  companies  will                                                                    
     evaluate  before deciding  to invest  here. Before  you                                                                    
     accept the  rate reflected in the  Governor's bill, you                                                                    
     must first  be comfortable with the  potential risks of                                                                    
     future  investment that  such  a high  rate imposes.  I                                                                    
     would like to reiterate  that Alaska and ConocoPhillips                                                                    
     are aligned as partners on  many very important goals -                                                                    
     increasing  investment in  Alaska, increasing  Alaska's                                                                    
     oil   and    gas   production,    increasing   Alaska's                                                                    
     competitiveness,  developing   long-term  relationships                                                                    
     with proven partners for long-term mutual benefit.                                                                         
                                                                                                                                
     In closing,  many factors  have to  be considered  by a                                                                    
     government in choosing the appropriate  tax rate for an                                                                    
     industry as complex  as the oil and  gas industry. Cost                                                                    
     structure including distance  to market, prospectivity,                                                                    
     potential  field  size, reservoir  quality,  regulatory                                                                    
     constraints  and the  desired level  of investment  are                                                                    
     perhaps  but a  few  of  the factors  that  need to  be                                                                    
     considered.  Today, Alaska  is  challenged  in each  of                                                                    
     these areas  and the fiscal  regime needs  to recognize                                                                    
     this. Thank you for considering our views.                                                                                 
                                                                                                                                
4:45:50 PM                                                                                                                    
CHAIR WAGONER said  that ConocoPhillips was the first  of the big                                                               
three companies to  sign an understanding with  the Governor that                                                               
it accepted  certain terms on  the gas  pipeline and he  asked if                                                               
the PPT  was being discussed  at that time or  did ConocoPhillips                                                               
request it or did it come up after.                                                                                             
                                                                                                                                
MR. WENZEL replied that the PPT had been discussed prior to that                                                                
date, as early as last July. It is typical for an administration                                                                
to  approach  potential  taxpayers  about a  change  in  the  tax                                                               
system.  ConocoPhillips  found the  base  terms  of the  contract                                                               
acceptable in October.                                                                                                          
                                                                                                                                
CHAIR WAGONER  asked if ConocoPhillips  didn't at  least consider                                                               
that  the Legislature  would discuss  fixing  ELF or  going to  a                                                               
different tax structure in the near future.                                                                                     
                                                                                                                                
MR.  WENZEL   replied  no,  their  investment   analysis  doesn't                                                               
typically look for a change in a  tax regime in Alaska - in other                                                               
countries  perhaps  -  and  certainly   not  a  doubling  of  the                                                               
production tax rate.                                                                                                            
                                                                                                                                
SENATOR ELTON  asked him to  clarify what he meant  by "doubling"                                                               
pointing out that the tax doubles  only if the price of oil stays                                                               
at  $60 a  barrel. It  doesn't double  if it's  at $40  a barrel.                                                               
"It's  certainly a  loss to  the state  if it's  less than  $27 a                                                               
barrel."                                                                                                                        
                                                                                                                                
MR. WENZEL  apologized and  agreed that  the doubling  happens at                                                               
current prices, not at all price levels.                                                                                        
                                                                                                                                
SENATOR DYSON clarified that when  he asked the question earlier,                                                               
it's only  a 6 or 7  percent change from government's  total take                                                               
now.                                                                                                                            
                                                                                                                                
MR. WENZEL replied that was correct.                                                                                            
                                                                                                                                
SENATOR DYSON  continued by  pointing out that  at least  some of                                                               
that may be offset by the credits.                                                                                              
                                                                                                                                
MR. WENZEL  responded that the  tax credits were built  into that                                                               
analysis.                                                                                                                       
                                                                                                                                
SENATOR  DYSON asked  if he  figured in  how much  ConocoPhillips                                                               
would invest  in exploration  and development  in Alaska  when he                                                               
made the chart.                                                                                                                 
                                                                                                                                
