Legislature(2007 - 2008)BUTROVICH 205

10/24/2007 10:00 AM RESOURCES


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10:05:33 AM Start
10:06:25 AM SB2001
07:26:42 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change --
+= SB2001 OIL & GAS TAX AMENDMENTS TELECONFERENCED
Heard & Held
Industry Major Producers
ExxonMobil, BP, ConocoPhillips
-- Testimony <Invitation Only> --
Public Testimony at 6:15 - Time limit
may be set
                                                                                                                              
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        October 24, 2007                                                                                        
                           10:05 a.m.                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Charlie Huggins, Chair                                                                                                  
Senator Bert Stedman, Vice Chair                                                                                                
Senator Lyda Green                                                                                                              
Senator Gary Stevens                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Bill Wielechowski                                                                                                       
Senator Thomas Wagoner                                                                                                          
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Bettye Davis                                                                                                            
Senator Joe Thomas                                                                                                              
Senator Hollis French                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                              
SENATE BILL NO. 2001                                                                                                            
"An Act  relating to  the production  tax on oil  and gas  and to                                                               
conservation  surcharges  on oil;  relating  to  the issuance  of                                                               
advisory  bulletins and  the  disclosure  of certain  information                                                               
relating to the  production tax and the  sharing between agencies                                                               
of certain information relating to  the production tax and to oil                                                               
and gas or  gas only leases; amending the State  Personnel Act to                                                               
place in  the exempt service  certain state oil and  gas auditors                                                               
and their immediate supervisors; establishing  an oil and gas tax                                                               
credit  fund and  authorizing payment  from that  fund; providing                                                               
for retroactive  application of certain statutory  and regulatory                                                               
provisions  relating to  the production  tax on  oil and  gas and                                                               
conservation  surcharges on  oil;  making conforming  amendments;                                                               
and providing for an effective date."                                                                                           
     HEARD AND HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                              
BILL: SB2001                                                                                                                  
SHORT TITLE: OIL & GAS TAX AMENDMENTS                                                                                           
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
10/18/07       (S)       READ THE FIRST TIME - REFERRALS                                                                        
10/18/07       (S)       RES, JUD, FIN                                                                                          
10/19/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/19/07       (S)       Heard & Held                                                                                           
10/19/07       (S)       MINUTE(RES)                                                                                            
10/20/07       (S)       RES AT 8:00 AM BUTROVICH 205                                                                           
10/20/07       (S)       Heard & Held                                                                                           
10/20/07       (S)       MINUTE(RES)                                                                                            
10/21/07       (S)       RES AT 1:00 PM HOUSE FINANCE 519                                                                       
10/21/07       (S)       Heard & Held                                                                                           
10/21/07       (S)       MINUTE(RES)                                                                                            
10/22/07       (S)       RES AT 11:30 AM BUTROVICH 205                                                                          
10/22/07       (S)       Heard & Held                                                                                           
10/22/07       (S)       MINUTE(RES)                                                                                            
10/23/07       (S)       RES AT 9:00 AM BUTROVICH 205                                                                           
10/23/07       (S)       Heard & Held                                                                                           
10/23/07       (S)       MINUTE(RES)                                                                                            
10/24/07       (S)       RES AT 10:00 AM BUTROVICH 205                                                                          
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
CLAIRE FITZPATRICK, Senior Commercial Vice President                                                                            
BP Exploration (Alaska)                                                                                                         
Anchorage AK                                                                                                                    
POSITION STATEMENT: Testified on SB 2001.                                                                                     
                                                                                                                                
MIKE UTSLER, Senior Vice President for Greater Prudhoe Bay                                                                      
BP Exploration (Alaska)                                                                                                         
Anchorage AK                                                                                                                    
POSITION STATEMENT: Testified on SB 2001.                                                                                   
                                                                                                                                
KEVIN MITCHELL, Vice President of Finance and Administration                                                                    
ConocoPhillips Alaska                                                                                                           
Anchorage AK                                                                                                                    
POSITION STATEMENT: Testified on SB 2001.                                                                                   
                                                                                                                                
JIM TAYLOR, Vice President of Commercial Assets                                                                                 
ConocoPhillips Alaska                                                                                                           
Anchorage AK                                                                                                                    
POSITION STATEMENT: Testified on SB 2001.                                                                                   
                                                                                                                                
BO DARRAH, President                                                                                                            
Brooks Range Petroleum Company                                                                                                  
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed SB 2001.                                                                                          
                                                                                                                                
MARK SHARP                                                                                                                      
Fairbanks AK                                                                                                                    
POSITION STATEMENT: Supported SB 2001.                                                                                        
                                                                                                                                
JERRY WALKER                                                                                                                    
Fairbanks AK                                                                                                                    
POSITION STATEMENT: Opposed SB 2001.                                                                                          
                                                                                                                                
RICH SIEFERT                                                                                                                    
Fairbanks AK                                                                                                                    
POSITION STATEMENT: Supported SB 2001.                                                                                        
                                                                                                                                
TOM LAKOSH                                                                                                                      
Anchorage AK                                                                                                                    
POSITION STATEMENT: Opposed SB 2001.                                                                                          
                                                                                                                                
MERRICK PEIRCE                                                                                                                  
Fairbanks AK                                                                                                                    
POSITION STATEMENT: Opposed SB 2001.                                                                                          
                                                                                                                                
TOM MALONEY                                                                                                                     
Anchorage AK                                                                                                                    
POSITION STATEMENT: Supported SB 2001.                                                                                        
                                                                                                                                
PAUL KENDALL                                                                                                                    
Representing himself                                                                                                            
POSITION STATEMENT: Testified on SB 2001.                                                                                     
                                                                                                                                
TONY TENGS                                                                                                                      
Juneau AK                                                                                                                       
POSITION STATEMENT: Supported SB 2001.                                                                                        
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  CHARLIE  HUGGINS  called  the  Senate  Resources  Standing                                                             
Committee meeting  to order at  10:05:33 AM. Present at  the call                                                             
to  order were  Senators Green,  Stevens, Wagoner,  Wielechowski,                                                               
and Chair Huggins.                                                                                                              
                                                                                                                                
                SB2001-OIL & GAS TAX AMENDMENTS                                                                             
                                                                                                                                
10:06:25 AM                                                                                                                   
CHAIR HUGGINS announced SB 2001 to be up for consideration.                                                                     
                                                                                                                                
CLAIRE FITZPATRICK,  Commercial Senior  Vice President for  BP in                                                               
Alaska, introduced Mike  Utsler, Senior Vice President  for BP in                                                               
Prudhoe Bay.                                                                                                                    
                                                                                                                                
She  said that  the  debate is  about  Alaska's economic  future;                                                               
production  is declining  and  the  state and  BP  have a  common                                                               
objective  in trying  to minimize  that.  BP wants  to focus  the                                                               
conversation  on  Alaska's  resources and  associated  costs  and                                                               
geography. BP  supports the  net tax basis  although the  rate is                                                               
too  high;  the  principle  behind   the  tax  was  to  encourage                                                               
investment  and get  more  barrels into  the  pipeline. BP  makes                                                               
investments for  the short, medium  and long terms; it  won't say                                                               
no to investment  because of an increase in taxes  or walk out on                                                               
the business. Ultimately  it is a decision for the  state to make                                                               
about tax policy, and whether  it is increasing or decreasing the                                                               
desired  effect; tax  policy changes  the  scale and  pace of  an                                                               
activity.                                                                                                                       
                                                                                                                                
10:10:06 AM                                                                                                                   
SENATOR  STEVENS  asked  for clarification  of  Ms.  Fizpatrick's                                                               
position within BP.                                                                                                             
                                                                                                                                
MS.   FITZPATRICK  replied   that  she   looks  after   financial                                                               
reporting, planning,  taxes, supply  chains, and  other financial                                                               
areas; her position is similar to that of a CFO.                                                                                
                                                                                                                                
10:11:44 AM                                                                                                                   
She said  that BP's key message  is that production is  the major                                                               
factor in  determining state  revenue for  the future  years, and                                                               
the goal  is to  stem the decline.  Changes in  production impact                                                               
royalties,  which can  be  more important  than  taxes. A  fiscal                                                               
policy dependent  on price is  not the best  approach. Investment                                                               
in development  is key to  stemming the decline. BP  is concerned                                                               
about fiscal stability  because three tax changes  in three years                                                               
doesn't seem stable.                                                                                                            
                                                                                                                                
10:13:04 AM                                                                                                                   
SENATOR WAGONER asked Ms. Fitzpatrick to list the changes.                                                                      
                                                                                                                                
MS.  FITZPATRICK said  the first  was the  Economic Limit  Factor                                                               
(ELF)  aggregation,  the  objective  of  which  was  to  increase                                                               
revenue  to  the  state.  The  PPT change  came  second  and  the                                                               
proposed PPT change would be the third.                                                                                         
                                                                                                                                
SENATOR  WAGONER responded  that the  ELF aggregation  was not  a                                                               
change in tax structure, but a change in administrative policy.                                                                 
                                                                                                                                
MS. FITZPATRICK replied that that was his perspective.                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI asked when the  last change was before those                                                               
being discussed.                                                                                                                
                                                                                                                                
10:15:03 AM                                                                                                                   
MS.  FITZPATRICK replied  there had  been a  period of  stability                                                               
previous to that and offered to give more detail later.                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI  said he  heard 1989  mentioned as  the last                                                               
year in  which a change was  made and only one  change since 1989                                                               
seemed pretty stable to him.                                                                                                    
                                                                                                                                
MS. FITZPATRICK  said she bases  current investment  decisions on                                                               
current news.                                                                                                                   
                                                                                                                                
10:16:14 AM                                                                                                                   
SENATOR WIELECHOWSKI asked  if BP has a defined pool  of money it                                                               
uses to  invest around the world  or if the amounts  invested are                                                               
flexible.                                                                                                                       
                                                                                                                                
MS.  FITZPATRICK  replied BP  doesn't  have  an infinite  pot  of                                                               
money. Its  financial group decides what  investment framework is                                                               
appropriate  for  the entire  company.  It  considers debt  rates                                                               
because  the   company  is  severely  impacted   by  prices.  The                                                               
investment  community   expects  to  see  prudence.   BP  made  a                                                               
strategic  decision to  invest  in Libya,  but  that didn't  take                                                               
money away from other locations.  Alaska gets money by presenting                                                               
the London office  with a robust business plan; a  good plan will                                                               
mean more money over time.                                                                                                      
                                                                                                                                
