Legislature(2017 - 2018)SENATE FINANCE 532

03/29/2017 03:30 PM RESOURCES

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Audio Topic
03:31:11 PM Start
03:32:52 PM Presentation: World Oil and Gas Markets Impact on Alaska
04:57:47 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Joint with Senate Finance Committee --
-- Please Note Location Change --
+ World Oil & Gas Markets - Impact on Alaska: TELECONFERENCED
Marianne Kah, Chief Economist, ConocoPhillips
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                    SENATE FINANCE COMMITTEE                                                                                  
                         March 29, 2017                                                                                         
                           3:31 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Cathy Giessel, Chair                                                                                                   
 Senator John Coghill, Vice Chair                                                                                               
 Senator Natasha von Imhof                                                                                                      
 Senator Bert Stedman                                                                                                           
 Senator Shelley Hughes                                                                                                         
 Senator Kevin Meyer                                                                                                            
                                                                                                                                
SENATE FINANCE                                                                                                                  
                                                                                                                                
 Senator Lyman Hoffman, Co-Chair                                                                                                
 Senator Anna MacKinnon, Co-Chair                                                                                               
 Senator Click Bishop, Vice Chair                                                                                               
 Senator Peter Micciche                                                                                                         
 Senator Mike Dunleavy                                                                                                          
 Senator Natasha von Imhof                                                                                                      
 Senator Donald Olson                                                                                                           
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
SENATE RESOURCES                                                                                                                
                                                                                                                                
 Senator Bill Wielechowski                                                                                                      
                                                                                                                                
SENATE FINANCE                                                                                                                  
                                                                                                                                
 All members present                                                                                                            
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Lora Reinbold                                                                                                    
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION: WORLD OIL AND GAS MARKETS IMPACT ON ALASKA                                                                        
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
SCOTT JEPSEN, Vice Chair                                                                                                        
External Affairs and Transportation                                                                                             
ConocoPhillips Alaska                                                                                                           
Anchorage, Alaska                                                                                                               
POSITION  STATEMENT:   Presented information  on current  oil and                                                             
gas markets and their impact on Alaska.                                                                                         
                                                                                                                                
MARIANNE KAH, Chief Economist                                                                                                   
ConocoPhillips Alaska                                                                                                           
Houston, Texas                                                                                                                  
POSITION STATEMENT:   Provided  the overview  on current  oil and                                                             
gas markets and their impact on Alaska.                                                                                         
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
3:31:11 PM                                                                                                                    
CHAIR  CATHY  GIESSEL called  the  joint  meeting of  the  Senate                                                             
Resources Standing Committee and  the Senate Finance Committee to                                                               
order at  3:31 p.m. Present  at the  call to order  were Resource                                                               
members Senators Coghill, Stedman,  Hughes, von Imhof, Meyer, and                                                               
Chair  Giessel and  Finance  members  Senators Bishop,  Micciche,                                                               
Dunleavy, von Imhof, Olson, and Co-Chairs Hoffman and MacKinnon.                                                                
                                                                                                                                
^Presentation: World Oil and Gas Markets Impact on Alaska                                                                       
    Presentation: World Oil and Gas Markets Impact on Alaska                                                                
                                                                                                                              
3:32:52 PM                                                                                                                  
CHAIR  GIESSEL introduced  and thanked  staff who  helped arrange                                                               
today's meeting and announced the  only order of business was the                                                               
presentation of  world oil and  gas markets impacts on  Alaska by                                                               
Marianne  Kah  and Scott  Jepsen  with  ConocoPhillips. She  said                                                               
Alaska  is an  energy producing  state  and oil  and gas  markets                                                               
cross international  jurisdictions that affect Alaska  at various                                                               
levels.  Energy resources  has not  only driven  Alaska's private                                                               
economy but its  state budget for two  generations. Policy makers                                                               
must  understand  the  nuances  of these  global  commodities  to                                                               
realistically  perceive  Alaska's   place  in  the  international                                                               
marketplace. She welcomed Mr. Jepsen and Ms. Kah to the table.                                                                  
                                                                                                                                
3:34:07 PM                                                                                                                    
SCOTT JEPSEN,  Vice Chair,  External Affairs  and Transportation,                                                               
ConocoPhillips Alaska, Anchorage,  Alaska, introduced himself and                                                               
thanked   the  committees   for   the   opportunity  to   present                                                               
information on current oil and gas  markets. He said he hoped the                                                               
information would be  useful to them in  formulating policies and                                                               
providing context  for the  strategic actions  ConocoPhillips has                                                               
taken over the last few years.                                                                                                  
                                                                                                                                
Before turning the presentation over  to Ms. Kah, he provided her                                                               
biography. She is responsible  for developing the ConocoPhillips'                                                               
market  outlooks for  oil and  natural gas  and is  the company's                                                               
expert in scenario planning. She  has also presented her views on                                                               
oil  and natural  gas  markets at  major  conferences around  the                                                               
world.  Prior  to  joining ConocoPhillips,  she  was  manager  of                                                               
planning at Cabot  Corporation, a chemicals company  in Boston, a                                                               
planner  at   the  U.S.  Synthetic   Fuels  Corporation,   and  a                                                               
management  analyst in  the energy  and mineral  division of  the                                                               
U.S.  General Accountability  Office in  Washington, D.C.,  where                                                               
she conducted energy  policies for various U.S.  Senate and House                                                               
energy  committees.  She  is  the  past  president  of  the  U.S.                                                               
Association for  Energy Economics and received  the Senior Fellow                                                               
Award from  that organization.  She has also  served as  chair of                                                               
the  Committee  on  Economics  and  Statistics  of  the  American                                                               
Petroleum Institute.  An economist by  training, Ms. Kah  holds a                                                               
Bachelor  of  Science  Degree  from   Cornell  University  and  a                                                               
Master's Degree from Syracuse University.                                                                                       
                                                                                                                                
3:35:25 PM                                                                                                                    
CHAIR GIESSEL recognized Representative Reinbold as present.                                                                    
                                                                                                                                
3:36:04 PM                                                                                                                    
MARIANNE  KAH, Chief  Economist, ConocoPhillips  Alaska, Houston,                                                               
Texas, said  it is a  pleasure to be back  here even for  a short                                                               
visit and that she was going  to talk about the crude and natural                                                               
gas outlook and  the implications it has for  ConocoPhillips as a                                                               
company  in  its  investment  decision making,  as  well  as  the                                                               
implications for the State of Alaska.                                                                                           
                                                                                                                                
In 2005 the  world looked like this: the U.S.  oil production had                                                               
peaked  in  1970,  then  it  had a  second  peak  because  Alaska                                                               
production  came  in,  but  it   has  declined  ever  since.  The                                                               
Department of Energy (DOE) forecast  is that it would continue to                                                               
decline.                                                                                                                        
                                                                                                                                
For liquefied natural gas (LNG) there  was a belief that the U.S.                                                               
was running  out of low cost  natural gas and the  projection was                                                               
that it  would have to import  18 bcf/day. Today demand  is about                                                               
75  bcf/day,   and  many  companies,   including  ConocoPhillips,                                                               
actually  built regasification  terminals to  bring LNG  into the                                                               
U.S. There was also  a belief that the U.S. was  going to have to                                                               
import energy at a growing rate.                                                                                                
                                                                                                                                
3:37:15 PM                                                                                                                    
The shale  renaissance completely turned this  world upside down.                                                               
In 2015,  before the downturn, instead  of a decline there  was a                                                               
huge  uptick in  U.S. production  basically back  to the  peak of                                                               
1970.  LNG  exports went  to  zero  and  this  year the  U.S.  is                                                               
becoming  a net  exporter  of  LNG and  net  energy imports  have                                                               
actually dropped substantially as opposed  to going up. This is a                                                               
great story  for the U.S.  economy and U.S. energy  security, but                                                               
it has really turned the entire industry on its head.                                                                           
                                                                                                                                