MR.  WENZEL  replied yes;  it  was  his  best estimate  for  both                                                               
ConocoPhillips and the industry.                                                                                                
                                                                                                                                
SENATOR  DYSON remarked,  "That's  fascinating when  we all  have                                                               
difficulty predicting oil prices, but  you're able to predict the                                                               
investments for not only yourselves, but the industry."                                                                         
                                                                                                                                
MR. WENZEL replied  that ConocoPhillips felt it  was necessary to                                                               
make an estimate  and show what it felt was  a dramatic impact in                                                               
terms of where  the state of Alaska is moving  on its overall tax                                                               
regimes.                                                                                                                        
                                                                                                                                
4:51:04 PM                                                                                                                    
SENATOR GENE  THERRIAULT referenced the tax  credit mechanism and                                                               
                                                                rd                                                              
the  ability  for them  to  be  sold  in SB  185  [from  the  23                                                                
Legislature]  and  asked  if ConocoPhillips  could  purchase  tax                                                               
credits in Alaska under the existing system.                                                                                    
                                                                                                                                
MR. WENZEL replied  that he didn't think so, but  he couldn't say                                                               
for sure.                                                                                                                       
                                                                                                                                
SENATOR THERRIAULT requested that  information along with what is                                                               
paid for $100  worth of credit. He thought it  might be advisable                                                               
for  the state  to  have some  limits on  what  credits could  be                                                               
bought for  even though  the consultant advised  to let  the free                                                               
market set that rate.                                                                                                           
                                                                                                                                
4:51:46 PM                                                                                                                    
MR.  WENZEL  replied   that  the  trading  of   the  credits  was                                                               
structured for the benefit of the state.                                                                                        
                                                                                                                                
     The alternative  is to simply write  producers a check.                                                                    
     I  believe the  state  actually  structures the  system                                                                    
     with credits such  that in a scenario  where prices are                                                                    
     low,  they don't  have  to cut  those  checks -  rather                                                                    
     those  credits remain  out there....  I would  have the                                                                    
     same view that you should  allow the free market system                                                                    
     to work and value those credits as appropriate.                                                                            
                                                                                                                                
SENATOR  THERRIAULT  responded that  he  thought  Mr. Wenzel  was                                                               
right, but he thought the value had some "leakage."                                                                             
                                                                                                                                
4:53:31 PM                                                                                                                    
SENATOR BEN  STEVENS asked to  go back to  slide 19 based  on the                                                               
Wood  MacKenzie 10-year  study from  2004  and said,  "I find  it                                                               
fascinating that  no matter what  we do,  we're in the  high cost                                                               
portion of  production on a  global scale."  He asked if  the tax                                                               
credits  would move  Alaska  left on  the  horizontal scale,  why                                                               
wouldn't the tax  credit in the PPT  cause it to move  to a lower                                                               
tax structure.                                                                                                                  
                                                                                                                                
MS. KAH  replied, "It's  because the overall  tax rate  is higher                                                               
and that has more than offset the additional tax credits."                                                                      
                                                                                                                                
SENATOR  BEN  STEVENS responded  that  this  was another  way  to                                                               
demonstrate what  Dr. van Meurs  said -  that the tax  credit has                                                               
low sensitivity and the high sensitivity is in the tax rate.                                                                    
                                                                                                                                
MS.  KAH replied,  "It's less  sensitivity than  the overall  tax                                                               
rate."                                                                                                                          
                                                                                                                                
MR. WENZEL agreed.                                                                                                              
                                                                                                                                
SENATOR BEN STEVENS  said he still couldn't fathom  why the state                                                               
hadn't moved down the cost structure with tax incentives.                                                                       
                                                                                                                                
MS.  KAH  explained  that  that   graph  charted  costs  with  no                                                               
government take factored in.                                                                                                    
                                                                                                                                
SENATOR BEN  STEVENS repeated that  if tax credits  were factored                                                               
in, "We still don't see a movement."                                                                                            
                                                                                                                                