10:18:18 AM                                                                                                                   
SENATOR WIELECHOWSKI said  he was trying to figure  out if Alaska                                                               
is  in competition  with  other countries  or  if any  profitable                                                               
project would be developed. His  concern was that a higher profit                                                               
margin   elsewhere   would  mean   respectively   less-profitable                                                               
projects wouldn't be developed.                                                                                                 
                                                                                                                                
MS. FITZPATRICK responded  that she would attempt  to answer that                                                               
question later in the meeting.                                                                                                  
                                                                                                                                
CHAIRMAN  HUGGINS   remarked  that  Senators   McGuire,  Stedman,                                                               
Hoffman, and Thomas were present.                                                                                               
                                                                                                                                
10:20:40 AM                                                                                                                   
MS. FITZPATRICK said  that there are resources  that haven't been                                                               
discovered in Alaska,  but the bulk of  opportunity within Alaska                                                               
is within its  known resources. BP is working on  how to actually                                                               
extract them  economically. The debate should  be around creating                                                               
the environment that basically allows them to be accessed.                                                                      
                                                                                                                                
10:21:19 AM                                                                                                                   
She then referenced  a slide showing how  production has declined                                                               
in recent  years, as well  as the related investment  numbers; BP                                                               
invested in  100 wells on  the North Slope  in 2007 and  hopes to                                                               
invest in 100 more in the next year.                                                                                            
                                                                                                                                
SENATOR WAGONER asked if those wells are exploratory in nature.                                                                 
                                                                                                                                
MS. FITZPATRICK  replied that  BP does  not use  true exploratory                                                               
wells.                                                                                                                          
                                                                                                                                
SENATOR WAGONER asked how many  wells deal with heavy and viscous                                                               
oil.                                                                                                                            
                                                                                                                                
MS.  FITZPATRICK   replied  BP  isn't  currently   producing  the                                                               
thickest heavy oil; it has only one such pilot well.                                                                            
                                                                                                                                
10:24:15 AM                                                                                                                   
MIKE UTSLER, Senior Vice President  for BP Exploration in Prudhoe                                                               
Bay,  said  a  percentage  of  BP's  program  is  geared  towards                                                               
developing viscous oil in Prudhoe Bay.                                                                                          
                                                                                                                                
SENATOR STEVENS asked how the unknown is defined.                                                                               
                                                                                                                                
MS.   FITZPATRICK   replied    that   she   examines   production                                                               
projections; 70 percent  of production in coming  years will come                                                               
from  the Prudhoe  and  Kuparuk fields,  which  will include  the                                                               
viscous  and the  heavy oils.  The exploratory  opportunities are                                                               
unknown  by  nature; the  response  to  that question  will  thus                                                               
change over time.                                                                                                               
                                                                                                                                
SENATOR  STEVENS asked  if she  was including  the land  becoming                                                               
exposed through global warming in her estimates.                                                                                
                                                                                                                                
MS. FITZPATRICK replied  that she does not  take her calculations                                                               
to extremes.                                                                                                                    
                                                                                                                                
10:28:24 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked if her  figures were in  2006 dollars                                                               
or actual dollars per year.                                                                                                     
                                                                                                                                
MS.  FITZPATRICK replied  that  the history  of  spending was  in                                                               
actual dollars spent.                                                                                                           
                                                                                                                                
SENATOR WIELECHOWSKI asked  if the rate of  decline will increase                                                               
or  decrease with  the Alaska's  Clear and  Equitable Share  plan                                                               
(ACES). He  added that  there were many  years of  low production                                                               
taxes, and when the tax increased so did the production.                                                                        
                                                                                                                                
MS. FITZPATRICK said she couldn't  predict what the decline would                                                               
be if  the current bill was  passed. The economic outcome  is one                                                               
of the factors  she takes into consideration, and  overall it's a                                                               
hugely complicated  balancing act, and all  decisions aren't made                                                               
at the same  price. Increasing taxes will  decrease economics and                                                               
the decline curve  will probably become steeper,  she opined, but                                                               
then added that technology has changed  so BP can do more and now                                                               
prices have gone up.                                                                                                            
                                                                                                                                
10:31:43 AM                                                                                                                   
SENATOR WAGONER  said he doesn't  want to have to  recoup revenue                                                               
in hindsight  and asked how  the state would keep  that situation                                                               
from happening again.                                                                                                           
                                                                                                                                
MS. FITZPATRICK  said the current  PPT was designed  to stimulate                                                               
investment  and her  personal view  is that  BP's investment  has                                                               
increased. The oil industry doesn't  revolve on annual cycles; so                                                               
the effect of investments doesn't show immediately.                                                                             
                                                                                                                                
10:33:19 AM                                                                                                                   
SENATOR WAGONER asked what percentage  of the investment increase                                                               
is the result of inflation costs.                                                                                               
                                                                                                                                
MS. FITZPATRICK replied that she  would address that issue later.                                                               
She said that  800 wells have been drilled in  Prudhoe Bay in the                                                               
last 10  years. Drilling a  well now  is different than  10 years                                                               
ago; to  get the same production  rate a company must  drill more                                                               
wells in the future.                                                                                                            
                                                                                                                                
SENATOR STEVENS asked if BP alone drilled 800 wells.                                                                            
                                                                                                                                
MS. FITZPATRICK replied that was  the total number drilled by all                                                               
investors in the bay.                                                                                                           
                                                                                                                                
10:35:41 AM                                                                                                                   
CHAIR  HUGGINS asked  for an  explanation  of what  water in  the                                                               
wells means.                                                                                                                    
                                                                                                                                
MS. FITZPATRICK replied that she  would cover that issue later in                                                               
her presentation  if that  was alright.  She then  showed another                                                               
slide   regarding  how   declining  production   decreases  state                                                               
revenues. She stated  that 6 percent is the  current decline; the                                                               
DOR is forecasting 1 percent over  10 years and 3 percent over 20                                                               
years.                                                                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI  asked for how  she got the $25  billion and                                                               
$70 billion figures.                                                                                                            
                                                                                                                                
MS. FITZPATRICK explained how those  numbers were estimates based                                                               
on what the administration had presented.                                                                                       
                                                                                                                                
10:38:18 AM                                                                                                                   
SENATOR WIELECHOWSKI asked how accurate the numbers were.                                                                       
                                                                                                                                
MS. FITZPATRICK  replied that she  hasn't had the  opportunity to                                                               
fully scrutinize them.                                                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI  asked if  she could  create a  fiscal model                                                               
for the legislature.                                                                                                            
                                                                                                                                
MS. FITZPATRICK  said she would be  happy to do so;  the model is                                                               
not complicated.                                                                                                                
                                                                                                                                
SENATOR  WIELECHOWSKI  said  perhaps the  Department  of  Revenue                                                               
(DOR) should do so.                                                                                                             
                                                                                                                                
MS. FITZPATRICK said she is trying to work with the DOR.                                                                        
                                                                                                                                
10:40:42 AM                                                                                                                   
MR.  UTSLER  explained that  Prudhoe  Bay  is still  the  largest                                                               
producing field  in North  America. BP  believes Prudhoe  Bay has                                                               
another 50  years of possible production  and it is at  the heart                                                               
of that future. He then described the area.                                                                                     
                                                                                                                                
SENATOR WIELECHOWSKI asked him to  detail the number of wells and                                                               
their success rates.                                                                                                            
                                                                                                                                
MR.  UTSLER  replied that  the  2,500  wells include  dry  holes;                                                               
currently 1,200 of them are active.                                                                                             
                                                                                                                                
SENATOR WIELECHOWSKI asked if 50 percent is a high success rate.                                                                
                                                                                                                                
MR. UTSLER  replied no;  an 80  percent success  rate is  what BP                                                               
expects. Historically, that is the range in Prudhoe Bay.                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI asked how that  compares to success rates in                                                               
other parts of the world.                                                                                                       
                                                                                                                                
MR.  UTSLER replied  that  80 percent  is  consistent around  the                                                               
world.                                                                                                                          
                                                                                                                                
10:47:30 AM                                                                                                                   
SENATOR MCGUIRE asked if he has worked in tar sands.                                                                            
                                                                                                                                
MR. UTSLER replied no, but he has studied them.                                                                                 
                                                                                                                                
SENATOR  MCGUIRE said  she and  Senator Wagoner  were in  such an                                                               
area, and  the technology  just wasn't  there. The  Calgary heavy                                                               
oil industry is  now taking off. She asked if  that area could be                                                               
compared to Prudhoe Bay.                                                                                                        
                                                                                                                                
MR.  UTSLER replied  that BP  believes in  an exciting  heavy oil                                                               
future   for  Alaska,   but  there   are  technical   and  fiscal                                                               
challenges. He said  he would talk about the  ability to leverage                                                               
the Alberta technologies, and emphasized  that a robust supply of                                                               
light oil  is needed to  develop heavy  oil; the latter  can't be                                                               
developed independently.                                                                                                        
                                                                                                                                
10:51:03 AM                                                                                                                   
SENATOR STEVENS  said he wanted  to confirm the  speculation that                                                               
moving west from  Prudhoe Bay would lead to finding  more gas and                                                               
less oil.                                                                                                                       
                                                                                                                                
MR. UTSLER replied  that BP believes that the  development of the                                                               
hydrocarbon  basin of  the  North Slope  basin  suggests that  in                                                               
moving westward,  the probability of finding  oil with associated                                                               
gas  is  greater.  Because  of  the  fundamental  nature  of  the                                                               
depositional  environment,  BP  would   expect  a  more  gas-rich                                                               
terrain, probably including associated liquids.                                                                                 
                                                                                                                                
10:53:00 AM                                                                                                                   
SENATOR  WAGONER  noted that  when  he  was  at  an oil  and  gas                                                               
symposium in  Anchorage, BP  made a  presentation on  viscous and                                                               
heavy oil, which would be useful to the committee.                                                                              
                                                                                                                                
MR.  UTSLER  replied  that  he  would be  sharing  some  of  that                                                               
information  with them  and a  group  was being  put together  to                                                               
address the issue of heavy oil.                                                                                                 
                                                                                                                                
10:54:38 AM                                                                                                                   
He  then talked  about a  slide showing  the cumulative  recovery                                                               
since  1977  with changes  in  technology  noted along  the  way.                                                               
Originally Prudhoe  Bay was expected  to be a 25-year  oil field,                                                               
he said,  and currently it may  produce for a total  of 80 years.                                                               
Such a  field requires  tremendous investments  and technological                                                               
developments. Over  time, $19 billion  in capital has  been spent                                                               
to develop the greater bay, not including operating costs.                                                                      
                                                                                                                                
