Legislature(2011 - 2012)HOUSE FINANCE 519

03/23/2011 01:30 PM House FINANCE


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01:40:58 PM Start
01:41:41 PM HB110
05:09:22 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 110 PRODUCTION TAX ON OIL AND GAS TELECONFERENCED
Heard & Held
Industry Testimony
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 23, 2011                                                                                            
                         1:40 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:40:58 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Stoltze called the  House Finance Committee meeting                                                                    
to order at 1:40 p.m.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Bill Thomas Jr., Co-Chair                                                                                        
Representative Anna Fairclough, Vice-Chair                                                                                      
Representative Mia Costello                                                                                                     
Representative Mike Doogan                                                                                                      
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Reggie Joule                                                                                                     
Representative Mark Neuman                                                                                                      
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Ken Sheffield, President,  Pioneer Natural Resources Alaska;                                                                    
Wendy   King,   Vice    President   of   External   Affairs,                                                                    
ConocoPhillips  Alaska;  Dale   Pittman,  Alaska  Production                                                                    
Manager,  Exxon Mobil  Alaska;  Mark  Landt, Executive  Vice                                                                    
President,   Renaissance  Alaska;   Joe  Michel,   Staff  to                                                                    
Representative Bill  Stoltze; Representative  Craig Johnson;                                                                    
Senator Cathy Giessel; Senator Charlie Huggins.                                                                                 
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Ed  Duncan, President  and  Chief  Operating Officer,  Great                                                                    
Bear Petroleum; Ryan Moynagh, Vice  President of Finance and                                                                    
Chief Financial Officer, Great Bear Petroleum.                                                                                  
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HB 110    PRODUCTION TAX ON OIL AND GAS                                                                                         
                                                                                                                                
          HB 110 was HEARD and HELD in committee for                                                                            
          further consideration.                                                                                                
                                                                                                                                
HOUSE BILL NO. 110                                                                                                            
                                                                                                                                
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
1:41:41 PM                                                                                                                    
                                                                                                                                
KEN SHEFFIELD, PRESIDENT,  PIONEER NATURAL RESOURCES ALASKA,                                                                    
discussed a PowerPoint  presentation titled "Pioneer Natural                                                                    
Resources, House  Resources Committee Testimony  re: CSHB110                                                                    
(RES)" dated March  23, 2011 (copy on  file). He appreciated                                                                    
the opportunity  to testify before  the committee  and hoped                                                                    
to  provide   insight  on   the  company's   other  national                                                                    
projects. He  made forecasts in  regard to  Pioneer's future                                                                    
activities. He discussed Slide 3: "Pioneer Alaska Profile."                                                                     
                                                                                                                                
   · Anchorage headquarters                                                                                                     
   · 60+ full-time employees                                                                                                    
   · 120 AK contract workers                                                                                                    
   · World class Oooguruk project                                                                                               
   · 1st independent operator on NS                                                                                             
   · $1B capital investment                                                                                                     
   · 120-150 MMBO resource potential (net)                                                                                      
   · 2010 Production ~10MBOPD (gross)                                                                                           
   · State and NS producer support                                                                                              
                                                                                                                                
Co-Chair Stoltze took the committee role.                                                                                       
                                                                                                                                
Mr. Sheffield continued with  his presentation. He discussed                                                                    
the  company   history  on  Slide  4,   "Pioneer:  1997-2005                                                                    
Deepwater/International  Focus."  He  elaborated  about  the                                                                    
company's exploration  strategy with big investments  in the                                                                    
Gulf of Mexico,  Africa, and Alaska. He moved  on to discuss                                                                    
Slide 5, "Why Alaska in 2002?"                                                                                                  
                                                                                                                                
   · Worldwide exploration focus                                                                                                
   · Alaska- large, oil resource potential in the U.S.                                                                          
   · Limited competition for resources                                                                                          
   · State actively courting independents                                                                                       
        o Exploration credits, low severance tax (ELF)                                                                          
        o Available acreage at a low cost                                                                                       
   · Independent mindset                                                                                                        
        o Quick decision making                                                                                                 
        o Lower cost structure                                                                                                  
                                                                                                                                