She said that shale is actually  called "tight oil" and her chart                                                               
indicated  the  huge  size  of  that  resource.  In  perspective,                                                               
Prudhoe Bay  was about 14  bbl/boe -  barrel of oil  equivalent -                                                               
and the  Permian Basin, Eagle  Ford, and the Bakken  have 100-200                                                               
bbl/boe of  resource just in  the major  plays and new  plays are                                                               
continuing to be  discovered. This is a new  phenomenon. The same                                                               
is true  for gas if  one looks at  the Marcellus (huge  gas basin                                                               
with very low cost gas of $2-2.50 per mmbtu).                                                                                   
                                                                                                                                
3:39:05 PM                                                                                                                    
For an idea of how big this  tight oil phenomenon is in the U.S.,                                                               
Ms. Kah  compared it  to the  size of  production of  various oil                                                               
producing exporting  countries (OPEC).  When this all  started in                                                               
2010, the  U.S. was  producing less  than 1  mmbbl/day, basically                                                               
the  size of  Qatar or  Libya. Today,  despite the  downturn, the                                                               
U.S. is  producing over 4  mmbbl/day of tight oil  (not including                                                               
conventional  production  in  the   Lower  48,  the  offshore  or                                                               
Alaska). The  only countries that  are larger are Iraq  and Saudi                                                               
Arabia.  Most forecasts  have this  at least  doubling and  more.                                                               
This is  a very large  production phenomenon and probably  one of                                                               
the key drivers of the oil downturn.                                                                                            
                                                                                                                                
The  U.S. just  produced production  at a  rate of  1.5 mmbbl/day                                                               
including  natural  gas liquids  per  year  and demand  was  only                                                               
growing  at about  1 mmbbl/day.  That disrupted  OPEC production,                                                               
which was trying to come back,  but everyone saw what happened as                                                               
a result of that.                                                                                                               
                                                                                                                                
3:40:06 PM                                                                                                                    
Texas has  been impacted  most by the  shale revolution  with the                                                               
Eagle  Ford  and the  Permian.  And  what  makes the  Permian  so                                                               
special is  that there are  different layers of resource  and the                                                               
industry is working  on trying to do multilateral  wells (use the                                                               
same  well  to   reach  different  pay  zones).   There  is  huge                                                               
production potential if that can  be done economically. So Texas,                                                               
alone, is  going to be  an amazing  force, but even  North Dakota                                                               
and  Colorado  production came  back  when  the shale  revolution                                                               
started.                                                                                                                        
                                                                                                                                
Alaska doesn't have the shale  revolution, but on the other hand,                                                               
Ms.  Kah was  amazed at  how in  the last  five years  or so  its                                                               
production decline  has truly stabilized  and last  year slightly                                                               
increased. Who would have expected  that to occur five years ago?                                                               
Part of that is due to  the better business climate that industry                                                               
perceived after SB 21.                                                                                                          
                                                                                                                                
The  U.S. production  and shale,  particularly, has  responded to                                                               
this price  downturn with a  decrease in  the number of  oil rigs                                                               
from 1,600  to 450 in  one year and  huge layoffs in,  but Alaska                                                               
has been mostly insulated from what has been happening there.                                                                   
                                                                                                                                
3:41:59 PM                                                                                                                    
Now, just  with prices moving  up towards $50/barrel, there  is a                                                               
doubling  of  the horizontal  rig  count.  The many  productivity                                                               
improvements in tight  oil keep pushing the cost  of supply lower                                                               
and lower, so  more and more is coming on  line. She thought that                                                               
is one of reasons why the prices kept dropping.                                                                                 
                                                                                                                                
Another  chart  showed the  DOE  short-term  forecast. The  prior                                                               
trend was about 1 mmbbl/day/year  growth. During the downturn the                                                               
U.S.  lost  about  1  mmbbl/day  and  probably  more,  but  since                                                               
September, it  is on  a growth trajectory  again, and  the prices                                                               
weren't  even $50  in September.  Production has  been increasing                                                               
and is expected to increase to  basically a new record by the end                                                               
of 2018.  In the  marketplace, everyone wonders  how much  of the                                                               
work OPEC has  done to cut production to get  inventories down to                                                               
a normal  level is  going to  be offset by  the increase  in U.S.                                                               
production.                                                                                                                     
                                                                                                                                
3:43:11 PM                                                                                                                    
CHAIR  GIESSEL asked  what happens  to rigs  when the  count goes                                                               
down.                                                                                                                           
                                                                                                                                
MS. KAH  answered they get  stacked. The alter rigs  probably get                                                               
cannibalized and never  come back. The horizontal  rigs and tight                                                               
oil drilling drill-days  have gone way down, so not  as many rigs                                                               
are  needed on  a permanent  basis.  It would  be an  interesting                                                               
experiment to  see how long it  would take to bring  them back if                                                               
it could be  done. Probably the older rigs have  gotten laid down                                                               
and the newer more modern ones are the ones running today.                                                                      
                                                                                                                                
CHAIR GIESSEL asked what happens to the rigs in Alaska.                                                                         
                                                                                                                                
MR. JEPSEN  answered the same  thing happens in Alaska:  the rigs                                                               
get stacked. Some "age-out," but  those that are still relatively                                                               
new can come back into service.                                                                                                 
                                                                                                                                
MS. KAH said  the way this translates  to ConocoPhillips's bottom                                                               
line is  in terms of  service industry cost inflation.  There has                                                               
been  a great  deflation, which  is one  of the  things that  has                                                               
helped  the economics  of  tight oil  in the  Lower  48, but  the                                                               
reverse is happening now and  everyone is wondering just how much                                                               
the inflation  rate is going  to be coming  back - and  it's only                                                               
for  specific items  like  completions or  sand.  She wished  she                                                               
owned  a sand  mine in  Minnesota today,  because it  is used  in                                                               
hydraulic fracturing  and is the kind  of thing that is  in short                                                               
demand.                                                                                                                         
                                                                                                                                
Where production goes  from here revolves around  two things: the                                                               
rate of  productivity decline that  will either improve  or lower                                                               
the cost of  supply and how much service  industry cost inflation                                                               
will offset  that. If she knew  the answer to that,  she would be                                                               
able  to forecast  very  accurately what  U.S.  supply growth  is                                                               
going to be, but she really doesn't know the answer.                                                                            
                                                                                                                                
3:45:28 PM                                                                                                                    
Slide  10 graphed  the average  production profile  by month  for                                                               
different  parts  of Texas.  The  initial  production rates  have                                                               
gotten higher and higher there  and that directly translated to a                                                               
lower  cost of  supply per  barrel. Her  graphs showed  where the                                                               
benefits came from: how much  the 90-day initial production rates                                                               
were, how  much recoverable reserves  have gone up, and  how much                                                               
drilling  days have  dropped. "It's  truly  incredible," Ms.  Kah                                                               
remarked. For example,  what used to cost $80/bbl  for U.S. tight                                                               
oil,  would  today  cost  $50/bbl  and the  cost  of  supply  for                                                               
resources  that used  to  cost $50/bbl  may  cost $30/bbl  today.                                                               
"That  is sort  of the  target that  U.S. tight  oil has  put out                                                               
there that investments sort of have to beat," Ms. Kah said.                                                                     
                                                                                                                                
3:46:41 PM                                                                                                                    
MS.  KAH said  the DOE  long term  forecast illustrated  the huge                                                               
impact  of U.S.  tight oil,  but there  was also  an increase  in                                                               
natural gas  liquids (it  gets turned  into propane  and ethane),                                                               
which a  lot of plays  have. There is a  question of how  big the                                                               
market is going  to be for these liquids, which  reduces the need                                                               
for crude  supplies in the rest  of the world to  the extent that                                                               
refineries can use them.                                                                                                        
                                                                                                                                
So, between the U.S. tight oil  and the natural gas liquids there                                                               
is huge  growth, but based  on her views  of the geology  and the                                                               
rate of technology improvement, the  U.S. is probably in the high                                                               
resource case.  If she had  to personally  bet, she would  bet on                                                               
the DOE's  high case and  not its  low case scenario,  because of                                                               
all the technology development so  far - like longer laterals and                                                               
bigger hydraulic fracturing jobs with  more water and sand - that                                                               
are just  now moving  around throughout  the industry.  There are                                                               
also the new operating practices  are being implemented like more                                                               
perforations and  more clusters of perforations,  and intelligent                                                               
drilling, which  is when a drill  bit can get real  time data for                                                               
how to produce.                                                                                                                 
                                                                                                                                