SENATOR  WAGONER  asked if  that  number  included all  partners'                                                               
investments.                                                                                                                    
                                                                                                                                
MR. UTSLER replied that it did.                                                                                                 
                                                                                                                                
SENATOR WIELECHOWSKI  asked what the  total profit has  been over                                                               
the Prudhoe Bay's development period.                                                                                           
                                                                                                                                
MR. UTSLER replied  that he didn't have an answer;  the field has                                                               
been  profitable in  some years,  but not  others. Overall  it is                                                               
profitable and continues to justify increasing investment.                                                                      
                                                                                                                                
11:01:59 AM                                                                                                                   
He then referenced water production  in the drilling process, and                                                               
explained that  water and gas  must be separated  and re-injected                                                               
to maintain  pressure. Even though  oil production  is declining,                                                               
the amount of fluids is actually  increasing; but, much of it has                                                               
no economic value  and disposal is costly. However,  it allows BP                                                               
to continue to produce oil for a longer period of time.                                                                         
                                                                                                                                
He said  that Prudhoe Bay  has the  largest gas plant  complex in                                                               
the world and managing it has many challenges.                                                                                  
                                                                                                                                
11:04:07 AM                                                                                                                   
SENATOR  WIELECHOWSKI asked  how many  barrels of  oil have  been                                                               
produced from Prudhoe Bay.                                                                                                      
                                                                                                                                
MR. UTSLER replied that 11.5 billion barrels have been produced.                                                                
                                                                                                                                
SENATOR WIELECHOWSKI asked if the cost was $1.55 per barrel.                                                                    
                                                                                                                                
MR. UTSLER  replied that  would be  the capital  costs; operating                                                               
costs would  add to that. He  said he would return  to that topic                                                               
later in the presentation.                                                                                                      
                                                                                                                                
11:05:32 AM                                                                                                                   
He  referenced another  slide to  show the  well bores  that have                                                               
been  drilled, and  how the  field is  in an  anticline. He  then                                                               
explained the  geography of  the reservoirs, and  how the  oil is                                                               
recovered from them.                                                                                                            
                                                                                                                                
11:07:30 AM                                                                                                                   
SENATOR  WAGONER asked  at what  pressure reduction  the gas  cap                                                               
loses efficacy.                                                                                                                 
                                                                                                                                
MR.  UTSLER replied  that  the issue  is  complex; overall,  when                                                               
there is no more gas in the  oil, the oil becomes harder to lift.                                                               
That  situation  would  require  a  new  sort  of  mechanism  for                                                               
removing the oil from the ground.                                                                                               
                                                                                                                                
SENATOR  STEVENS asked  if  the  existence of  a  gas line  would                                                               
inhibit oil extraction.                                                                                                         
                                                                                                                                
MR. UTSLER  replied that BP  is working  with the Alaska  Oil and                                                               
Gas Commission (AOGC) to determine  the optimal level of gas off-                                                               
take; regardless, there  will be an impact  to production decline                                                               
of oil reservoirs.  That can be offset somewhat by  water, but it                                                               
is only partially  effective. The oil industry and  the state are                                                               
working together to figure out that issue.                                                                                      
                                                                                                                                
CHAIR HUGGINS commented that the answer is always dynamic.                                                                      
                                                                                                                                
MR UTSLER agreed.                                                                                                               
                                                                                                                                
CHAIR HUGGINS asked if CO2 could be injected as a substitute.                                                                   
                                                                                                                                
11:11:39 AM                                                                                                                   
MR. UTSLER  replied that  CO2 flooding could  be used  to enhance                                                               
oil  recovery  from some  reservoirs.  The  disadvantage is  that                                                               
there will be an additional cost to remove the CO2.                                                                             
                                                                                                                                
11:12:36 AM                                                                                                                   
He explained that  only 30 wells re-inject gas back  into the gas                                                               
cap; part of the reservoir  is produced with gravity drainage. He                                                               
then explained  the mechanisms  of oil  extraction and  how water                                                               
flooding helps that.                                                                                                            
                                                                                                                                
11:14:04 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked how  Mr. Utsler defined  a successful                                                               
return rate.                                                                                                                    
                                                                                                                                
MR.  UTSLER   replied  that   success  means   finding  projected                                                               
hydrocarbons and bringing them to  the surface; technical success                                                               
doesn't necessarily mean  economic success. BP looks  at the well                                                               
modeling and  the costs  to drill and  develop versus  the volume                                                               
the  well  will  recover;  that   results  in  an  economic  life                                                               
scenario.                                                                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI asked for an average barrel number.                                                                        
                                                                                                                                
MS. FITZPATRICK responded that sometimes  assessments are done on                                                               
a single-well basis,  but often assessments have to be  done on a                                                               
program  basis  to  keep  the   calculations  from  becoming  too                                                               
unwieldy.                                                                                                                       
                                                                                                                                
11:16:29 AM                                                                                                                   
MR. UTSLER explained that BP has  drilled 70 wells in Prudhoe Bay                                                               
in 2007 on the basis of a program expectation.                                                                                  
                                                                                                                                
11:17:04 AM                                                                                                                   
CHAIRMAN   HUGGINS   called   an   at-ease   due   to   technical                                                               
difficulties.                                                                                                                   
                                                                                                                                
11:26:18 AM                                                                                                                   
CHAIR HUGGINS called the meeting back to order.                                                                                 
                                                                                                                                
MR. UTSLER  said even a field  with 30 years of  history presents                                                               
challenges in moving forward.                                                                                                   
                                                                                                                                
11:28:13 AM                                                                                                                   
He  then referenced  a slide  regarding water  injection projects                                                               
and pressure  history. Pressure  began to  flatten over  a recent                                                               
period and now BP is looking  at different, more specific ways of                                                               
injection. The  longer the pressure profile  can remain flattened                                                               
the  better  the  recovery.  BP  has  had  to  initiate  seawater                                                               
injection,  putting  900,000  barrels of  filtered,  cleaned  and                                                               
chemically  treated   seawater  into  the   reservoirs.  Seawater                                                               
injection was  started in 1985.  As the field has  evolved, water                                                               
produced  from  drilling  wasn't   enough  and  BP  brought  back                                                               
seawater injection.                                                                                                             
                                                                                                                                
11:32:29 AM                                                                                                                   
He said  that BP and the  state are dealing with  a common enemy,                                                               
in terms of declining production. There  is a need to continue to                                                               
find ways  of recovering oil  to keep the industry  going; fields                                                               
need  continued investment.  Just a  1 percent  improvement means                                                               
250 million barrels of oil over the next 50 years.                                                                              
                                                                                                                                
11:34:22 AM                                                                                                                   
CHAIR HUGGINS commented that BP is  now handling as much water as                                                               
oil and  that salt  water is  now being used.  He added  that the                                                               
that technology has extended the  life of the field significantly                                                               
and the  challenge is  that they are  much more  significant than                                                               
people realize.                                                                                                                 
                                                                                                                                
SENATOR WAGONER asked  for the dollar amount that  BP budgets per                                                               
well in the field.                                                                                                              
                                                                                                                                
MR. UTSLER  replied that BP  uses a  range of different  types of                                                               
wells, and said he would  explain those different wells and their                                                               
cost structures later in the presentation.                                                                                      
                                                                                                                                
SENATOR STEVENS  asked if BP had  expected a recovery rate  of 45                                                               
percent but is currently operating at 57 percent.                                                                               
                                                                                                                                
MR.  UTSLER  agreed.  The  original estimates  pointed  to  a  45                                                               
percent rate.                                                                                                                   
                                                                                                                                
SENATOR STEVENS asked if 1 percent equal 250 million barrels.                                                                   
                                                                                                                                
MR. UTSLER replied yes.                                                                                                         
                                                                                                                                
SENATOR STEVENS asked what important discoveries they came from.                                                                
                                                                                                                                
MR.  UTSLER replied  for example  that  the Liberty  field BP  is                                                               
proposing to develop  is a 100-million barrel  resource. That was                                                               
discovered years ago  and it's going to take five  to seven years                                                               
to develop. It  would get 30,000 to 40,000  barrels of production                                                               
for the 100 million barrels.                                                                                                    
                                                                                                                                
11:39:50 AM                                                                                                                   
He then referenced another slide  and discussed how BP is working                                                               
for the future;  it is trying to develop a  mechanism that allows                                                               
water to move into restricted  areas, and is looking at injecting                                                               
polymers that solidify with rising  temperature and swell to form                                                               
a plug  for the  water. It is  also experimenting  with different                                                               
techniques  in  three particular  wells,  and  might recover  1.8                                                               
million barrels more.                                                                                                           
                                                                                                                                
He  then  explained  another mechanism  that  involves  injecting                                                               
miscible gas  to wells,  which picks  up molecules  of oil  as it                                                               
moves through the water.                                                                                                        
                                                                                                                                
11:47:07 AM                                                                                                                   
SENATOR GREEN  asked how  they know  for sure  that the  water is                                                               
going to the desired pipe.                                                                                                      
                                                                                                                                
MR. UTSLER replied  that in a miscible sense on  the diagram, she                                                               
would see a fine surface of  oil [irreducible oils] left as water                                                               
is moved through. As the gas  comes through, as opposed to water,                                                               
it  is attracted  to the  surface of  oil. It  actually literally                                                               
strips  off  a few  more  drops.  That  mechanism is  costly  and                                                               
inefficient  in the  sense that  it doesn't  bring large  barrels                                                               
with it,  but it brings  more. So,  one can take  irreducible oil                                                               
saturations of 19 - 20 percent down to 16 or 17 percent.                                                                        
                                                                                                                                
SENATOR GREEN asked if BP developed the polymer procedure.                                                                      
                                                                                                                                
MR.  UTSLER replied  that it  was developed  by the  industry and                                                               
several different companies were testing it.                                                                                    
                                                                                                                                
SENATOR STEVENS  asked if  the companies  could recover  both the                                                               
polymer and the miscible gas.                                                                                                   
                                                                                                                                
MR. UTSLER replied that the  company doesn't recover the polymer;                                                               
it wants it to stay in the  ground. In theory the miscible gas is                                                               
stripped  during use  and it  has  to be  re-enriched before  re-                                                               
injection  into the  ground. BP  constantly has  to use  existing                                                               
product to be able to return the miscible gas to the reservoir.                                                                 
                                                                                                                                