1:45:48 PM                                                                                                                    
                                                                                                                                
Mr.  Sheffield discussed  "North Slope  Exploration History"                                                                    
on  Slide  6.  He  explained that  Pioneer  embarked  on  an                                                                    
exploration program in Alaska  in 2003. Pioneer participated                                                                    
in eleven  exploration wells in  a four year  period between                                                                    
2003  and  2007.  The  exploration  led  to  one  commercial                                                                    
discovery,  Oooguruk.   He  noted  that   hydrocarbons  were                                                                    
located in  almost every exploration well  drilled; however,                                                                    
the quality of the reservoirs was too low.                                                                                      
                                                                                                                                
Mr. Sheffield discussed  Slide 7: "8 Years Later  - What has                                                                    
Changed?" on Slide 7.                                                                                                           
                                                                                                                                
    · Technology                                                                                                                
    · Oil and gas prices                                                                                                        
    · Resource play development                                                                                                 
    · Alaska's severance tax system                                                                                             
                                                                                                                                
Mr.  Sheffield   addressed  "Technology"  on  Slide   8.  He                                                                    
expressed excitement about  horizontal well improvements and                                                                    
fracture  stimulation.  Drilling   a  horizontal  well  with                                                                    
hydraulic  fracturing unlocked  unconventional resources  in                                                                    
shale for both oil and gas.                                                                                                     
                                                                                                                                
Mr.  Sheffield  discussed "Oil  and  Gas  Price History"  on                                                                    
Slide 9.  He commented on  the oversupply of natural  gas in                                                                    
the Lower 48. Oil prices continue to rise.                                                                                      
                                                                                                                                
1:49:37 PM                                                                                                                    
                                                                                                                                
Representative Gara asked about  Slide 9. He understood that                                                                    
lower  taxes  provide  incentive.  He asked  if  oil  prices                                                                    
provide  comparable incentive.  Mr.  Sheffield replied  that                                                                    
with  increased  oil  prices, the  cost  of  doing  business                                                                    
increased dramatically. He  added that competition increased                                                                    
substantially.                                                                                                                  
                                                                                                                                
Representative Gara  wondered about the high  oil prices and                                                                    
whether it  was more attractive  to invest today  than under                                                                    
conditions in 2002  and 2003 when taxes and  oil prices were                                                                    
low. He wondered  about profit margin at  today's prices. He                                                                    
queried  whether the  company  could make  more money  today                                                                    
even under  the current tax regime.  Mr. Sheffield responded                                                                    
that expectations  and prices changed.  He claimed  that the                                                                    
analysis was difficult to make.                                                                                                 
                                                                                                                                
Mr. Sheffield  continued with his presentation  on Slide 10,                                                                    
"U.S. Shale  Liquids Production."  The chart  illustrated 50                                                                    
million barrels  of new liquid hydrocarbons  produced in the                                                                    
United  States from  shale  in 2009.  He  expected that  the                                                                    
volume would dramatically increase over the next few years.                                                                     
                                                                                                                                
Mr. Sheffield  discussed "Alaska's  Severance Tax"  on Slide                                                                    
11.                                                                                                                             
                                                                                                                                
   · Pre 2007: ELF (Oooguruk project sanction)                                                                                  
        o Low rate fields- no severance tax                                                                                     
   · 2007: PPT (Oooguruk construction)                                                                                          
        o 20% investment tax credit                                                                                             
        o 22.5 % net profits tax                                                                                                
        o Moderate progressivity                                                                                                
   · 2008: ACES (Oooguruk first production)                                                                                     
        o 20% investment tax credit                                                                                             
        o 25% base tax rate                                                                                                     
        o Aggressive progressivity (not indexed)                                                                                
        o Maximum tax rate = 75%                                                                                                
                                                                                                                                
Mr. Sheffield  conveyed that the Alaska  Clear and Equitable                                                                    
Share (ACES)  tax structure was  not competitive  with other                                                                    
areas.  He opined  that  ACES places  Alaska  projects at  a                                                                    
disadvantage.                                                                                                                   
                                                                                                                                