MS.  KAH said  big  data has  really come  to  the oil  industry.                                                               
Everyone  is running  pilot plans  to  get data  that will  allow                                                               
better identification  of sweet spots for  understanding where to                                                               
drill. The interesting thing about  why innovation takes place so                                                               
quickly is because  thousands of wells are being  drilled. So one                                                               
can  experiment with  all the  different  wells and  as a  result                                                               
learn must faster than just  drilling one $200-million well every                                                               
five  years offshore.  That is  why she  thinks the  productivity                                                               
growth is going  to improve and production will  continue to drop                                                               
in cost.                                                                                                                        
                                                                                                                                
3:48:54 PM                                                                                                                    
SENATOR VON IMHOF  asked if Alaska can see the  same cost savings                                                               
as Texas.                                                                                                                       
                                                                                                                                
MS. KAH  answered that the  interesting thing about that  is that                                                               
new  technologies,  like  intelligent drilling,  will  eventually                                                               
work their  way around the  world. But Alaska doesn't  drill that                                                               
many wells, so it  will be a slow process.   She asked Mr. Jepsen                                                               
how many wells  ConocoPhillips is drilling in Alaska  in the next                                                               
five years.                                                                                                                     
                                                                                                                                
MR. JEPSEN  answered that ConocoPhillips  has three  rigs running                                                               
now and  BP has three  rigs; some  of the other  operators aren't                                                               
drilling now  because of the  low oil  price. About 500  rigs are                                                               
drilling in the Lower 48.                                                                                                       
                                                                                                                                
MS. KAH said deep  water is out of the money now,  but it has its                                                               
own  standardization  of equipment  and  trying  to compete.  Oil                                                               
sands is doing the same thing.  Everyone is trying to lower their                                                               
costs to be able to compete.                                                                                                    
                                                                                                                                
MR.  JEPSEN  added that  ConocoPhillips  Alaska  is paying  close                                                               
attention  to what  is  happening with  their  operations in  the                                                               
Lower 48 and sharing that data with their Alaska operations.                                                                    
                                                                                                                                
3:50:57 PM                                                                                                                    
SENATOR BISHOP,  in response to  their comments about  the number                                                               
of rigs  in the Lower  48 drilling,  said that that  Alaska wells                                                               
are  prolific producers;  some produce  north of  10,000 bbl/day,                                                               
and  are drilling  in a  conventional play  versus a  tight shale                                                               
play.                                                                                                                           
                                                                                                                                
MR. JEPSEN agreed  and added that some recent wells  have come in                                                               
at 10,000-plus bbl/day.                                                                                                         
                                                                                                                                
MR.  KAH added  that initial  production  from each  well in  her                                                               
graph (Lower  48) is about  500 bbl/day compared to  Alaska's big                                                               
wells.                                                                                                                          
                                                                                                                                
3:52:08 PM                                                                                                                    
MR. JEPSEN  mentioned that  some of  the wells  ConocoPhillips is                                                               
drilling in existing fields do come  in at a 500-700 bbl/day rate                                                               
and that drives up their cost of supply in Alaska.                                                                              
                                                                                                                                
MS. KAH also noted that having  to constantly drill is a capital-                                                               
intensive  operation  (referring to  the  steep  decline rate  on                                                               
slide 9  on the left), but  it returns investment right  away and                                                               
is low risk.                                                                                                                    
                                                                                                                                
3:53:17 PM                                                                                                                    
Slide  15  graphed   a  curve  of  all  the   world's  supply  (a                                                               
characterization  of 10,000  different assets  and their  cost of                                                               
supply) with the  lowest cost on the left to  the highest cost on                                                               
the right.  Looking out  as an  investor at  what cost  of supply                                                               
will be,  she put them all  into 2017 dollars per  barrel for the                                                               
year  2025.  This matters  to  ConocoPhillips  because they  have                                                               
lined  up their  portfolio this  way. They  have said  publically                                                               
they don't  know what the  price is going  to be and  will invest                                                               
only in the lowest cost of  supply projects to make sure they can                                                               
withstand  downturns like  the  one we  have  just been  through.                                                               
ConocoPhillips wants  to be as far  left on that supply  curve as                                                               
it  can be.  She noted  that  this slide  doesn't count  existing                                                               
production,  because  she  wanted  to focus  on  the  incremental                                                               
production or  what an investor  like ConocoPhillips can  look at                                                               
doing. It  takes production  today and declines  it out  to 2025,                                                               
which is where starting production  is 15 mmbbl/day. What happens                                                               
with tight oil  in this scenario? Ms. Kah said  she broke it into                                                               
three tranches to be able to  talk about what types of things are                                                               
lower cost  and higher  cost as  best she  could, but  in reality                                                               
projects are not in this order.                                                                                                 
                                                                                                                                
What they  have learned about  U.S. tight  oil is that  the fracs                                                               
don't travel  very far, therefore  more wells have to  be layered                                                               
in to  get much greater  recovery out  of the same  acreage. Just                                                               
learning  that allowed  ConocoPhillips  to  increase their  Eagle                                                               
Ford resource estimate  by 40 percent a couple of  years ago. So,                                                               
the  tight oil  areas keep  stretching out  and getting  more and                                                               
more in  volume and also dropping  in cost. She would  say in the                                                               
next  five years  the main  oil price-setting  mechanism will  be                                                               
what it costs to get that tight  oil into the market and then how                                                               
much  of it  is needed  to satisfy  demand, because  an economist                                                               
would say that  price is set by the most  expensive supply needed                                                               
to satisfy demand. For example,  if the demand was 100 mmbbl/day,                                                               
the  chart  indicates  that  Brazil   or  Gulf  of  Mexico  (GOM)                                                               
production  would be  needed. So,  as  the tight  oil areas  keep                                                               
stretching out  and taking  more volume, it  knocks down  all the                                                               
production to  the right of  that demand line. For  example, some                                                               
of the oil  sands projects have become uneconomic and  not a good                                                               
investment. Some of  the deep offshore projects  won't go forward                                                               
either, because  they are on  the right  of the supply  curve and                                                               
have been pushed out by the lower-cost tight oil.                                                                               
                                                                                                                                
MS.  KAH said  this  is  how ConocoPhillips  lines  up their  own                                                               
portfolio  and  doesn't invest  in  things  above certain  target                                                               
prices and  time periods.  Their current policy  is to  invest in                                                               
things that meet today's price.                                                                                                 
                                                                                                                                
3:57:16 PM                                                                                                                    
She knew  members would ask  her where  Alaska is. And  Alaska is                                                               
probably  in the  China/US/Canada camp  (still on  slide 15),  so                                                               
Alaska  is in  a  "slightly precarious  position,"  which is  why                                                               
increasing taxes isn't a good  idea. Anything they do that pushes                                                               
Alaska to the  right will get knocked off by  tight oil squeezing                                                               
things  out.  So,  right  now  Alaska is  in  a  reasonably  good                                                               
position given the status quo business climate.                                                                                 
                                                                                                                                
SENATOR MEYER  asked where the  Keystone pipeline oil  at 800,000                                                               
bbl/day stands  in that graph and  if it does come  on soon, what                                                               
that will do to the price.                                                                                                      
                                                                                                                                
MS. KAH  answered the problem  with oil sands  is not only  is it                                                               
expensive -  heavy stuff with low  value - to produce,  but it is                                                               
also expensive to  transport to markets. It has to  be shipped by                                                               
rail now,  because there  isn't enough  pipeline capacity  and it                                                               
will probably have  a $12 tariff or more. Shipping  by pipe could                                                               
cost more  like a $7.  So, suddenly  oil sands is  more economic.                                                               
But having said  that, green field oil sands  projects don't make                                                               
it in the current price  environment. So, investment will only be                                                               
in brown field projects and will remain there.                                                                                  
                                                                                                                                