11:51:40 AM                                                                                                                   
He emphasized  that there is  a continuing challenge  against the                                                               
backdrop of a continually declining  reservoir; this challenge is                                                               
how to encourage  the type of investment it will  take to get the                                                               
production.                                                                                                                     
                                                                                                                                
11:52:46 AM                                                                                                                   
MR.  UTSLER then  referenced a  slide showing  underlying decline                                                               
and  how that  will continue  if  new investments  are not  made.                                                               
Contributions from  new wells have greatly  increased production,                                                               
he said. The oil production would be  half of what it is today if                                                               
BP had stopped drilling in 2003.  Keeping the decline in check is                                                               
very costly.                                                                                                                    
                                                                                                                                
SENATOR WAGONER asked  if oil would stop flowing in  six years if                                                               
there was  no technological advancement, and  commented that that                                                               
seemed unlikely to him.                                                                                                         
                                                                                                                                
MR.  UTSLER replied  that the  field would  not disappear  within                                                               
that period  of time, but  maintaining a set level  of production                                                               
begs  the   question  of  when   that  production   would  become                                                               
uneconomic.                                                                                                                     
                                                                                                                                
11:57:52 AM                                                                                                                   
SENATOR WIELECHOWSKI  asked for  clarification on  the investment                                                               
chart before the committee.                                                                                                     
                                                                                                                                
MR.  UTSLER replied  in clarifying  BP's  investment figures.  He                                                               
explained  that each  year the  problem  of declining  production                                                               
worsens.                                                                                                                        
                                                                                                                                
12:00:20 PM                                                                                                                   
CHAIR HUGGINS asked him to explain an element of the graph.                                                                     
                                                                                                                                
MR.  UTSLER  said  that  the  400  wells  drilled  by  2007  have                                                               
contributed 50 percent of the total production stream.                                                                          
                                                                                                                                
CHAIR HUGGINS  stated that Alaskans  need to understand  that new                                                               
production  within  the  legacy  fields  needs  to  continue  and                                                               
investment is needed.                                                                                                           
                                                                                                                                
MR. UTSLER  agreed and added  that activity in the  legacy fields                                                               
needs to be  not only maintained, but  accelerated. Their capital                                                               
spending  in greater  Prudhoe Bay  over the  past four  years has                                                               
increased from $400  million per year to next  year's proposed $1                                                               
billion. They are spending more money to mitigate that decline.                                                                 
                                                                                                                                
CHAIR HUGGINS said that the  consequences of misunderstanding the                                                               
importance of the legacy fields could be dramatic.                                                                              
                                                                                                                                
SENATOR WIELECHOWSKI  asked if the  numbers on the chart  were in                                                               
real dollars or discounted.                                                                                                     
                                                                                                                                
MR. UTSLER  answered that  the numbers were  meant to  be equally                                                               
weighted. It is  meant to demonstrate $250 million  spent in 2002                                                               
versus $250 million spent in 2007 has resulted in the decline.                                                                  
                                                                                                                                
SENATOR  WIELECHOWSKI asked  how much  the dollar  value declined                                                               
between 2002 and 2007.                                                                                                          
                                                                                                                                
MS. FITZPATRICK said  that she would be happy to  get back to him                                                               
with that number.                                                                                                               
                                                                                                                                
12:05:22 PM                                                                                                                   
SENATOR MCGUIRE asked for an  explanation of a dip in exploration                                                               
in July 2006.                                                                                                                   
                                                                                                                                
MR.  UTSLER explained  that the  dip was  a result  of a  partial                                                               
shutdown of Prudhoe Bay due to an oil leak.                                                                                     
                                                                                                                                
12:06:20 PM                                                                                                                   
SENATOR STEDMAN asked if it  isn't normal for the major producers                                                               
to move  out and  let smaller  companies enter  the field  in the                                                               
case of oil production decline.                                                                                                 
                                                                                                                                
MR.  UTSLER  replied  that  the   question  was  a  complex  one;                                                               
normally, a  smaller operator  couldn't afford  to pay  to manage                                                               
the infrastructure  on a field  like Prudhoe Bay. It  will likely                                                               
remain  in  the  hands  of  the  larger  companies,  and  smaller                                                               
independents will play off that infrastructure.                                                                                 
                                                                                                                                
CHAIR HUGGINS  announced a recess  at 12:10:00 PM and  called the                                                             
meeting back to order at 1:15:09 PM.                                                                                          
                                                                                                                                
MR. UTSLER  recapped his  technical review  of the  legacy fields                                                               
and the challenges  of finding the resource and  carrying it into                                                               
the future.                                                                                                                     
                                                                                                                                
1:16:09 PM                                                                                                                    
He referenced  a slide regarding seismic  imaging and directional                                                               
drilling  enabling   development,  and   explained  how   BP  has                                                               
developed  a  way  to  drill   vertically  and  then  in  another                                                               
direction.  This method  has  allowed BP  to  unlock smaller  and                                                               
smaller resources.  He explained  that up  to five  lateral bores                                                               
can be drilled using one vertical well.                                                                                         
                                                                                                                                
SENATOR STEVENS asked  if BP could laterally  drill from existing                                                               
wells.                                                                                                                          
                                                                                                                                
MR.  UTSLER replied  that it  could, by  using coil  drilling. BP                                                               
could drill  out about  8,000 feet today  and drill  within three                                                               
feet  of a  target. He  then talked  about the  use of  injection                                                               
wells  and  the high  costs  of  those,  and  how they  are  most                                                               
effective in producing  the viscous oil in the  western region of                                                               
Prudhoe Bay.                                                                                                                    
                                                                                                                                
1:22:18 PM                                                                                                                    
He explained  that viscous oil  is lighter than heavy  oil, which                                                               
is the  consistency of peanut  butter. Viscous oil can  be pushed                                                               
with  water,  but heavy  oil  cannot.  The biggest  challenge  in                                                               
developing viscous oil is the needed technology.                                                                                
                                                                                                                                
1:24:44 PM                                                                                                                    
CHAIR  HUGGINS asked  about  the cost  differential  in terms  of                                                               
processing different types of oil.                                                                                              
                                                                                                                                
MR. UTSLER replied that viscous  oil means another $15 million in                                                               
facilities costs.                                                                                                               
                                                                                                                                
CHAIR  HUGGINS  commented that  the  entire  business of  getting                                                               
viscous oil to market is complicated.                                                                                           
                                                                                                                                
MR. UTSLER  gave an  example of  how viscous  oil wells  are more                                                               
expensive to drill and that it  couldn't be done 10 years ago. If                                                               
you were to drill five vertical  wells to get to five zones, each                                                               
well is on an average of $5 million  to $6 million - or about $25                                                               
million  to $30  million. Using  the new  technology, they  could                                                               
drill one  well bore for  $13 million to $15  million. Offsetting                                                               
that, though, they would have  to drill three additional injector                                                               
wells  at a  cost of  about $5  million each.  The facilities  to                                                               
handle  the  viscous  oil including  pipe,  separation  and  heat                                                               
necessary  to handle  viscous oil  wells would  cost another  $15                                                               
million plus.  Collectively it's a  higher cost and the  only way                                                               
to develop viscous oil at scale  currently is to use this type of                                                               
technology. It takes  two times as long to  drill as conventional                                                               
wells, around 60 days. So they  can only reasonably drill five to                                                               
six a  year. Only  three rigs  currently on  the North  Slope can                                                               
drill this  kind of well.  This is  how greater Prudhoe  Bay will                                                               
continue to be developed.                                                                                                       
                                                                                                                                
CHAIR HUGGINS asked,  "When you drill laterally, is  that in your                                                               
tabulation as well or is it just a lateral drill?"                                                                              
                                                                                                                                
MR. UTSLER  explained that viscous  oil is  predominantly located                                                               
in the  legacy fields  in between  and on  the western  plains of                                                               
Prudhoe Bay. Since  2000 these technologies have  helped four new                                                               
reservoirs  to start  producing. He  said that  BP is  working as                                                               
operator with its working interest  owners to develop the viscous                                                               
oil potential. By  the end of this year or  the beginning of next                                                               
year  they will  have  a  $2.1 billion  proposal  to develop  new                                                               
facilities  at the  surface to  deal  with the  viscous oil,  the                                                               
development  and  drilling  of  new viscous  wells  and  all  the                                                               
facilities  necessary  to  support  that. This  will  unlock  250                                                               
million plus or minus barrels of new oil.                                                                                       
                                                                                                                                
1:30:42 PM                                                                                                                    
SENATOR  MCGUIRE  commented  that  Alaskans  have  a  sense  that                                                               
there's no hope for the future  of the oil fields, and people say                                                               
that  BP is  not  investing  in Alaska.  Hearing  talk about  new                                                               
developments is exciting  and hopefully it will  make people more                                                               
optimistic.                                                                                                                     
                                                                                                                                
MS. FITZPATRICK said some of  BP's investments aren't necessarily                                                               
visible, but they are there regardless  and there is a future for                                                               
oil in Alaska.                                                                                                                  
                                                                                                                                
MR.  UTSLER added  that  BP  believes in  the  50-year future  of                                                               
Alaskan oil production, and is  adding new employees all the time                                                               
to plan  for tomorrow and  the future. It has  a lot of  pride in                                                               
the oil field  work as well as much awareness  and sensitivity to                                                               
the environment.                                                                                                                
                                                                                                                                
SENATOR WAGONER remarked  that the sensitivity is due  to a zero-                                                               
tolerance  policy,  and  the  industry has  not  always  been  so                                                               
sensitive.                                                                                                                      
                                                                                                                                
1:34:28 PM                                                                                                                    
MR. UTSLER went on to  describe the tremendous potential of heavy                                                               
oil production in Alaska, and  showed slides about the history of                                                               
such production.                                                                                                                
                                                                                                                                
1:36:23 PM                                                                                                                    
He explained  that heavy oil  isn't as  valuable as light  oil in                                                               
the  marketplace;  the differential  is  up  to $14/barrel.  Most                                                               
refineries are not  designed to process the heavy  oils and would                                                               
need retooling,  so the oil is  more costly to refine  for use in                                                               
the marketplace as well.                                                                                                        
                                                                                                                                
1:38:09 PM                                                                                                                    
SENATOR  WAGONER said  it would  seem more  appropriate to  try a                                                               
preliminary  process in  the field;  transportation of  heavy oil                                                               
will eat into the profit.                                                                                                       
                                                                                                                                