1:57:06 PM                                                                                                                    
                                                                                                                                
Mr. Sheffield  introduced Slide  12: "What's  Next? Oooguruk                                                                    
Expansion."   He explained the  map illustrating  the island                                                                    
drill site  and the development  wells. He commented  on the                                                                    
well log with production  horizons. He highlighted the Turok                                                                    
area, which was a small  volume producing well. Another plan                                                                    
included the development of onshore  drill wells that access                                                                    
the reserves that underlie the Colville River Delta.                                                                            
                                                                                                                                
Representative Gara  asked whether  the Torok well  site was                                                                    
considered an exploration, development,  or hybrid well. Mr.                                                                    
Sheffield  responded  that he  would  call  it an  appraisal                                                                    
well. The presence  of hydrocarbons in the  system was known                                                                    
prior  to   the  project.  At  question   was  the  economic                                                                    
viability of the well.                                                                                                          
                                                                                                                                
Representative Gara  stated that  the term  "appraisal well"                                                                    
had not been mentioned  in committee meetings. Mr. Sheffield                                                                    
remarked  that  the  Torok  well   did  not  qualify  as  an                                                                    
exploration well.                                                                                                               
                                                                                                                                
Vice-chair  Fairclough wondered  how an  appraisal well  was                                                                    
permitted in Alaska.  Mr. Sheffield did not  know the answer                                                                    
but would provide it to the committee.                                                                                          
                                                                                                                                
Representative Doogan  referred to the phrase  "low quality"                                                                    
and wondered  what was meant  by that phrase.  Mr. Sheffield                                                                    
explained  that  the  reservoir  rather  than  the  oil  was                                                                    
qualified  as   "low  quality."  The  permeability   of  the                                                                    
reservoir was of low quality.                                                                                                   
                                                                                                                                
Mr. Sheffield  continued with his presentation  on Slide 13:                                                                    
"Expansion Project Scope."                                                                                                      
                                                                                                                                
   · 1 or 2 onshore drillsites connected to Oooguruk tie-in                                                                     
     pad                                                                                                                        
   · 25 development wells envisioned                                                                                            
   · Large, but challenged oil resource                                                                                         
   · Project contingent upon pilot waterflood success                                                                           
   · Must compete with low risk, high margin projects in                                                                        
     L48                                                                                                                        
                                                                                                                                
2:01:11 PM                                                                                                                    
                                                                                                                                
Mr. Sheffield remarked  that much had changed  over the past                                                                    
eight  years.  He  discussed   Slide  14,  "Competition  for                                                                    
Capital - Texas Projects."                                                                                                      
                                                                                                                                
   · Pioneer resource plays in Texas                                                                                            
        o Spraberry: West Texas                                                                                                 
        o Eagle Ford shale: South Texas                                                                                         
        o Barnett shale: North Texas                                                                                            
   · Investment characteristics                                                                                                 
       o Low geologic and project and execution risk                                                                            
       o Short project cycle times and high margins                                                                             
       o Year round operations and simple logistics                                                                             
        o Low severance taxes - no progressivity                                                                                
        o Much lower well and services costs                                                                                    
        o Flexibility to ramp up or ramp down activity                                                                          
                                                                                                                                
Co-Chair Thomas  wondered whether  the other  areas provided                                                                    
tax  incentives.  Mr.  Sheffield responded  that  the  other                                                                    
areas did not provide tax credits.                                                                                              
                                                                                                                                
Representative Doogan wondered  whether additional costs are                                                                    
incurred outside of Alaska. Mr.  Sheffield replied that most                                                                    
of the land  was private and that royalties  ranged from 1/8                                                                    
to 1/4. The 4.6 percent severance tax is the only charge.                                                                       
                                                                                                                                
Representative Wilson wondered how long  it took to permit a                                                                    
project in Texas.  Mr. Sheffield did not  know, but believed                                                                    
it would take weeks.                                                                                                            
                                                                                                                                