It's not  just Keystone, she  said, the Canadian  government just                                                               
approved the  Trans-Mountain Pipeline  to take  oil sands  to the                                                               
West Coast.  However, the project  still has to happen.  But that                                                               
also allows  the Canadian  producers to  diversify away  from the                                                               
U.S. market  and send it to  Asia. Those things are  both helpful                                                               
to oil sands.                                                                                                                   
                                                                                                                                
3:59:59 PM                                                                                                                    
MS. KAH emphasized  that everyone must be cognizant  that each of                                                               
these  tranches of  production are  going to  try to  lower their                                                               
cost  to compete.  It's a  very competitive  market in  which you                                                               
can't just sit there and not try to improve your situation.                                                                     
                                                                                                                                
SENATOR  DUNLEAVY said  the  market seems  to  have absorbed  the                                                               
civil war in  Syria, Iraq, the sanctions in Iran,  and Egypt, and                                                               
that   coupled   with   the   Venezuela   situation,   which   is                                                               
deteriorating,  and  the  Southern   Gulf,  which  is  not  being                                                               
utilized, if all  those things recover and Mexico  begins to ramp                                                               
up  in the  Gulf, those  are things  that make  the oil  price so                                                               
unpredictable.                                                                                                                  
                                                                                                                                
MS. KAH  said that is part  of what went wrong  this time around:                                                               
disrupted  Iraqi  and Iranian  production  coming  back into  the                                                               
market at the  same time U.S. production was  ramping up, clearly                                                               
running  into  an  over-supply situation.  Other  people  believe                                                               
though,  because the  industry has  lost billions  of dollars  of                                                               
investment over the  last three years that come  2019 there won't                                                               
be  enough  production. She  personally  believes  that the  U.S.                                                               
could  fill  any gap  there  is  in  10  months. There  are  just                                                               
different  points  of view  about  that  and  there can  be  very                                                               
different outcomes.  Those things are unpredictable.  That is why                                                               
the oil price is so volatile.                                                                                                   
                                                                                                                                
She would argue  that because of tight oil, it  will be even more                                                               
volatile,  the  reason  being  that   when  the  Saudi's  managed                                                               
inventories, they  kept production at  a fairly stable  rate that                                                               
sort of  matched demand - so,  the price was fairly  stable. When                                                               
they said  they weren't  going to do  that anymore,  suddenly the                                                               
price has to  go up and then U.S. tight  oil production is needed                                                               
and has  to drop when  it's not  needed. Therefore, the  price is                                                               
going to mirror  a tight oil investment cycle. It  took 10 months                                                               
from the time the price  started dropping before one actually saw                                                               
U.S. production  falling. This means  a 10-18-month cycle  of the                                                               
price going up and down to  get the thousands of producers to act                                                               
in  a way  that brings  up production  or lowers  it, and  to the                                                               
world that will  look like volatility. But it will  be more of an                                                               
18-month cycle,  not the 7-year or  10-year cycle as in  the past                                                               
when projects took  7-10 years to come onto  the market. Layering                                                               
geopolitical   things   on  top   of   that   makes  it   totally                                                               
unpredictable. And  economic volatility is another  factor people                                                               
have to deal with today.                                                                                                        
                                                                                                                                
4:03:18 PM                                                                                                                    
MS.  KAH said  slide 13  illustrated  oil demand  growth by  year                                                               
broken down to  source. Most of the demand growth  is coming from                                                               
China, India,  and other developing countries.  So, anything that                                                               
affects  demand  or   the  economy  in  China  or   India  has  a                                                               
disproportionately large  impact on the oil  market, because that                                                               
is the source  of demand. When ConocoPhillips used  to just worry                                                               
about the  U.S. as a  source of  demand, the U.S.  economy wasn't                                                               
quite as volatile  as some of these developing  markets, but this                                                               
has  made the  world demand  growth much  more volatile  and more                                                               
difficult to predict.                                                                                                           
                                                                                                                                
So, looking forward,  as an economist, in terms  of demand growth                                                               
she worries about what happens  in the global economy and second,                                                               
as  the dollar  appreciates because  the U.S.  is tightening  its                                                               
monetary  supply and  no other  country really  is yet,  that oil                                                               
becomes  more  expensive outside  of  the  U.S., because  oil  is                                                               
priced in  dollars. So that  depresses international  demand, and                                                               
then many  producing countries in  the Middle East  and Venezuela                                                               
all  have price  controls  and price  subsidies,  but they  can't                                                               
afford them anymore.  So, with the low price they  are taking the                                                               
opportunity to  reduce these subsidies.  What that means  is when                                                               
the price of the oil comes  back up, suddenly these countries are                                                               
facing a lot higher price and higher demand growth.                                                                             
                                                                                                                                
MS. KAH said people  hear a lot about peak oil  in the market due                                                               
to things like autonomous driving,  but those things are out past                                                               
2020. That is not at all  what we're seeing today. In fact, today                                                               
demand growth is  very strong, because of the low  oil price. So,                                                               
the peak oil  concern that has been raised is  something that one                                                               
eventually has  to worry about,  but post-2020 and  post-2030. In                                                               
fact, when  people talk about  the impact of  autonomous driving,                                                               
it  is more  likely for  them to  be electric  vehicles. So  that                                                               
might be  an impact.  But if you  have autonomous  cars, children                                                               
and  people who  are too  old  to drive  will create  a lot  more                                                               
demand  and suddenly  the  cost  of driving  is  reduced and  the                                                               
demand for vehicles  will go up. She believes that  in the end it                                                               
could increase  demand not  decrease it, but  the outcome  is not                                                               
obvious. Her belief  is that demand is strong and  the problem we                                                               
have today  is too much supply,  and the world economy  is one of                                                               
the big factors driving demand.                                                                                                 
                                                                                                                                
She displayed  a forecast by  the International Monetary  Fund of                                                               
economic growth in  the world on slide 14. On  April 13 when they                                                               
first  started to  forecast 2015  economic growth,  they said  it                                                               
would be  4.5 percent.  But by  the time 2015  ended, it  was 3.2                                                               
percent. The same  thing happened in 2016: a  bright forecast and                                                               
by the  end of the  year it was  lowered. The question  arises if                                                               
the same  thing is  being done  for 2017.  The risks  she worries                                                               
about  are: if  the Chinese  economic deceleration  happens in  a                                                               
controlled, safe way  as it has been, or does  it somehow get out                                                               
of hand, what  the impact of Brexit will have  on Europe, what is                                                               
going  to be  its impact  on  European elections,  and will  more                                                               
countries look at a Brexit scenario for them.                                                                                   
                                                                                                                                
Because the  U.S. is the  only country doing  monetary tightening                                                               
right  now,  does  that  affect funds  flowing  out  of  emerging                                                               
markets?  Ms. Kah  said that  the first  time the  U.S. announced                                                               
that  it was  not going  to  be doing  these treasury  buy-backs,                                                               
suddenly  funds were  flowing out  of the  emerging markets  at a                                                               
rapid rate. She  worries that governments around  the world might                                                               
have policy missteps:  does the U.S. tighten too  quickly and the                                                               
world  isn't quite  ready for  that? Does  something happen  that                                                               
threatens world trade and therefore everybody loses?                                                                            
                                                                                                                                
4:08:47 PM                                                                                                                    
MS. KAH  said this is  the first time in  two or three  years she                                                               
has thought there  is a potential for upside in  the economy. So,                                                               
she is watching  what governments do. Putting  all this together,                                                               
her chart illustrated the price  curve back to 1861, according to                                                               
BP, who is  the only company that kept track  of prices back that                                                               
far. She  put the  data into  2017 dollars  and took  the general                                                               
inflation  rate out  so  members could  compare  all the  periods                                                               
equivalently. She advised  to ignore the beginning  of the curve,                                                               
because  this is  basically when  people went  from whale  oil to                                                               
kerosene, a very  small and volatile market. But  since then, she                                                               
very  well remembers  the 1986  price  collapse and  in 1998  the                                                               
Asian financial crisis. So, the  big price moves can generally be                                                               
explained by some geopolitical event.                                                                                           
                                                                                                                                