MR. UTSLER said it is not  economically feasible. It will have to                                                               
be mixed  with lighter  oils to  be thin  enough to  move through                                                               
TAPS.  Getting it  out of  the reservoir  has to  be figured  out                                                               
first. Each step requires development of expensive technologies.                                                                
                                                                                                                                
1:40:47 PM                                                                                                                    
MR. UTSLER  said the majority of  that resource base sits  in the                                                               
legacy fields.  Injecting diesel, solvents, and  steam stimulates                                                               
production.                                                                                                                     
                                                                                                                                
SENATOR WAGONER asked how deeply buried the heavy oil is.                                                                       
                                                                                                                                
MR. UTSLER  replied that it is  between 1500 and 3000  feet below                                                               
the surface,  below the  permafrost. The  heavy oil  will require                                                               
many more  wells and a  way to mix the  heavy oil with  the light                                                               
oil at  roughly a  one to  one ratio to  move through  the Trans-                                                               
Alaska Pipeline System (TAPS).                                                                                                  
                                                                                                                                
1:43:58 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked how much the  increased capital costs                                                               
for heavy oil would be.                                                                                                         
                                                                                                                                
MR.  UTSLER replied  he  couldn't estimate  that  number at  this                                                               
stage in the process; BP is still developing its first well.                                                                    
                                                                                                                                
MS.  FITZPATRICK added  that  the first  models  showed that  the                                                               
wells weren't economic, and the  numbers are not fully understood                                                               
yet.                                                                                                                            
                                                                                                                                
1:45:21 PM                                                                                                                    
SENATOR WAGONER  asked if  the liquids  from a  potential natural                                                               
gas pipeline could be used to help drill heavy oil.                                                                             
                                                                                                                                
MR. UTSLER replied  that it would be an  economic decision; there                                                               
wouldn't be  sufficient natural gas  liquids distilled  to create                                                               
the dilutants needed for the heavy oil.                                                                                         
                                                                                                                                
1:47:35 PM                                                                                                                    
CHAIR  HUGGINS  commented  that Senator  French  had  joined  the                                                               
committee.                                                                                                                      
                                                                                                                                
SENATOR  WIELECHOWSKI said  he wants  to see  BP move  forward to                                                               
profitability and he urged them to  get together with the DOR and                                                               
come up with a scheme.                                                                                                          
                                                                                                                                
MS. FITZPATRICK said  BP has been working with the  DOR, but they                                                               
are still working out the details of the plan.                                                                                  
                                                                                                                                
MR. UTSLER said  that so far, BP has drilled  one heavy oil well;                                                               
it  is called  the CHOPS  (Cold  Heavy Oil  Production) well.  It                                                               
produces sand  along with the  oil, which creates flow  paths and                                                               
could  increase  the  production  rate.  This  is  still  in  the                                                               
development phase.                                                                                                              
                                                                                                                                
1:50:33 PM                                                                                                                    
MR. UTSLER  said that, using  the state's data, drilling  a heavy                                                               
oil well costs $16/barrel.                                                                                                      
                                                                                                                                
SENATOR WAGONER asked why he  used the state's data, because BP's                                                               
data is more accurate.                                                                                                          
                                                                                                                                
MS. FITZPATRICK replied  that BP wanted to  keep the calculations                                                               
simple, and the state's data  looks reasonable to BP although the                                                               
company does anticipate that costs will be going up.                                                                            
                                                                                                                                
1:51:57 PM                                                                                                                    
MR.  UTSLER  explained  the  higher  operating  costs  in  Alaska                                                               
compared  to   the  average  U.S.  cost   structure  which  would                                                               
disadvantage the product's profitability.                                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI asked if the  production tax was included in                                                               
the $16-dollar figure quoted.                                                                                                   
                                                                                                                                
MS. FITZPATRICK replied yes.                                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI  asked how much  of the Alyeska  pipeline BP                                                               
owns.                                                                                                                           
                                                                                                                                
MS. FITZPATRICK  replied that the  company owns  about one-third;                                                               
BP views profitability from an upstream perspective.                                                                            
                                                                                                                                
SENATOR WIELECHOWSKI asked how BP  chooses one profitable project                                                               
over another.                                                                                                                   
                                                                                                                                
MS. FITZPATRICK replied that investment  decisions aim to balance                                                               
their  global portfolio.  The factors  of cost,  fiscal position,                                                               
geological  and  technical  risks,  and the  existence  of  other                                                               
opportunities are weighed. There is no single criterion.                                                                        
                                                                                                                                
MR. UTSLER added  that BP's is not an  unlimited investment pool.                                                               
The company starts with a list  and works through it. Each year a                                                               
whole  new  set of  projects  comes  forward; the  investment  is                                                               
incremental.                                                                                                                    
                                                                                                                                
CHAIR HUGGINS said that there is  not one single template for all                                                               
situations.                                                                                                                     
                                                                                                                                
1:58:58 PM                                                                                                                    
MS. FITZPATRICK  said the quality  of the resource is  known. The                                                               
engineering needs  will continue to  be difficult and BP  has not                                                               
yet proved it can get the heavy oil.                                                                                            
                                                                                                                                
2:00:44 PM                                                                                                                    
She  then referenced  the blue  line  on a  slide indicating  oil                                                               
production  decline  and how  the  future  of oil  production  is                                                               
critically  dependent on  existing  large  fields and  additional                                                               
investments. She  said the blue  line didn't adequately  show the                                                               
difference between  light and heavy  oil, but explained  that the                                                               
IRS attempted to  differentiate the two with  the windfall profit                                                               
tax  and  abandoned  doing  it,   because  they  couldn't  do  it                                                               
successfully.  Both Norway  and the  UK  have had  many years  of                                                               
conversations  trying to  establish  how it  could  be done,  but                                                               
hadn't  managed it  yet.  The interdependence  of  heavy oil  and                                                               
light  oil is  complicated.  She stated,  "Speaking  from my  own                                                               
perspective, there  are many  days I know  sitting in  the office                                                               
that I wish it could be  differentiated more easily simply for me                                                               
in terms of managing performance. It's not possible."                                                                           
                                                                                                                                
MS.  FITZPATRICK  went  to  the  mustard-yellow  line  indicating                                                               
additional investments  in existing fields and  commented that BP                                                               
estimates about  half of that  is coming  from heavy oil  and the                                                               
other half  from light  oil. That  was the basis  of some  of her                                                               
arithmetic for the  $25 billion versus $70  billion estimate. She                                                               
reiterated that new technology is  key, but there is no guarantee                                                               
that that will deliver and new  investment is needed to keep even                                                               
the  low estimate  number and  certainly  to move  it above  that                                                               
number. Of the two new  developments, they hope Pioneer will come                                                               
on next  year with  Oooguruk and  that they  can progress  on the                                                               
Liberty field in  the next year or two. However,  she pointed out                                                               
that those  were on federal lands  as opposed to state  lands; so                                                               
they wouldn't  be subject to PPT  - but she thought  the DNR used                                                               
those numbers in its long-term forecasts.                                                                                       
                                                                                                                                
She reiterated two key issues  - the interdependence of light and                                                               
heavy oil  and the facilities  and infrastructure.  She explained                                                               
that the North Slope was built with  a 25 to 30-year life in mind                                                               
and now  BP is looking  at the next  50 and hopefully  many years                                                               
beyond  that.  So  it  is appropriate  to  consider  whether  the                                                               
infrastructure  is the  right one  for the  next 50  years or  if                                                               
another would  be more efficient and  fit for the purpose  of the                                                               
up and  coming mixed hydrocarbon  streams. This  investment would                                                               
be  substantial  and  wouldn't  come through  in  terms  of  more                                                               
barrels, but  not having  it could impact  the cost  structure of                                                               
the barrels that are actually getting produced.                                                                                 
                                                                                                                                
SENATOR   WIELECHOWSKI  commented   that   this   chart  she   is                                                               
referencing goes out only 19 more  years, but she said that BP is                                                               
planning to  be here for 50  years. He asked if  she had modeling                                                               
somewhere  that  shows BP  can  sustain  production for  50  more                                                               
years.                                                                                                                          
                                                                                                                                
MS. FITZPATRICK replied that the chart  came from the DOR and she                                                               
does have a  chart and schematic with a lot  of assumptions in it                                                               
that goes out 50 years. All  of its facilities on the North Slope                                                               
have it on the wall.                                                                                                            
                                                                                                                                
2:05:37 PM                                                                                                                    
She then  showed another  slide regarding  the fields  from which                                                               
the  oil  will  be  produced  and how  they  would  affect  state                                                               
revenue.  She pointed  out that  70 percent  of the  barrels will                                                               
come from Prudhoe and Kuparuk.                                                                                                  
                                                                                                                                
She went  back to  the question  of how  BP makes  its investment                                                               
decisions. She  said they use a  mixture of things, but  no magic                                                               
template;  clearly costs  are  a  part of  it.  The global  steel                                                               
shortage will impact  the cost structure; there is  also a finite                                                               
supply of  rigs on the North  Slope. If BP wants  to increase its                                                               
rig  count, it  would be  in  direct competition  with the  other                                                               
producers. If  they get  another one  up there,  it would  need a                                                               
significant revamp  to fit the  purpose or build new  ones. Those                                                               
discussions would  happen in today's  supply environment.  So, if                                                               
she wants those things, the  market is competitive and the prices                                                               
are going up.                                                                                                                   
                                                                                                                                
2:07:24 PM                                                                                                                    
SENATOR MCGUIRE asked about the  degree to which stability of the                                                               
political environment impacts BP's decisions.                                                                                   
                                                                                                                                
MS. FITZPATRICK responded that  political environment does impact                                                               
decisions in terms of post-tax cash flow and fiscal policy.                                                                     
                                                                                                                                
SENATOR MCGUIRE  said that people  in the public and  the capitol                                                               
want to negotiate what the profits will be.                                                                                     
                                                                                                                                
MS. FITZPATRICK said she is well aware of that fact.                                                                            
                                                                                                                                
SENATOR  MCGUIRE said  that people  are also  thinking about  the                                                               
possibility of another company doing the same business.                                                                         
                                                                                                                                
2:12:32 PM                                                                                                                    
SENATOR WAGONER  commented that the replacement  of BP's pipeline                                                               
was  estimated  at  $255  million  and asked  if  a  more  recent                                                               
estimate was available.                                                                                                         
                                                                                                                                
MR. UTSLER  replied that the pipe  has been ordered and  would be                                                               
replaced in the  upcoming winter season, at around  the same cost                                                               
as  originally proposed.  However, there  are inflationary  costs                                                               
associated with the manpower needed.                                                                                            
                                                                                                                                