MS. KAH replied they wouldn't put  the tax credits in that graph.                                                               
Those would be  represented on the chart in  the lower government                                                               
take.                                                                                                                           
                                                                                                                                
SENATOR  BEN  STEVENS  remarked,  "But  it should  if  it  had  a                                                               
significant impact.  It should  still move  us down  more towards                                                               
the center."                                                                                                                    
                                                                                                                                
MS. KAH agreed saying:                                                                                                          
                                                                                                                                
     Right, it  should have moved  you to lower  overall tax                                                                    
     rate, but  the increase in  the absolute tax  rate from                                                                    
     13  percent  in  ELF  to 20  percent  in  what's  being                                                                    
     proposed more  than offsets the improvement  in the tax                                                                    
     credits.                                                                                                                   
                                                                                                                                
4:56:17 PM                                                                                                                    
SENATOR  STEVENS  said  he  thought  the  chart  illustrated  the                                                               
overall insignificance of a tax credit  in the scheme of things -                                                               
in  terms  of  what  Legislators  can  do  to  make  Alaska  more                                                               
competitive.                                                                                                                    
                                                                                                                                
4:56:53 PM                                                                                                                    
DARREN JONES,  Vice President, Commercial  Assets, ConocoPhillips                                                               
replied:                                                                                                                        
                                                                                                                                
     I  think the  way  you  think about  that  is that  the                                                                    
     increased tax  rate would raise that  Alaska ELF higher                                                                    
     than  even that  circle is.  The tax  credits bring  it                                                                    
     back down  a little bit.  The other  way to look  at it                                                                    
     might be the way you're  suggesting is. You'd just have                                                                    
     a tax  increase, the rate  increase, and you  could say                                                                    
     the tax  credits lower your  effective costs.  Then you                                                                    
     might move it  to the left a little bit.  In that case,                                                                    
     you would be higher up on that scale.                                                                                      
                                                                                                                                
4:57:55 PM                                                                                                                    
SENATOR  BEN STEVENS  added, "We'd  be higher  on the  scale, but                                                               
maybe further to the left."                                                                                                     
                                                                                                                                
MS. KAH  agreed and  added that depended  on where  those numbers                                                               
were accounted.                                                                                                                 
                                                                                                                                
CHAIR   WAGONER   commented   that    it   didn't   much   impact                                                               
ConocoPhillips, but it might hugely impact an independent.                                                                      
                                                                                                                                
MR. WENZEL agreed.                                                                                                              
                                                                                                                                
SENATOR  BEN STEVENS  switched direction  to Standard  and Poor's                                                               
recommendations   that  highlighted   capital  expenditures   for                                                               
ConocoPhillips were about $11.6 billion globally last year.                                                                     
                                                                                                                                
MS. KAH replied that sounded right.                                                                                             
                                                                                                                                
SENATOR BEN STEVENS asked how much of that was in Alaska.                                                                       
                                                                                                                                
MR. WENZEL replied about $700 million.                                                                                          
                                                                                                                                
SENATOR BEN  STEVENS asked if  ConocoPhillips has  budgeted about                                                               
$10 billion for capital expenditures in 2006.                                                                                   
                                                                                                                                
MS. KAH replied that sounded right.                                                                                             
                                                                                                                                
SENATOR  BEN STEVENS  asked  how  much of  that  was budgeted  in                                                               
Alaska.                                                                                                                         
                                                                                                                                
MR. WENZEL replied roughly HH $700 million again.                                                                               
                                                                                                                                
SENATOR  BEN  STEVENS  asked if  ConocoPhillips  had  spent  $700                                                               
million   a   year   consistently  regardless   of   its   global                                                               
percentages.                                                                                                                    
                                                                                                                                
MR. WENZEL replied that ConocoPhillips'  investment over the last                                                               
five  years  was closer  to  $2.5  billion,  an average  of  $500                                                               
million per year and stated:                                                                                                    
                                                                                                                                