In  the  mid-2000s   there  was  a  huge  increase   due  to  the                                                               
industrialization of  China. It happened  so rapidly  that people                                                               
wonder  whether it  will be  repeated by  India and  to the  same                                                               
degree, but  she didn't  think it would.  The discovery  of being                                                               
able to produce shale economically  is responsible for the latest                                                               
downturn. She  concluded that one  thing can be said  these days:                                                               
prices are extremely volatile. ConocoPhillips  used to be focused                                                               
on  equilibrium prices,  but stopped  that. In  a complex  system                                                               
like the  oil market there may  not even be an  equilibrium price                                                               
and  it may  never be  at  equilibrium.   So, Ms.  Kah said,  she                                                               
spends  more time  now worrying  about what  the price  path will                                                               
look like and what will set prices.  How is it going to move over                                                               
the next three or four years?  What part of this investment cycle                                                               
for tight oil are we in?                                                                                                        
                                                                                                                                
4:11:29 PM                                                                                                                    
Another chart  showed the  range of  20 or  30 external  views of                                                               
what the price  is going to be between now  and 2020 (the futures                                                               
curve). This has to be taken with  a grain of salt, because a lot                                                               
of  the independents  who produce  shale hedged  their production                                                               
and there  are more  people trying to  hedge production  and sell                                                               
forward than trying to buy  forward. Therefore, it sort of drives                                                               
down the  futures price. So,  she doesn't take the  futures price                                                               
as literally  as in the  past. But it  is still an  indication of                                                               
where things are  trading. She just doesn't know  how to quantify                                                               
the risk component.                                                                                                             
                                                                                                                                
Experts think  that the  price will be  anywhere between  $50 and                                                               
$80/bbl  in  2020.  There  are   completely  different  camps  of                                                               
thinking. Goldman Sachs  is a good example of the  $50 camp. They                                                               
believe that  Permian productivity  improvement is going  to just                                                               
keep driving the price down,  even though there is inflation. The                                                               
$80-camp  believes in  the things  further  to the  right of  the                                                               
tight oil on  the supply curve. Therefore, the price  has to rise                                                               
to  a level  that  will  get one  there  and  maybe overshoot  it                                                               
because of the supply/investment hole.                                                                                          
                                                                                                                                
She believes it will be  somewhere in between, because in looking                                                               
at between  now and 2020,  besides the projects that  are already                                                               
under way that are known  in non-OPEC production, it doesn't look                                                               
like  more  is needed  than  OPEC  and  tight oil  production  to                                                               
satisfy  demand in  2020. One  assumption is  that decline  rates                                                               
will be higher  because of the downturn, and she  wasn't sure she                                                               
agreed,  because one  of the  best things  one can  invest in  is                                                               
maintaining existing production.  That is one of  the last things                                                               
that gets cut when capital expenditures  have to be cut. A lot of                                                               
people in the  higher priced camp believe that  the decline rates                                                               
on  existing  production will  go  up.  When  she looks  back  in                                                               
history  she can't  find  evidence or  data  that supports  that,                                                               
although there  is no dated evidence  that will tell you  one way                                                               
or the other. Production can't be dissected that cleanly.                                                                       
                                                                                                                                
CHAIR GIESSEL  asked for questions  about oil, and  finding none,                                                               
Ms. Kah moved on to natural gas.                                                                                                
                                                                                                                                
4:13:32 PM                                                                                                                    
She  said  about  one-third  of   the  shale  gas  revolution  is                                                               
associated with tight  oil production. Shale gas is  a lot easier                                                               
to produce,  because it  is in impermeable  reservoirs and  a gas                                                               
molecule  is  smaller,  so  it's  easier  for  it  to  move.  The                                                               
Marcellus is  huge and the  only reason it  doesn't ramp up  at a                                                               
higher rate is  because the Northeast ran  out of infrastructure.                                                               
They added  more infrastructure  and suddenly it  started ramping                                                               
up  again,  and  with  this  big  price  decline  production  has                                                               
flattened for a time but will probably start rising again.                                                                      
                                                                                                                                
The same thing  happens in terms of the  production profile. Over                                                               
the  years, productivity  is  still improving  in  the shale  gas                                                               
wells, because the  things industry has learned in  tight oil are                                                               
translating  back to  shale gas.  She pointed  out the  7 million                                                               
cubic feet  (cf)/day wells in the  Marcellus wells: unbelievable!                                                               
The Permian  is associated gas coming  out of an oil  well, so it                                                               
is smaller production.                                                                                                          
                                                                                                                                
4:15:28 PM                                                                                                                    
MS. KAH said the Wood Mackenzie  forecast for the U.S. and Canada                                                               
is  completely dominated  by shale  gas and  associated gas  from                                                               
tight  oil. The  big animal  again, is  the Marcellus,  which has                                                               
already grown by  16 bcf/day and will grow by  another 20 bcf/day                                                               
by 2030.                                                                                                                        
                                                                                                                                
SENATOR VON  IMHOF asked who  benefits from the  Marcellus wells:                                                               
the State  of Pennsylvania  or private land  owners who  own one-                                                               
acre-by-one-acre parcels.  Where is the money going?                                                                            
                                                                                                                                
MS. KAH  answered what makes the  Lower 48 really unique  is that                                                               
private landowners own the mineral rights  and that is one of the                                                               
reasons it  happened so quickly.  All of  the people on  the East                                                               
Coast benefit from it, because they used  to be at the end of the                                                               
pipeline.  Now they  are at  the beginning  and their  prices are                                                               
lower than the  rest of the country when they  used to be higher.                                                               
In fact, it has reversed pipelines  in the Lower 48. They used to                                                               
flow  from the  Gulf Coast  up to  the East  Coast. Now  they are                                                               
starting  to flow  from the  East Coast  down to  the Gulf  Coast                                                               
where the petrochemical plants are and to the Mid-West.                                                                         
                                                                                                                                
SENATOR   VON  IMHOF   asked  if   private   owners  are   called                                                               
shaleionaires. She remarked that if you  own a parcel of land and                                                               
are being paid  royalties similar to what the state  of Alaska is                                                               
being paid now, that is pretty tremendous.                                                                                      
                                                                                                                                
MS. KAH  agreed. She wished she  had the job of  handling royalty                                                               
owners' checks. These  are poor rural areas that  don't have jobs                                                               
and it is really changing their communities and their lives.                                                                    
                                                                                                                                
SENATOR  DUNLEAVY asked  if  it is  also  rearranging the  entire                                                               
electrical  grid concept  where Quebec  used to  send hydro  down                                                               
there and there were nuclear and coal plants.                                                                                   
                                                                                                                                
MS. KAH replied  that she is seeing more  natural gas-fired power                                                               
plants, but interestingly, even in Texas,  but not as many as one                                                               
would think,  because so much  wind is  coming on that  the power                                                               
prices are negative at night  sometimes, and there is no capacity                                                               
charge  for bringing  on  a natural  gas-fired  power plant.  So,                                                               
there is  no incentive to build  any. Even in a  state like Texas                                                               
that is swimming in gas - it has  a low CO2 profile - the country                                                               
is not  taking advantage of  it. It is  not changing the  grid as                                                               
much as she had hoped.                                                                                                          
                                                                                                                                
4:19:16 PM                                                                                                                    
Slide  18 showed  natural  gas  demand in  the  U.S. in  two-time                                                               
periods: from 2016-2020 and from  2020-2030, and there is a small                                                               
increase in power use of  natural gas. With renewable tax credits                                                               
and state  mandates -  Texas has  a mandate -  there just  is not                                                               
enough gas being  used. This is not just a  U.S. problem; this is                                                               
a global  problem. Europe  has added so  much renewable  and have                                                               
made  their  carbon  price  so  low and  can  easily  meet  their                                                               
standards  with  the renewables  that  gas  is ignored.  So,  she                                                               
worries that  even though there  is all this  gas it is  not even                                                               
being used as a bridge fuel.  Given the resource this country has                                                               
of gas,  this is a  problem. An  IHS forecast based  power growth                                                               
after 2020  on the  Clean Power  Plan that is  in the  process of                                                               
being dismantled,  so that 2020-plus  growth on this  chart might                                                               
not happen.                                                                                                                     
                                                                                                                                