MS.  FITZPATRICK thanked  Senator Wagoner  for his  question, and                                                               
commented that all  costs don't increase at the same  rate at the                                                               
same time. She added that BP  will continue to develop, but there                                                               
is a question of scale and pace; attracting investment is key.                                                                  
                                                                                                                                
SENATOR WIELECHOWSKI said he planned  to look at the state's data                                                               
on the issue,  and since the state and BP  are partners, he would                                                               
like to see the company sit down with administration.                                                                           
                                                                                                                                
MS. FITZPATRICK  agreed, and she said  she would like the  DOR to                                                               
share its  models with her.  A number  of things in  the proposed                                                               
bill concern BP, and any sort  of changes made should be assessed                                                               
as  to  whether they  would  increase  or  decrease the  risk  in                                                               
meeting objectives.                                                                                                             
                                                                                                                                
2:21:46 PM                                                                                                                    
SENATOR  MCGUIRE asked  if there  had been  any discussion  about                                                               
whether BP would prefer to address  the question of tax rates now                                                               
or in 2011.                                                                                                                     
                                                                                                                                
MS.  FITZPATRICK replied  that  from her  perspective, from  what                                                               
they understood the  purpose of PPT to be in  terms of increasing                                                               
investment,  she  hadn't  had  any indication  that  is  not  yet                                                               
working. So she thought it was  too early to say; she will design                                                               
a business  plan around whatever the  law is. The current  law is                                                               
PPT and it has a review date on 2011; she will respect that law.                                                                
                                                                                                                                
SENATOR MCGUIRE said  she didn't disagree and  that the committee                                                               
will focus on the practicalities  of the issue. However, there is                                                               
an  overarching  political dilemma  regarding  the  way in  which                                                               
previous decisions were  made, and the committee needs  to find a                                                               
way to encourage the public trust.  It is a reality and it cannot                                                               
be changed.  She said it  is in  BP's best interest  to encourage                                                               
this trust as well.                                                                                                             
                                                                                                                                
SENATOR GREEN said that there  is nothing to keep the legislature                                                               
from addressing the tax issue every year.                                                                                       
                                                                                                                                
2:25:56 PM                                                                                                                    
CHAIR HUGGINS said  that the numbers are important  to the issue,                                                               
and the  people that  rely on  BP for  business are  an important                                                               
component  of the  issue; he  appreciates seeing  the data  about                                                               
those people from BP.                                                                                                           
                                                                                                                                
SENATOR GREEN noted an upcoming meeting pertinent to the issue.                                                                 
                                                                                                                                
MS. FITZPATRICK  quoted some  data regarding  the number  of jobs                                                               
tied to the oil industry in Alaska.                                                                                             
                                                                                                                                
2:29:47 PM                                                                                                                    
SENATOR WAGONER thanked  the presenters, and asked  if Bill Allen                                                               
and Rick Smith were representing BP when they were lobbying.                                                                    
                                                                                                                                
MS. FITZPATRICK responded that BP is not under investigation.                                                                   
                                                                                                                                
CHAIR  HUGGINS called  an at-ease  at 2:32:05  PM and  called the                                                             
meeting back to order at 2:43:33 PM.                                                                                          
                                                                                                                                
KEVIN MITCHELL, Vice President of  Finance and Administration for                                                               
ConocoPhillips  (CP) Alaska,  said  that CP  is Alaska's  largest                                                               
producer  and  leaseholder, and  a  major  explorer and  industry                                                               
community supporter.                                                                                                            
                                                                                                                                
2:46:03 PM                                                                                                                    
He said that industry and the  state should be in partnership; it                                                               
is too  early to determine whether  the PPT is doing  what it was                                                               
expected  to do,  and  thus too  early to  make  any changes.  An                                                               
increase in taxes  will mean the industry will make  a claim that                                                               
investment will be inhibited.                                                                                                   
                                                                                                                                
He said  that his  presentation would show  how an  increased PPT                                                               
would  impact  investments; that  hadn't  been  done in  previous                                                               
testimony. He  then showed a chart  for the 2007 fiscal  year and                                                               
the projections from when the  Economic Limit Factor (ELF) system                                                               
was  in place.  He explained  that the  PPT is  delivering higher                                                               
revenues than expected,  and that prices of oil  have been higher                                                               
as well. However  those prices have been offset  by higher costs.                                                               
Prices, production and costs have  all differed from predictions,                                                               
but such variances are a part of business.                                                                                      
                                                                                                                                
2:50:26 PM                                                                                                                    
He explained  that actual results  always differ from  the budget                                                               
because of prices,  volumes and costs. It is  difficult to budget                                                               
with  run-up in  prices  and  the inflation  rates  of goods  and                                                               
services; it's  important to  think about  the bigger  picture of                                                               
revenue shaping up to expectations.  PPT contains a safeguard for                                                               
the  state of  a  10  percent minimum  gross  tax  on the  legacy                                                               
fields. This makes the tax  very regressive by increasing it when                                                               
industry is  suffering the most  and when prices decline.  The 10                                                               
percent  floor  can  be  triggered  by  lower  prices  or  higher                                                               
investments.                                                                                                                    
                                                                                                                                
2:53:15 PM                                                                                                                    
CHAIR HUGGINS asked  if that conversation had been  held with the                                                               
administration.                                                                                                                 
                                                                                                                                
2:53:55 PM                                                                                                                    
MR. MITCHELL replied that the  administration does understand the                                                               
argument. He then showed a chart  explaining how the tax floor is                                                               
calculated, and gave an example.  He explained how the additional                                                               
investment in the example did not attract any incentive.                                                                        
                                                                                                                                
SENATOR WAGONER  said that  the credit is  still there,  but they                                                               
weren't able to use it all.                                                                                                     
                                                                                                                                
MR.  MITCHELL replied  that  was correct,  but  depending on  the                                                               
spend profile over a period of  years; they might not ever get to                                                               
use it.                                                                                                                         
                                                                                                                                
CHAIR HUGGINS suggested, "It's a disincentive."                                                                                 
                                                                                                                                
2:57:55 PM                                                                                                                    
MR. MITCHELL agreed and showed the  next page which was more like                                                               
reality.  He scoped  out what  a Kuparuk  budget might  look like                                                               
using DOR  assumptions for  volumes, prices,  operating expenses,                                                               
and  capital expenses.  It indicated  the  net tax  to the  state                                                               
would be  $408 million. Investments  are not getting  the benefit                                                               
of the  credits and features  meant to incentivize. He  said that                                                               
the  reality is  that the  tax  will have  the same  impact in  a                                                               
higher investment climate.                                                                                                      
                                                                                                                                
JIM   TAYLOR,   Vice   President   of   Commercial   Assets   for                                                               
ConocoPhillips (CP), said  that CP participates on  all levels of                                                               
production and  exploration in  Alaska. He  showed an  excerpt of                                                               
the DOR's projection  for the industry, and said  that since 1999                                                               
CP's  exploration wells  have led  to new  fields and  satellites                                                               
with a minimal footprint, yielding 6,000 barrels a day.                                                                         
                                                                                                                                
3:05:34 PM                                                                                                                    
SENATOR WAGONER asked if certain  fields on the diagram were ones                                                               
that had been discovered but not put into production yet.                                                                       
                                                                                                                                
MR. TAYLOR said that he was not  sure; the point is that CP wants                                                               
to  see  those  fields  explored.  He  then  explained  different                                                               
elements of the  diagram, and talked about which  fields oil will                                                               
come from in the next decade;  investments need to be made in the                                                               
legacy fields.                                                                                                                  
                                                                                                                                
3:08:06 PM                                                                                                                    
He said that  there's a lot of challenge  in future opportunities                                                               
and a lot of needed technological  advances. The viscous oil is a                                                               
large  resource  base and  unlocking  its  potential is  a  major                                                               
focus.                                                                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI asked about  CP's progress in technology for                                                               
producing viscous oil.                                                                                                          
                                                                                                                                
3:09:33 PM                                                                                                                    
MR. TAYLOR  replied that he  has spent  time in Canada  and there                                                               
are a lot of emerging technologies  there; it's a matter of using                                                               
them appropriately  and having a  good economic  scenario. Alaska                                                               
has taken some  steps towards meeting this  challenge. What makes                                                               
the recovery of viscous oil so  challenging is that the costs are                                                               
higher  from the  start, and  the production  profile starts  out                                                               
lower  and remains  flatter  over time.  The  Century project  in                                                               
Canada  epitomizes the  shallowest  of heavy  oils; such  deposit                                                               
projects have  the advantage of  having the  infrastructure built                                                               
already  and  by  having  to  take small  steps  along  the  way.                                                               
However, as oil prices increase, so do opportunities.                                                                           
                                                                                                                                
3:12:07 PM                                                                                                                    
He then talked  about the challenges associated  with getting the                                                               
heavy oil out of  the ground, and how it has  a lot of associated                                                               
sand production. He  said anything they do that  would affect the                                                               
economics  for  marginal fields  can  delay  or defer  investment                                                               
there  or  cause   it  to  become  uneconomic.   These  are  real                                                               
situations they are dealing with today.                                                                                         
                                                                                                                                
SENATOR WAGONER asked what CP will do with the sand.                                                                            
                                                                                                                                
MR. TAYLOR said  there is a plant for disposing  of byproducts of                                                               
production,  which are  re-injected in  similar zones  from which                                                               
they came.                                                                                                                      
                                                                                                                                
3:14:45 PM                                                                                                                    
He said  a sizable oil  target remains  in the legacy  assets and                                                               
that price  and the  advances in  technology have  presented this                                                               
investment opportunity  to the industry. He  showed them examples                                                               
of the  West Sak wells  that have  been completed in  the Kuparuk                                                               
area. He pointed out that a  single well bore has three different                                                               
well bores that penetrate a  variety of stacked sands. The length                                                               
from the original  well bore to the final length  of the well can                                                               
range anywhere  from a  mile to  a mile and  a half.  They extend                                                               
long  distances  and  need  technology to  make  it  possible  to                                                               
penetrate the thin sands.                                                                                                       
                                                                                                                                
Also because sand production as  a byproduct is a possibility, he                                                               
showed them  various completion techniques that  can prevent that                                                               
sand from  coming into the  wells. They add complexity,  cost and                                                               
risk.                                                                                                                           
                                                                                                                                
3:18:46 PM                                                                                                                    
CHAIR  HUGGINS   asked  for  elaboration  on   water  versus  oil                                                               
production.                                                                                                                     
                                                                                                                                