Representative  Wilson  wondered  whether royalties  on  the                                                                    
land  were paid  in Texas.  Mr. Sheffield  replied that  the                                                                    
royalties  were  paid  directly to  the  landowner  and  the                                                                    
severance tax was 4.6 percent.                                                                                                  
                                                                                                                                
2:04:41 PM                                                                                                                    
                                                                                                                                
Mr. Sheffield  discussed Slide 15,  "Pioneer: 2011  "Back to                                                                    
Our  Roots."   The  Spraberry   field  transformed   from  a                                                                    
declining  field   to  a  growing   field  due   to  massive                                                                    
investment. He  highlighted the expansion of  the Eagle Ford                                                                    
Shale field  with 2000 drilling  locations and 7  rigs, soon                                                                    
increasing to 19.  He mentioned the Barnet  Shale Combo with                                                                    
600 drilling locations and 2 rigs running.                                                                                      
                                                                                                                                
Co-Chair  Stoltze  asked  if  the  mature  fields  in  Texas                                                                    
provide hope  for extending  the life  of fields  in Alaska.                                                                    
Mr. Sheffield  referred to Slide  15 and explained  that the                                                                    
margins  had   increased.  The  combination   of  horizontal                                                                    
drilling   and  hydraulic   fracturing  result   in  greater                                                                    
efficiency.  He noted  that the  existing infrastructure  in                                                                    
Texas is taxed with the increased production.                                                                                   
                                                                                                                                
Representative  Guttenberg referred  to the  rising tide  of                                                                    
commodities.  He  wondered  whether the  rising  commodities                                                                    
would  create additional  available  capital. Mr.  Sheffield                                                                    
replied  that as  commodity  prices  increased and  drilling                                                                    
ramped  up  that additional  cash  flow  followed suit.  The                                                                    
company continued to seek new opportunities.                                                                                    
                                                                                                                                
2:09:31 PM                                                                                                                    
                                                                                                                                
Representative  Costello wondered  how Alaska  could compete                                                                    
with  the   scenario  presented  in  other   locations.  Mr.                                                                    
Sheffield replied  that Alaska's  geography affects  its tax                                                                    
structure  and the  time  frames needed  to  move a  project                                                                    
forward.  The state  did have  one big  lever that  it could                                                                    
pull, which was  fiscal policy. One deterrent  to the Alaska                                                                    
projects  is the  progressivity element.  The changes  in HB
110 were  significant steps that  would provide  the company                                                                    
with the tools to compete.                                                                                                      
                                                                                                                                
Mr.   Sheffield  discussed   Slide   16,  "Competition   for                                                                    
Capital."  The purple  line illustrated  on the  graph shows                                                                    
the level of  drilling activity in the state.  The blue line                                                                    
illustrated drilling activity in  Spraeberry. He pointed out                                                                    
that Pioneer  plans to drill  over five times the  amount of                                                                    
wells drilled in Alaska.                                                                                                        
                                                                                                                                
Mr. Sheffield  provided closing remarks on  Page 17 "Closing                                                                    
Thoughts."                                                                                                                      
                                                                                                                                
   · Oooguruk expansion must compete with L48 resource                                                                          
     plays with:                                                                                                                
        o Large resource potential in Pioneer's back yard                                                                       
        o Short project cycle time and high margins                                                                             
        o Very favorable fiscal terms                                                                                           
        o Much lower capital cost                                                                                               
   · Oooguruk expansion                                                                                                         
        o New project - new barrels in TAPS                                                                                     
        o Create ~500 construction jobs                                                                                         
        o Create ~100 development jobs                                                                                          
   · HB 110 will have a positive, material impact                                                                               
        o Increased investment credits for well related                                                                         
          costs                                                                                                                 
        o Bracketing of progressivity                                                                                           
        o Provide administrative certainty                                                                                      
                                                                                                                                
2:13:55 PM                                                                                                                    
                                                                                                                                
Representative  Hawker wondered  about the  dollar value  of                                                                    
the  mentioned  expansion  project.  Mr.  Sheffield  replied                                                                    
hundreds of millions. He did  not have an approximate number                                                                    
at the time.                                                                                                                    
                                                                                                                                