MS. KAH said  there are still some bright spots  for natural gas.                                                               
LNG  exports out  of the  Gulf is  the biggest  source of  demand                                                               
growth over  the next five  years and pipeline exports  to Mexico                                                               
are  really  big.  Whatever investment  ConocoPhillips  has  they                                                               
focus on  oil not  on gas.  This is a  great opportunity  for gas                                                               
producers in the U.S. Overall,  she summarized that demand growth                                                               
is  reasonably strong,  but  she worries  that  the power  demand                                                               
growth just isn't  there when everyone five years  ago thought it                                                               
would be.                                                                                                                       
                                                                                                                                
CHAIR  GIESSEL asked  if base  load is  still needed  and if  the                                                               
renewables are variable in meeting that base load.                                                                              
                                                                                                                                
MS. KAH answered  a natural gas plant is very  good at backing up                                                               
renewables, because coal plants take  too long to start and can't                                                               
be tuned. They  also create noxious pollution. The best  one is a                                                               
single cycle gas plant that can  be ramped up in seconds although                                                               
it is  inefficient. The  problem is  that they  are not  run that                                                               
often and they don't create that much gas demand.                                                                               
                                                                                                                                
MS. KAH explained  that gas isn't being used as  a base load fuel                                                               
partly  because  it  has  the highest  variable  cost.  It's  the                                                               
cheapest  plant to  be built,  but  it is  the last  plant to  be                                                               
dispatched, because it  has the higher fuel cost. So,  if you add                                                               
anything into  the grid you're  knocking out gas demand  and that                                                               
is really what is happening.                                                                                                    
                                                                                                                                
LNG capacity in  the U.S. has huge growth.  Several companies are                                                               
continuing to add capacity now,  which she finds amazing since we                                                               
are going  through a boom/bust  investment cycle in  LNG capacity                                                               
right now. The  reason is because they are  inexpensive plants to                                                               
build  and we  already  have a  lot  of regasification  terminals                                                               
built for taking in gas, berths  for ships, a lot of tankage, and                                                               
that is why they were built in such a large quantity.                                                                           
                                                                                                                                
4:23:39 PM                                                                                                                    
MS.  KAH  said the  Wood  Mackenzie  forecast  is a  little  more                                                               
optimistic than  IHS' because they argue  that a lot of  this new                                                               
capacity won't be  used simply because there is  an oversupply in                                                               
the world LNG market right now  and there just is no room. Almost                                                               
like  a natural  gas-fired  power plant,  these  plants were  the                                                               
cheapest to build because a lot  of capital costs were already in                                                               
place, but  they are the  most expensive to dispatch  because the                                                               
fuel cost  is $3 where  if you are in  a place that  has stranded                                                               
gas, the gas may  cost $.50. So if any plant is  going to shut in                                                               
in the world it's probably going to be in the U.S. Gulf Coast.                                                                  
                                                                                                                                
Australia has much lower fuel  prices, so the cost of dispatching                                                               
Australian gas  is going to be  lower and they are  closer to the                                                               
Asian  market. She  expects to  see  problems in  the next  three                                                               
years. In 2017 we were bailed  out by a cold winter, particularly                                                               
in Asia, and a storage  problem in Europe. Some Australian plants                                                               
were  down  or   hadn't  come  up  on  time.   A  combination  of                                                               
circumstances  made 2017  be  not  as bad  as  what the  industry                                                               
expected.                                                                                                                       
                                                                                                                                
SENATOR  BISHOP   commented  that  it  looks   like  industry  is                                                               
switching gears a  bit, because he sees an  uptick in value-added                                                               
in the Gulf  Coast where a lot  of capex is being  spent over the                                                               
next 10 years.                                                                                                                  
                                                                                                                                
MS. KAH agreed  saying slide 18 indicates  that industrial demand                                                               
growth  for  gas  is  very   robust  within  the  context  of  no                                                               
industrial demand  growth for years.  This is because of  all the                                                               
new petrochemical facilities  coming on line over  the next three                                                               
years in  the Gulf Coast that  were planned because of  low shale                                                               
gas prices.                                                                                                                     
                                                                                                                                
4:26:10 PM                                                                                                                    
The  global LNG  supply/demand balance  through 2025  starts with                                                               
excess and adds more by 2025.  There is huge growth in supply for                                                               
U.S. and  Australia; just  in 2016 and  2017 enough  LNG capacity                                                               
was added  the size  of Qatari LNG  production. The  magnitude of                                                               
changes  is really  large.  The  whole world  market  is only  40                                                               
bcf/day and we're  talking about 25 bcf/day growth  by 2025. This                                                               
is also changing rapidly.                                                                                                       
                                                                                                                                
On the other hand, demand is  robust but not quite enough to keep                                                               
up with supply. One of the  reasons is that Japan has its nuclear                                                               
power plants  coming back on line  and Korea and Taiwan  have all                                                               
had  nuclear power  plants down.  So, they  will lose  gas demand                                                               
over this time period unless Japan  decides not to bring back its                                                               
nuclear  power  plants,  in  which case  there  would  be  upside                                                               
potential.                                                                                                                      
                                                                                                                                
The big  growth is expected  to be in  China and India.  In India                                                               
it's because prices are low. In  fact, they are discovering a lot                                                               
of new markets and new,  smaller countries - Pakistan, Argentina,                                                               
Brazil,  and Chile  - can  now afford  to buy  LNG in  this lower                                                               
price  environment,   because  now   you  can  have   a  floating                                                               
regasification terminal  that just  pulls up  to the  country; it                                                               
doesn't take very  long. So, lots of new markets  are being found                                                               
to place the surplus demand. In fact,  there is not going to be a                                                               
surplus. There  is very little LNG  storage in the world  and you                                                               
can't have  a surplus. What  the chart  really means is  that the                                                               
price has to drop  to a level to make this  new demand appear and                                                               
to make Europe switch from coal  to natural gas, which would take                                                               
a price  of $3-$5/mmbtu  to happen. And  some U.S.  capacity will                                                               
probably be shut in.                                                                                                            
                                                                                                                                
4:29:18 PM                                                                                                                    
MS. KAH said this  is a very long investment cycle,  but it is an                                                               
investment cycle. We  have a very nasty-looking  surplus now, but                                                               
this clearly  has to  change because the  world does  have demand                                                               
for LNG that  will rise. In fact, because demand  is healthy that                                                               
isn't the problem.                                                                                                              
                                                                                                                                
4:30:30 PM                                                                                                                    
Another chart showed  gas prices around the world  as reported by                                                               
Bloomberg. The Japanese  import price, the U.S.  Gulf Coast Henry                                                               
Hub price,  and the European  prices all come down  and converge.                                                               
This makes it very hard to  ship LNG between regions, because all                                                               
of the prices have moved together.  This is what one would expect                                                               
to see  in a surplus.  What you would  expect to see  when things                                                               
recover is Japan and Europe to come back up.                                                                                    
                                                                                                                                
The biggest reason that contracts  have declined is because crude                                                               
prices have declined,  but also China has  weakening economic and                                                               
natural gas  demand growth.  But in 2016,  Chinese LNG  growth is                                                               
pretty strong.  Substantial increases in Australian  and U.S. LNG                                                               
capacity is probably the biggest factor.                                                                                        
                                                                                                                                
ConocoPhillips  has  reacted  by  dramatically  reducing  capital                                                               
spending from  $17 billion  in 2014 to  $5 billion/year  and that                                                               
won't go  up even if prices  do, Ms. Kah said.  They are deciding                                                               
to live in  a lower cost of supply world  whether the world stays                                                               
there. ConocoPhillips wants to be immune to price changes.                                                                      
                                                                                                                                
The  good news  is  that ConocoPhillips  hasn't reduced  spending                                                               
much at all  in Alaska. It's almost strange coming  up here after                                                               
seeing  what  is going  on  in  Houston  -  how Alaska  has  been                                                               
somewhat immunized against  what the rest of the  oil industry is                                                               
facing -  although she has  been assured it  is just a  time lag.                                                               
She didn't think  Alaska would be hit as hard,  because it didn't                                                               
have the huge activity ramp up.                                                                                                 
                                                                                                                                