MR. TAYLOR  said in Kuparuk  and Alpine, CP is  producing 250,000                                                               
gross  barrels of  oil  daily with  an  associated 650,000  gross                                                               
barrels of  water; the  ratio is approximately  three to  one. In                                                               
addition,  CP  is  injecting seawater  as  an  enhanced  recovery                                                               
mechanism,  so  the  combined  handling is  close  to  1  million                                                               
barrels of  water daily. He  then referenced a table  showing the                                                               
six projects that  CP is currently dealing with;  the company has                                                               
a large portfolio of options. Four  out of the six are satellite-                                                               
type projects, and the majority  dealt with heavy or viscous oil.                                                               
The projects are significant if aggregated.                                                                                     
                                                                                                                                
3:22:23 PM                                                                                                                    
CHAIR HUGGINS asked  if Mr. Taylor was talking  about the project                                                               
modeling.                                                                                                                       
                                                                                                                                
MR. TAYLOR replied that he was.                                                                                                 
                                                                                                                                
CHAIR HUGGINS  asked about Mr.  Taylor's confidence in  the model                                                               
data in question.                                                                                                               
                                                                                                                                
MR. TAYLOR  said the data came  from consultants who used  a wide                                                               
range of  possible projects,  but the costs  in reality  might be                                                               
higher  and the  economic results  may depend  on the  investor's                                                               
actions.                                                                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI asked how what  percentage of Field A was on                                                               
the North Slope.                                                                                                                
                                                                                                                                
3:24:58 PM                                                                                                                    
MR.  TAYLOR  referred  to  a  chart  that  showed  six  different                                                               
projects of an  aggregated 50,000 to 60,000 barrels  a day. There                                                               
are 2 billion barrels of oil  remaining in the legacy fields, and                                                               
the viscous and heavy oil target  could range between four and 20                                                               
billion barrels.   While there are significant  viscous and heavy                                                               
oil  reserves,  they  represent  a  larger  target  than  can  be                                                               
simulated  and they  do  rely heavily  on  conventional oil;  the                                                               
gross minimum could cause an obstacle to investments.                                                                           
                                                                                                                                
MR. TAYLOR then referenced another  diagram showing how different                                                               
projects would  look under different  prices.  Under  the current                                                               
PPT, developments are advancing well, he reported.                                                                              
                                                                                                                                
3:28:11 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if Dr.  Finiza's estimates  were done                                                               
at $40-dollar stress rate.                                                                                                      
                                                                                                                                
MR. TAYLOR  replied yes,  and said  that the  calculations showed                                                               
that projects would not be economic at $40.                                                                                     
                                                                                                                                
SENATOR WIELECHOWSKI asked for the net present value.                                                                           
                                                                                                                                
MR. TAYLOR replied that he  was portraying the investors' view of                                                               
the black  solid line with the  zero MPV at some  hurdle discount                                                               
rate. Anything above  that line would meet or  exceed that hurdle                                                               
and create value;  anything below it would not.  He explained how                                                               
these projects  are challenged with higher  development costs and                                                               
technical reserve  risk. An increase  in tax has  erosion effects                                                               
on  investment  that  could turn  a  project  uneconomic  because                                                               
investors didn't receive deductibility.                                                                                         
                                                                                                                                
SENATOR  WIELECHOWSKI  asked  for clarification  of  net  present                                                               
value between  Project 2 on  the previous  page and Project  5 on                                                               
the current one.                                                                                                                
                                                                                                                                
3:31:23 PM                                                                                                                    
MR.  TAYLOR  explained that  anything  below  the indicated  line                                                               
destroys   MPV   value   and   those   above   have   value-added                                                               
characteristics.                                                                                                                
                                                                                                                                
SENATOR  WIELECHOWSKI said  that  the two  projects seemed  close                                                               
together on the graph, and looked identical under PPT tax rates.                                                                
                                                                                                                                
MR. TAYLOR  responded that he  would have to compare  tax effects                                                               
and lifting costs on different graphs.                                                                                          
                                                                                                                                
CHAIR HUGGINS commented  that the graph didn't do  justice to the                                                               
numbers used.                                                                                                                   
                                                                                                                                
MR.  TAYLOR agreed.  He said  that his  main point  was that  the                                                               
gross  minimum may  have unintended  consequences, and  he wasn't                                                               
sure that it  captured the full reality of the  situation. It may                                                               
need to be reexamined.                                                                                                          
                                                                                                                                
3:34:12 PM                                                                                                                    
MR. MITCHELL said that  transitional investment expenditure (TIE)                                                               
credits  were   introduced  into   PPT  legislation   to  provide                                                               
compensation  to investors  who had  invested under  a prior  tax                                                               
structure and  who will invest in  future years. He then  gave an                                                               
example of how TIE credits would  work on a development field and                                                               
explained that  a company doesn't  get the benefit of  it without                                                               
continuing investments.                                                                                                         
                                                                                                                                
3:37:49 PM                                                                                                                    
CHAIR HUGGINS asked if the TIE credits had a 2008 sunset date.                                                                  
                                                                                                                                
MR. MITCHELL  replied that they  have a five-year  sunset period.                                                               
They  are on  a two-for-one  basis,  so a  double expenditure  is                                                               
required over the  five years. If the sunset were  in 2008, their                                                               
value would erode.                                                                                                              
                                                                                                                                
CHAIR  HUGGINS said  that  in  his opinion  the  TIE credits  are                                                               
disproportional  or punitive  and the  punitive factor  should be                                                               
examined.                                                                                                                       
                                                                                                                                
MR. MITCHELL agreed.  He said he would then  briefly discuss CP's                                                               
position  on  the legislation.  The  bill  includes an  increased                                                               
level of transparency between the  state and the industry, and CP                                                               
is supportive  of that.  However, a handful  of areas  cause them                                                               
concern  including  provisions  on  exploration  confidentiality.                                                               
Some  of the  explorers will  find these  be anticompetitive,  he                                                               
said. Cost deductions  are another concern and  he suggested that                                                               
lease  expenditure deduction  should  be defined  in statute.  He                                                               
urged a full and thoughtful  discussion about what the bill wants                                                               
to accomplish.                                                                                                                  
                                                                                                                                
SENATOR WIELECHOWSKI  asked if CP  wanted continued  inclusion of                                                               
dismantlement costs.                                                                                                            
                                                                                                                                
MR.  MITCHELL relied  that  the PPT  allows  for a  proportionate                                                               
share  of dismantlement  costs. These  are necessary  expenses in                                                               
the  full life  of the  field,  and CP  would view  dismantlement                                                               
costs as a legitimate part of doing business on the North Slope.                                                                
                                                                                                                                
SENATOR  WIELECHOWSKI  asked  if  including  dismantlement  costs                                                               
would encourage investment.                                                                                                     
                                                                                                                                
3:44:16 PM                                                                                                                    
MR. MITCHELL replied  that those make up just  one cost component                                                               
that is  factored into the  overall economic  decision. Including                                                               
them would help  slightly, but at the initial start  of the field                                                               
they don't make a huge  impact. He explained that such inclusions                                                               
are crucial to attracting investors to such a harsh climate.                                                                    
                                                                                                                                
MR. MITCHELL said  that CP absolutely believes  that the industry                                                               
must be aligned with the state  and currently there is not enough                                                               
information to make  changes in the PPT. The risk  of not getting                                                               
the  right  solutions  also  exists.  The  third  tax  change  is                                                               
significant, and no  one wants to have to revisit  the issue. The                                                               
10 percent legacy floor will have a real effect.                                                                                
                                                                                                                                
3:47:36 PM                                                                                                                    
CHAIR  HUGGINS   said  that  the   presenters  had   pointed  out                                                               
unintended consequences,  and that those  are some things  to pay                                                               
attention to. Great Alaskans are  writing the regulations for the                                                               
PPT, and that  takes time. The state does owe  CP answers, and it                                                               
will get  them. He commended  the administration  for recognizing                                                               
and  addressing investment  decline, and  said that  the industry                                                               
has to bear the brunt of the good and bad.                                                                                      
                                                                                                                                
SENATOR  WAGONER  said  that  he would  like  a  response  letter                                                               
regarding prior comments.                                                                                                       
                                                                                                                                
MR. TAYLOR  replied that  none of  CP's employees  were currently                                                               
under investigation,  and the company's intention  is to continue                                                               
to be active in the process.                                                                                                    
                                                                                                                                
CHAIR HUGGINS  called a recess  at 3:52:32 PM and  reconvened the                                                             
meeting  at 6:15:55  PM. He  announced that  the committee  would                                                             
take public testimony.                                                                                                          
                                                                                                                                
6:16:20 PM                                                                                                                    
BO  DARRAH,  President  of the  Brooks  Range  Petroleum  Company                                                               
(BRPC),  said that  his company  is  the newest  explorer on  the                                                               
North Slope, and his message is  to hold with the status quo. His                                                               
company is dependent  on outside investors; it  agreed to explore                                                               
under  ELF  and  it  doesn't believe  the  proposed  system  will                                                               
attract  business  or  cause the  producers  to  make  additional                                                               
investments.  As a  non-producer, BRPC  don't realize  any profit                                                               
now so  its investments are  high risk. Its end  goal is to  be a                                                               
producer,  so it's  looking at  the bill  from that  perspective.                                                               
BRPC  probably  shares  the  same  view  of  ACES  as  the  major                                                               
producers.  His opinion  is  that three  tax  increases in  three                                                               
years is  not the  answer; the  tax is good  now and  enough time                                                               
hasn't elapsed to  fully judge it. The state  is jeopardizing its                                                               
reputation by changing it again.                                                                                                
                                                                                                                                
6:25:13 PM                                                                                                                    
SENATOR  STEVENS thanked  Mr. Darrah  for his  confidence in  the                                                               
industry,  and  asked  where BRPC's  exploratory  wells  will  be                                                               
located.                                                                                                                        
                                                                                                                                
MR. DARRAH  said that  the company is  drilling east  of Newitsit                                                               
and also north of Prudhoe Bay.                                                                                                  
                                                                                                                                
CHAIR HUGGINS said that one of  the challenges the state faces is                                                               
that the average  citizen only thinks of the  big three producers                                                               
and loses track of the BPRCs  of the world; the company's size of                                                               
exploration is the future for Alaska.                                                                                           
                                                                                                                                
MR. DARRAH  said the benefits  of PPT do help  start-up companies                                                               
but ultimately his company hopes to be in the big game.                                                                         
                                                                                                                                