Representative  Gara referred  to a  tax benefit  related to                                                                    
royalty  relief  for  the   Oooguruk  field.  Mr.  Sheffield                                                                    
responded  that  Pioneer  did   receive  royalty  relief  at                                                                    
Oooguruk.  He stated  that the  primary  reason for  seeking                                                                    
relief  was  that  the  existing lease  was  burdened  by  a                                                                    
royalty plus thirty percent net profits lease.                                                                                  
                                                                                                                                
2:15:46 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:18:49 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Representative  Doogan recalled  unanswered questions  asked                                                                    
in previous testimony.                                                                                                          
                                                                                                                                
WENDY   KING,   VICE    PRESIDENT   OF   EXTERNAL   AFFAIRS,                                                                    
CONOCOPHILLIPSPHILLIPS   ALASKA,   discussed  a   PowerPoint                                                                    
presentation titled  "House Finance HB 110"  dated March 23,                                                                    
2011  (copy on  file).  She began  with  Slide 2,  "Positive                                                                    
Impact of HB 110."                                                                                                              
                                                                                                                                
   · Be more competitive                                                                                                        
   · Create More Jobs for Alaskans                                                                                              
   · Increase Production                                                                                                        
                                                                                                                                
Ms.  King discussed  Page 3,  "More Production  Key to  TAPS                                                                    
Future."  The  graph  provided a  plot  of  production.  The                                                                    
outline   illustrates   the  anticipation   of   significant                                                                    
challenges  with  low flow  in  the  pipeline. The  industry                                                                    
delivered  a   6  percent  production  decline   curve.  The                                                                    
challenges of low flow might be  faced in Alaska in the next                                                                    
decade.  She believed  it unlikely  that  new projects  will                                                                    
deliver oil production in the next ten years.                                                                                   
                                                                                                                                
Ms. King  discussed Page 4:  "Alaska's Decline  Rate Highest                                                                    
in US." She  mentioned that a number  of states successfully                                                                    
mitigated and  increased their oil production  over the last                                                                    
eight  year  period.  She   noted  that  Texas  successfully                                                                    
mitigated its  production decline.  Alaska declined  more in                                                                    
the last eight years than any other state.                                                                                      
                                                                                                                                
Ms. King  continued with Slide  5: "Alaska Lags  Other Major                                                                    
Oil  States:" She  noted the  comparison  between Texas  and                                                                    
Alaska.                                                                                                                         
                                                                                                                                
2:24:37 PM                                                                                                                    
                                                                                                                                
Representative Hawker  referred to a comment  made regarding                                                                    
a  lack   of  evidence  that  any   Alaska  producers  moved                                                                    
investment into the Lower 48.  He asked if the tax situation                                                                    
in   Alaska    affected   the   investment    strategy   for                                                                    
ConocoPhillips.  He   wondered  whether  Alaska  was   in  a                                                                    
position to compete with shale developments.                                                                                    
                                                                                                                                
Ms. King  reflected on an example  regarding Eagleford shale                                                                    
from  a   recent  analyst  presentation.  She   stated  that                                                                    
ConocoPhillips  invested $1.4  billion  in Eagleford  shale,                                                                    
while Alaska remained flat at $900 million.                                                                                     
                                                                                                                                
Representative  Hawker asked  what  an analyst  presentation                                                                    
was.  Ms.  King  responded   that  an  analyst  presentation                                                                    
included  an overview  provided by  ConocoPhillips regarding                                                                    
investment criteria and performance.                                                                                            
                                                                                                                                
Representative  Wilson   referenced  Slide  5   and  noticed                                                                    
Alaska's decline  throughout a  variety of tax  regimes. Ms.                                                                    
King  remarked that  a  different  commercial structure  was                                                                    
necessary to  "chase the  oil" and  highlighted Texas  as an                                                                    
example of success. She stated  that the fiscal structure in                                                                    
Alaska has  been a deterrent  to investment since  2005. She                                                                    
stressed  that ConocoPhillips  believed that  additional oil                                                                    
potential exists  on the North Slope,  although the resource                                                                    
is challenged.                                                                                                                  
                                                                                                                                