MS. KAH  said just like  ConocoPhillips is creating its  own cost                                                               
of supply curve for their  portfolio and ranking all the projects                                                               
and  only investing  in  the ones  that have  the  lower cost  of                                                               
supply, people don't even bring  projects forward that don't meet                                                               
that hurdle. ConocoPhillips is also  driving down operating costs                                                               
and that has translated to a  loss of people in Houston. Everyone                                                               
has to do this because everyone  has to survive in what the price                                                               
world is.                                                                                                                       
                                                                                                                                
In terms of production, because  ConocoPhillips has hi-graded and                                                               
have  invested in  the things  that maintain  production and  the                                                               
lowest cost things,  even with those capital cuts  thus far, they                                                               
have met their production target.                                                                                               
                                                                                                                                
MR. JEPSEN added  that their Alaskan oil production went  up by 3                                                               
percent in 2016.                                                                                                                
                                                                                                                                
4:33:16 PM                                                                                                                    
MS. KAH  summarized the  market outlook for  Alaska on  slide 23.                                                               
She  thinks the  tight  oil renaissance  has  changed the  supply                                                               
landscape.  She worries  about volatile  economic  growth and  is                                                               
less worried  about the peak  oil demand right  now, but it  is a                                                               
longer-term issue. We  are clearly in a weaker crude  price for a                                                               
long  time just  because  of circling  around  the shale  cycles.                                                               
Forecasts indicate an oversupply  extending through 2020 and it's                                                               
unclear how  much longer  after that.  A convergence  of regional                                                               
natural gas prices is also  being seen, which is currently making                                                               
LNG project economics  not look very good, but it  will be needed                                                               
eventually. It's just  whatever LNG projects are  coming into the                                                               
market have  to compete at a  $6-$8 mmbtu price, because  that is                                                               
what the  alternative project cost  is in places  like Mozambique                                                               
or the Gulf Coast projects.                                                                                                     
                                                                                                                                
For  Alaska,  to ConocoPhillips  this  means  a very  challenging                                                               
environment, a  lot less  capital to invest,  and they  are being                                                               
forced  to  allocate  it  to  only  the  lowest  cost  of  supply                                                               
projects.  Alaska has  to  compete  with this  in  the Lower  48.                                                               
Everyone has  to compete  with the Gulf  Coast projects  that are                                                               
all brown  field and relatively  low cost.  Also, it tends  to be                                                               
one of  the cheapest  places in  the world to  build in  terms of                                                               
service industry lack of inflation.                                                                                             
                                                                                                                                
4:35:41 PM                                                                                                                    
MS.  KAH said  this is  not  a hopeless  case and  Alaska can  do                                                               
somethings to  make itself economic,  which it has done  over the                                                               
years. The  single best thing is  make sure of a  competitive and                                                               
stable fiscal policy.  Greater access on federal  acreage is also                                                               
looking  promising  under  the  new  administration,  along  with                                                               
reliable and  timely federal permitting processes:  it takes five                                                               
to seven  years to get  something permitted in Alaska  on federal                                                               
land and it takes 10 months to  get projects in the ground in the                                                               
Lower 48.  Anything that  can be done  to improve  that situation                                                               
would make Alaska more competitive.                                                                                             
                                                                                                                                
Finally, she  is "jazzed" about  a state-led LNG project.  It has                                                               
issues,  but  the  state  has  a way  of  reducing  the  cost  so                                                               
dramatically that it  can keep that project in the  game: that is                                                               
if it was a state project  that didn't have to pay federal income                                                               
tax, a  rate of 35  percent. Accepting  a lower return  on equity                                                               
than a  private investor  is another  thing. Her  numbers suggest                                                               
the state  could reduce the  40 percent.  Her point is  that it's                                                               
rare  to have  something  you can  do that  is  that dramatic  to                                                               
improve cost of supply.                                                                                                         
                                                                                                                                
CHAIR GIESSEL  asked if it is  truly lowering the cost  of supply                                                               
if the state simply takes less return on investment.                                                                            
                                                                                                                                
MS.  KAH answered  that it  really  does, because  the state  can                                                               
accept a lower rate of return  than a private investor (it's like                                                               
a subsidy) and therefore get so  many benefits by doing that that                                                               
it will get that return on  the investment. Whereas for a private                                                               
investor, anything that is a government tax is a cost of supply.                                                                
                                                                                                                                
4:38:39 PM                                                                                                                    
CHAIR GIESSEL said she appreciated the word "subsidy."                                                                          
                                                                                                                                
MS.  KAH responded  that it's  an  opportunity as  opposed to  an                                                               
outright  expenditure of  money. You're  getting less  money than                                                               
you might  have gotten if  you had charged  a full tax  rate, but                                                               
then  you  would   have  no  project,  because   it  wouldn't  be                                                               
competitive.                                                                                                                    
                                                                                                                                
CHAIR GIESSEL  said it is  a tradeoff, and  Alaska's Constitution                                                               
mandates  getting  the  best  return   for  the  state's  natural                                                               
resources for its citizens.                                                                                                     
                                                                                                                                
MR.  JEPSEN  said  like  building  roads or  any  other  kind  of                                                               
infrastructure, it  certainly provides access to  huge amounts of                                                               
natural  gas  on  the  North  Slope  which  otherwise  won't  get                                                               
produced.  He said  ConocoPhillips  has  more opportunities  than                                                               
capital  which goes  for  the industry  as a  whole.  There is  a                                                               
special place for  a state-led project in Alaska and  that is why                                                               
they  support the  direction  the  state is  going  on the  AKLNG                                                               
project.                                                                                                                        
                                                                                                                                
MS.  KAH said  the  other thing  going for  Alaska  is that  with                                                               
economic incentives industry  does everything in a  herd, and, of                                                               
course,  that  is  what  creates  the  oversupply.  Because  this                                                               
project takes longer than the  normal LNG project, Alaska is sort                                                               
of  out  of cycle  with  the  market and  it  might  just end  up                                                               
bringing  it on  line at  a  good time  as opposed  to the  worst                                                               
possible time.                                                                                                                  
                                                                                                                                
SENATOR VON  IMHOF thanked  them very  much for  the presentation                                                               
and asked if getting a federal tax exemption is a deal breaker.                                                                 
                                                                                                                                
MS.  KAH answered  yes; it  would be  very hard  to jump  start a                                                               
project and get cost of supply much lower without that.                                                                         
                                                                                                                                
SENATOR VON IMHOF  asked not necessarily getting a  suite of FERC                                                               
permits at this time?                                                                                                           
                                                                                                                                
MS. KAH  said that  would obviously be  needed also,  but getting                                                               
the federal tax exemption may be the most important thing.                                                                      
                                                                                                                                
MR. JEPSEN  added that  clearly if  you can get  to the  point of                                                               
having cost of  supply that competes in the  world market, Alaska                                                               
is in  a very good  position to  move ahead. He  also understands                                                               
the desire to  continue to progress the project  and bring things                                                               
together at the same time. It's  a judgement call in terms of how                                                               
much  time and  effort  the  state wants  to  spend  and what  it                                                               
considers priorities. He  believes that AGDC is  pursuing both of                                                               
those options.                                                                                                                  
                                                                                                                                
SENATOR  VON IMHOF  asked Ms.  Kah's opinion  on the  state being                                                               
able to amass sufficient funding from  a variety of sources to be                                                               
able to make such an expensive project go forward.                                                                              
                                                                                                                                
4:42:07 PM                                                                                                                    
MS.  KAH said  she  is not  personally trying  to  finance a  $50                                                               
billion  project, but  that has  always been  the challenge  with                                                               
this project.  To look for the  money, though, she would  look to                                                               
the  governments that  want to  purchase the  gas -  the Japanese                                                               
investors that have teamed together  to do joint purchasing - the                                                               
potential consumers  of the gas  and try  to get them  to finance                                                               
it. They  may demand  things like ownership,  or building  of the                                                               
tankers, for instance.                                                                                                          
                                                                                                                                