6:28:37 PM                                                                                                                    
MARK  SHARP,  representing himself,  said  that  he testified  18                                                               
month ago  that PPT was  flawed from  the start, because  the net                                                               
profits  would lead  to  a gross  overstatement  of expenses  and                                                               
understatement of profits. Clearly PPT  was best for the industry                                                               
and the 24th Legislature abdicated  its responsibility in passing                                                               
it.  The state  needs to  set the  policy standard  and make  the                                                               
industry adhere to it. He favored a gross tax.                                                                                  
                                                                                                                                
CHAIR  HUGGINS  said  he recalled  that  the  administration  was                                                               
recently  in  Fairbanks  and  asked if  Mr.  Sharp  attended  the                                                               
meetings.                                                                                                                       
                                                                                                                                
MR. SHARP  replied that he did,  and said that the  gross portion                                                               
of the governor's  proposed tax doesn't kick in  until oil prices                                                               
reach $30  a barrel; so  it appears to him  that the tax  is more                                                               
net-based than a hybrid.                                                                                                        
                                                                                                                                
6:35:36 PM                                                                                                                    
JERRY WALKER,  representing himself, said  he was a  board member                                                               
of  the  Alaska  Support  Industry Alliance.  He  said  that  the                                                               
legislature's  role  is to  recognize  the  importance of  fiscal                                                               
stability, and that  means it shouldn't keep  changing the rules.                                                               
The legislature  should not  change the PPT,  but rather  work to                                                               
increase investment in Alaska.                                                                                                  
                                                                                                                                
6:37:39 PM                                                                                                                    
RICH SIEFERT, representing himself, said  that he agreed with Mr.                                                               
Sharp, and  has always advocated  a production tax. The  state is                                                               
experiencing a peak  oil crisis, and that factor will  serve as a                                                               
driver to  keep the  price of  oil high.  That will  make capital                                                               
available, which is  what the legislature is looking  for; it's a                                                               
good  bet to  assume that  the availability  of profits  from oil                                                               
sales will render incentives unnecessary.                                                                                       
                                                                                                                                
CHAIR  HUGGINS  said that  some  members  of the  committee  were                                                               
familiar with the  peak oil idea, and agreed that  and it is very                                                               
important.                                                                                                                      
                                                                                                                                
6:41:52 PM                                                                                                                    
TOM LAKOSH, representing himself, said  he wanted to see focus on                                                               
what lessees  are required to  develop in the ground;  there's no                                                               
correlation  between  tax  breaks  and oil  a  company  hopes  to                                                               
produce.  There should  also be  focus on  how the  Department of                                                               
Natural Resources (DNR)  and the Alaska Oil  and Gas Conservation                                                               
Commission  (AOGCC)  will  regulate hydrocarbons.  He  recommends                                                               
setting rates of parity with the  industry in Norway and to focus                                                               
on  providing an  infrastructure that  will help  all Alaska.  He                                                               
noted  that the  termination of  the Point  Thomson leases  was a                                                               
good  example; there  shouldn't  be a  "scatter-gun" approach  in                                                               
giving out more  money. He also suggested  the legislature pursue                                                               
a carbon tax.                                                                                                                   
                                                                                                                                
6:48:12 PM                                                                                                                    
MERRICK  PEIRCE,  representing  himself, said  he's  pleased  the                                                               
governor had the courage to  call the special session to question                                                               
how  the  sale   of  oil  is  taxed.  Article  8   of  the  State                                                               
Constitution requires that  the state's oil and gas  be sold such                                                               
that they return the maximum  benefit to the people; clearly that                                                               
isn't  happening now.  It was  frustrating to  testify last  year                                                               
because of the  things that have since come to  light, and it was                                                               
frustrating that  the legislature killed  a bill that  would have                                                               
allowed  the  DOR  to  offer competitive  salaries  to  hire  tax                                                               
auditors.  Currently,  $23.5 billion  worth  of  the state's  oil                                                               
resources  are leaving  the state  annually  without anything  to                                                               
show for  it. Fairbanks has  high property taxes and  high prices                                                               
for  heating  oil,  and  the  state  infrastructure  is  failing.                                                               
Clearly Alaska  is not  getting a reasonable  rate of  return. He                                                               
said  he  would  like  the  committee  to  answer  the  following                                                               
questions that hadn't been addressed:                                                                                           
                                                                                                                                
1. Where are the core comparisons  that show net profit is better                                                               
for the state and development than  a gross tax with simple price                                                               
escalators and  capital credits,  and how solid  is the  data for                                                               
those comparisons?                                                                                                              
                                                                                                                                
2. Oil  production is  declining from the  North Slope,  has been                                                               
declining for  decades, and is  continuing to decline  under PPT.                                                               
According  to  the consultants  that  are  working on  the  bill,                                                               
fifteen-year  forecast  levels  are  even  lower  than  in  prior                                                               
forecasts. With  world conditions  unfavorable to  oil investment                                                               
in  other areas  and prices  remaining  high, where  is the  data                                                               
showing Alaska is getting fair value?                                                                                           
                                                                                                                                
3.  Everyone  knows  that TAPS  tariffs  increased  substantially                                                               
after PPT was passed. This increased  big oil's tax burden to the                                                               
state  while   at  the  same   time  diminishing   incentive  for                                                               
independent oil  companies to develop  on the North Slope  due to                                                               
higher tariffs. Does it make  sense to give away production taxes                                                               
before correcting  that disincentive for independents  to develop                                                               
fields on the Slope?                                                                                                            
                                                                                                                                
MR.  PEIRCE  said he  looked  forward  to hearing  the  committee                                                               
discuss  how the  state  will diversify  the  economy and  create                                                               
well-paying  jobs  by  stopping  the  give-away  of  billions  of                                                               
dollars every  year by underselling and  under-taxing the state's                                                               
oil. He added  that he didn't hear anyone standing  up for Alaska                                                               
when the  producers run propaganda advertisements  that the state                                                               
is actually paying for through  tax deductions. The producers are                                                               
claiming that allowing billions of  dollars to leave the state to                                                               
multinational  corporations  is  somehow  good  for  the  Alaskan                                                               
economy. That's not true and that propaganda must be challenged.                                                                
                                                                                                                                
CHAIR  HUGGINS  asked  if  Mr. Peirce  had  attended  the  recent                                                               
administration's presentation  on this bill up  in Fairbanks. One                                                               
of its  tasks was to give  an overview with emphasis  on why they                                                               
selected a  net component  versus a gross  component for  the tax                                                               
concept.                                                                                                                        
                                                                                                                                
MR. PEIRCE replied  that he did. He said the  presentation by the                                                               
administration  was "didactic."  It was  advanced that  the issue                                                               
was very  complex and the average  member of the public  just was                                                               
able  to fathom  it. He  share that  an acquaintance  in the  oil                                                               
industry who really  cares about Alaska said if you  come up with                                                               
a complicated  scheme such  as a net  profit system  of taxation,                                                               
the oil industry  will always have better talent -  whether it be                                                               
lawyers or tax auditors - that  the State of Alaska will have. It                                                               
doesn't really  matter to the  oil industry  if the rate  is 22.5                                                               
percent or 25 percent; it would  always find a way to profit from                                                               
tax laws more than the state.                                                                                                   
                                                                                                                                
6:57:22 PM                                                                                                                    
SENATOR  GREEN questioned  an explanation  in previous  testimony                                                               
that advertising was not deductible.                                                                                            
                                                                                                                                
MR. PEIRCE recalled that in  part of that discussion an amendment                                                               
was offered on  the House floor that made it  illegal for the oil                                                               
industry to deduct lobbying expenses  under PPT; and that measure                                                               
failed. He didn't know about advertising.                                                                                       
                                                                                                                                
SENATOR GREEN  remembered that both advertising  and media aren't                                                               
allowable deductions.                                                                                                           
                                                                                                                                
6:59:01 PM                                                                                                                    
TOM MALONEY,  representing himself,  described his  background in                                                               
accounting and finance, and said  that lots of discussion centers                                                               
around  the taxation  of legacy  fields such  as Prudhoe  Bay and                                                               
Kuparuk. He  said that 100 percent  of the capital costs  for the                                                               
infrastructure were paid  for by private funds.  Some fields have                                                               
become  uneconomic, so  those owners  took on  all the  risk. New                                                               
fields will  be required, and for  that to happen there  needs to                                                               
be more tax relief. If the state  wants to tap heavy oil, it must                                                               
recognize that those  fields cost more and produce  less than the                                                               
legacy fields. The legislature needs  to define tax rules for new                                                               
investments. He  asked the committee  to think about what  can be                                                               
done to stem production decline,  and said he'd like the existing                                                               
producers to continue  to bring capital investment  to the state;                                                               
PPT would encourage that.                                                                                                       
                                                                                                                                
7:03:54 PM                                                                                                                    
PAUL KENDALL, representing  himself, said he wanted  to thank the                                                               
governor  because  AGIA  opened   up  discussion  that  had  been                                                               
neglected. He  said he has  been watching the development  of the                                                               
hydrogen industry  closely, and  believes there is  some interest                                                               
there.  Hydrogen  fueling stations  are  being  built around  the                                                               
world so  there should be caution  in terms of the  oil pipeline.                                                               
The  state  should think  about  what  it  would  do if  the  oil                                                               
companies  decided to  pull out  and prepare  for the  worst-case                                                               
scenario.  The workers  like him  in  the oil  field have  little                                                               
impact or  reward, and  there is  a small  number of  people that                                                               
reap all  the benefit.  He said  he would prefer  to see  a gross                                                               
tax.                                                                                                                            
                                                                                                                                
CHAIR HUGGINS announced  an at-ease at 7:14:01 PM  and called the                                                             
meeting back to order at 7:20:06 PM.                                                                                          
                                                                                                                                
7:20:07 PM                                                                                                                    
TONY  TENGS, representing  himself,  questioned whether  everyone                                                               
who says they're representing themselves  actually is because the                                                               
oil companies  are making  a full-court press;  he said  he hopes                                                               
the  committee factors  in that  possibility. He  said he  is for                                                               
simplicity and  a gross  tax and hoped  the legislature  comes up                                                               
with a fair deal for the state.                                                                                                 
                                                                                                                                
CHAIR HUGGINS said that it is  always nice to hear from citizens,                                                               
and agreed that the system  isn't perfect. There being no further                                                               
business to  come before the  committee, Chair  Huggins adjourned                                                               
the meeting at 7:26:42 PM.                                                                                                    

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