     No,  I can't  say  that  we hold  $700  million as  our                                                                    
     capital  expenditure level  year-in and  year-out on  a                                                                    
     go-forward  basis. It's  dependent on  the projects  we                                                                    
     see and the economics of the projects.                                                                                     
                                                                                                                                
SENATOR  BEN STEVENS  asked  of the  $700  million allocated  for                                                               
expenditure in  2006, how much  was for exploration and  how much                                                               
was for maintenance and development.                                                                                            
                                                                                                                                
MR.  WENZEL replied  that  it  was in  the  neighborhood of  $100                                                               
million.                                                                                                                        
                                                                                                                                
SENATOR  BEN  STEVENS asked  for  a  breakout of  ConocoPhillips'                                                               
exploration,  development  and  production figures.  He  said  he                                                               
found a 1999 quote from a former chairman that said:                                                                            
                                                                                                                                
     'When  we look  beyond 1999'  - and  you remember  what                                                                    
     1999 was -  it was $12 oil  - he says -  'The future of                                                                    
     Alaska   will   be   shaped  on   four   factors:   the                                                                    
     availability of the resource  base, our cost structure,                                                                    
     oil  price  and  the   state's  fiscal  and  regulatory                                                                    
     polices.' The question  I have to ask is  how would you                                                                    
     rank those?                                                                                                                
                                                                                                                                
He said that they have  shown the committee that the availability                                                               
of  the  Alaska  resource  base doesn't  compare  on  the  global                                                               
perspective - at the  most 50 MB to 100 MB field,  maybe a 400 MB                                                               
field and  the cost  structure won't change.  The only  thing the                                                               
state can change  is its fiscal regime. "So,  when you're talking                                                               
to us,  you want to  tell us that  the most number  one important                                                               
thing is the thing that we can change!"                                                                                         
                                                                                                                                
MS. KAH  replied, "I  think I've  said that  is really  why we've                                                               
stayed in  Alaska all these years  - because we viewed  Alaska as                                                               
having a stable  fiscal regime.... And our  people aren't getting                                                               
shot at here either."                                                                                                           
                                                                                                                                
SENATOR  BEN   STEVENS  said,  "The   one  thing  that   has  the                                                               
flexibility for change  is what is before us  and the flexibility                                                               
to skew  that one way  or another off the  global competitiveness                                                               
is the tax  rate and the credit  rate. No matter what  we do here                                                               
in Juneau,  we're not going to  change the cost structure  of the                                                               
North Slope. No  matter what we do in Juneau,  we're not going to                                                               
increase the  probability of  finding the next  500 MB  field. He                                                               
emphasized that the  tax change only occurs every 17  to 25 years                                                               
and that is why Alaska is viewed as a stable regime.                                                                            
                                                                                                                                
He further noted that the $40  a barrel figures Senator Elton was                                                               
requesting were in the Department of Revenue's fiscal note.                                                                     
                                                                                                                                
SENATOR ELTON said he would check the fiscal note.                                                                              
                                                                                                                                
SENATOR  BEN STEVENS  said he  thought the  number one  issue was                                                               
fiscal stability.                                                                                                               
                                                                                                                                
5:06:35 PM                                                                                                                    
SENATOR  THERRIAULT asked  what the  crossover point  was between                                                               
the status quo and the PPT.                                                                                                     
                                                                                                                                
5:07:15 PM                                                                                                                    
MR. WENZEL  replied that their  estimate is around $25  under the                                                               
PPT.                                                                                                                            
                                                                                                                                
SENATOR THERRIAULT asked what the crossover point was at 25/20.                                                                 
                                                                                                                                
MR. WENZEL didn't have that number.                                                                                             
                                                                                                                                
CHAIR WAGONER asked  if there were further  questions. There were                                                               
none.  He thanked  everyone for  their comments.  There being  no                                                               
further business to  come before the committee,  he adjourned the                                                               
meeting at 5:08:27 PM.                                                                                                        

Document Name Date/Time Subjects