SENATOR  MEYER  said  a consultant  testified  to  the  Resources                                                               
Committee, and  said they  didn't feel  like Alaska  is competing                                                               
with  the Lower  48, especially  in terms  of unconventional  oil                                                               
that tends to  come on faster, but also  depletes faster, whereas                                                               
Alaska  oil takes  longer  to  come on  but  stays in  production                                                               
longer. Still,  any oil company  has limited capital  dollars and                                                               
they are  probably going  to go  with the  project that  they can                                                               
bring on  quicker just because of  the time value of  money. What                                                               
is your opinion?                                                                                                                
                                                                                                                                
MS. KAH  answered that the  slides in their  analyst presentation                                                               
make a  case for having  a diversified portfolio with  some long-                                                               
term projects as  well as short term  projects. ConocoPhillips is                                                               
obviously  still  investing  in  Alaska, so  they  clearly  think                                                               
differently about that.                                                                                                         
                                                                                                                                
MR.  JEPSEN  expanded  that  means  there is  a  place  in  their                                                               
portfolio for  Alaska, but only as  long as it doesn't  climb too                                                               
high in the cost of supply  side of the chart. ConocoPhillips has                                                               
done a  lot to  try to  reduce its  cost of  supply here,  and is                                                               
still  competitive within  its portfolio.  However, Alaska  is on                                                               
the  high end  of cost  of supply,  so if  something pushed  that                                                               
higher, like  increased taxes, they  have plenty of  other places                                                               
to  invest.   "That  diversification   of  the   portfolio  isn't                                                               
diversification at any cost. Total cost matters." he said.                                                                      
                                                                                                                                
MS. KAH added  that ConocoPhillips just announced the  sale of 50                                                               
percent  of their  joint  operations of  oil  sands with  Cenovus                                                               
Energy  in  Canada,  a  $13 billion  sale.  That  was  long-lived                                                               
assets, but  they just didn't feel  it fit their cost  of supply:                                                               
an example of ConocoPhillips putting  its money where their mouth                                                               
is.                                                                                                                             
                                                                                                                                
SENATOR BISHOP  asked if the  jury is out  on fracking as  far as                                                               
the life of the well.                                                                                                           
                                                                                                                                
MR.  JEPSEN answered  that ConocoPhillips  has been  doing facing                                                               
since  the  40s  and  they  used   to  do  it  by  just  dropping                                                               
nitroglycerin down  the well. So,  fracing isn't  new technology,                                                               
but recently it  has been advancing. In terms of  the life of the                                                               
frack, sometimes  it is beneficial after  20 years to go  back in                                                               
and  refrac a  well, because  they can  become contaminated  with                                                               
fines or has  degraded somehow with sand migration  or some such,                                                               
although they  haven't seen a  lot of that in  their conventional                                                               
North  Slope   production.  Each  well  must   be  diagnosed  for                                                               
potential upside.                                                                                                               
                                                                                                                                
4:47:35 PM                                                                                                                    
MS. KAH  added that there  is a great  misunderstanding. Everyone                                                               
knows the wells  drop off very quickly and then  have long tails,                                                               
but as  an industry decline  isn't taking place  anymore, because                                                               
so  many  wells  have  reached   the  plateau  portion  of  their                                                               
production.                                                                                                                     
                                                                                                                                
4:47:57 PM                                                                                                                    
SENATOR MICCICHE went  back to the incremental  global oil supply                                                               
on slide  15 and noted that  companies seem to take  advantage of                                                               
the lower  cost of materials,  labor, design, and  engineers, and                                                               
one  sees investments  preparing for  price improvements,  but he                                                               
didn't see that right now, and that is worrisome.                                                                               
                                                                                                                                
MS. KAH responded  that there were no  acquisitions through 2015,                                                               
but  some started  in  the second  half of  2016.  People had  to                                                               
believe  the  price  was  at   the  bottom.  ExxonMobil  made  an                                                               
acquisition  in   the  Permian,  for  instance,   where  lots  of                                                               
acquisitions are taking place  along with consolidation. Industry                                                               
sentiment is very  cautious, because a lot of  companies had been                                                               
downgraded. While the industry's  "animal spirits" can't be seen,                                                               
the truth is that it is a lot stronger and healthier now.                                                                       
                                                                                                                                
SENATOR MICCICHE said the imbalance  seems different from the way                                                               
it felt in  the past where there were price  challenges. It seems                                                               
more permanent.                                                                                                                 
                                                                                                                                
MS. KAH replied that one thing  she has learned over the years is                                                               
that  nothing is  permanent,  but it  is  unpredictable. So  many                                                               
people did not see this coming  that it spooked them, so they are                                                               
going  into this  wait and  see and  let's keep  healthy mode  of                                                               
operation that ConocoPhillips is doing.                                                                                         
                                                                                                                                
CHAIR  GIESSEL asked  if ExxonMobil  is  selling some  properties                                                               
they had in Norway.                                                                                                             
                                                                                                                                
MS. KAH said she had not seen that.                                                                                             
                                                                                                                                
SENATOR DUNLEAVY asked  how this is going to  change the behavior                                                               
in the Middle East where the Saudi's controlled the price more.                                                                 
                                                                                                                                
MS.  KAH answered  when the  Saudi's stepped  back and  said they                                                               
wouldn't keep their  production down to match  supply and demand,                                                               
the market took  over and found a price that  balanced supply and                                                               
demand. The  way these countries  fit on the supply  curve really                                                               
isn't their  cost of  production, which  is very  low, but  it is                                                               
what they  need to match  their fiscal budget. They  won't change                                                               
for shale, although they said  they would reduce production for a                                                               
crisis.                                                                                                                         
                                                                                                                                
4:53:44 PM                                                                                                                    
SENATOR  HUGHES  asked  how  soon  the  African  rural  to  urban                                                               
movement will make a significant  difference in what is happening                                                               
in  terms  of   greater  needs  for  oil  and  gas   as  well  as                                                               
exploration, development and production in Africa.                                                                              
                                                                                                                                
MS. KAH  replied that is one  of the reasons she  doesn't believe                                                               
in  peak  demand, because  there  is  this urbanization  that  is                                                               
taking  place in  China, India,  countries in  Africa, and  other                                                               
countries  that  will  keep demand  growth  going  in  developing                                                               
countries  even if  peak  demand is  seen  in the  industrialized                                                               
countries. Africa  has a lot  of deep  water resource, but  it is                                                               
expensive  and there  is  no  infrastructure. ConocoPhillips  was                                                               
recently in Senegal,  but left. One of the issues  is that strong                                                               
institutions  are   needed  to  get  high   economic  growth  and                                                               
stability. Not  knowing what rules  and regulations are  in place                                                               
also  makes it  difficult for  investors. Mozambique  is a  great                                                               
example: it  has a lot of  gas discoveries and companies  want to                                                               
invest in  LNG there,  but it has  no infrastructure,  no service                                                               
companies, and the governments haven't  quite set the rules - and                                                               
now  there  is  competition  from   this  lower  risk/lower  cost                                                               
investment that  just delays  the higher  cost areas  from coming                                                               
into fruition.  Eventually the  demand growth  will come  in from                                                               
those areas,  but the governments  need to settle down  and allow                                                               
that to occur.                                                                                                                  
                                                                                                                                
SENATOR HUGHES  said if  there is no  expectation for  the 2030s,                                                               
what about the 2040s?                                                                                                           
                                                                                                                                
MS. KAH  said she couldn't  speculate on  the politics of  any of                                                               
these countries.                                                                                                                
                                                                                                                                
CHAIR GIESSEL thanked Ms. Kah and Mr. Jepsen.                                                                                   
                                                                                                                                
4:57:47 PM                                                                                                                    
CHAIR GIESSEL  adjourned the Joint  Senate Resources  and Finance                                                               
Committee meeting at 4:57 p.m.                                                                                                  

Document Name Date/Time Subjects
AK State Legislature - World Oil and Gas Markets.pdf SRES 3/29/2017 3:30:00 PM
Oil & Gas