Representative  Neuman asked  about  the  amount of  dollars                                                                    
invested in  Alaska in 2003  to produce one  million barrels                                                                    
of oil compared  to those invested currently  to produce 650                                                                    
thousand barrels.  Ms. King replied  that she  would address                                                                    
the question with several slides later in the presentation.                                                                     
                                                                                                                                
Vice-chair  Fairclough requested  discussion about  Alaska's                                                                    
recoverable   oil.  She   recalled   that   33  percent   of                                                                    
recoverable  oil  existed  in a  particular  reservoir.  She                                                                    
wondered  how Alaska  could compete  for investment  dollars                                                                    
under  the  current  tax structure.  Ms.  King  provided  an                                                                    
example related  to Prudhoe Bay.  The original  oil estimate                                                                    
on  the  field  was  thirty  billion  barrels  of  oil.  The                                                                    
industry accepted  less than  100 percent  recovery factors.                                                                    
Recovery  factors  range from  20  to  40 percent.  Recovery                                                                    
increased by  1 percent  in Prudhoe  Bay, which  amounted to                                                                    
300 million  barrels of  oil. She  cited 60  million barrels                                                                    
for one  additional percentage of  recovery for  the Kuparuk                                                                    
field. The legacy fields through  improved technology may be                                                                    
profitable, yet the cost to the industry is greater.                                                                            
                                                                                                                                
2:32:05 PM                                                                                                                    
                                                                                                                                
Ms. King moved  on to Slide 6, "Why Isn't  Alaska Booming at                                                                    
$100/bbl?" She  explained that  the left  side of  the graph                                                                    
represents Lower  48 oil production.  The Lower  48 declined                                                                    
from  4.7 million  barrels of  oil  per day  to 4.3  million                                                                    
barrels of  oil per day. Production  increased substantially                                                                    
to  4.8  million  barrels  of  oil  per  day  in  2008  with                                                                    
increased oil prices.                                                                                                           
                                                                                                                                
Ms.  King  explained  that  the  right  side  of  the  graph                                                                    
represents  Alaska. Alaska's  production declined  steadily,                                                                    
but  did not  see  the uptake  noted in  the  Lower 48.  The                                                                    
analysis  provided in  the graphs  reflects  oil rig  count,                                                                    
omitting  gas. The  oil rig  use in  the Lower  48 increased                                                                    
dramatically. The rig drilling  on the North Slope, however,                                                                    
remains flat.                                                                                                                   
                                                                                                                                
Representative Gara  understood that  roads in the  Lower 48                                                                    
allow for  the development  of smaller pools  of oil  with a                                                                    
greater number of  small rigs. He asked if a  greater use of                                                                    
rigs  always   translates  to  greater  quantities   of  oil                                                                    
produced.                                                                                                                       
                                                                                                                                
Ms.  King  responded  that the  different  fiscal  structure                                                                    
available  in  the  lower 48  allows  for  greater  drilling                                                                    
opportunities. She  believed the influence combined  the tax                                                                    
structure and  the overall cost  to move North Slope  oil to                                                                    
the market. She highlighted the  lack of increase in oil rig                                                                    
activity despite  the largest oil  price cycles seen  in the                                                                    
industry.  The activity  occurring  in  Alaska retained  the                                                                    
flat line indicating rig production.                                                                                            
                                                                                                                                
Representative Gara  clarified that a greater  number of oil                                                                    
rigs might be  employed to produce a small amount  of oil in                                                                    
an  area where  roads are  abundant. Ms.  King replied  that                                                                    
projects in the Lower  48 supported greater activity because                                                                    
of the  combination of the  lower cost structure  and better                                                                    
fiscal structure.                                                                                                               
                                                                                                                                
Representative Guttenberg  asked if  the tax regime  was the                                                                    
only important  factor in  the flat line  seen on  the right                                                                    
side of Slide 6. Ms. King  responded no. She stated that the                                                                    
objective of  the graph was  to provide a comparison  of oil                                                                    
rig activity in the Lower 48 versus Alaska.                                                                                     
                                                                                                                                
2:38:59 PM                                                                                                                    
                                                                                                                                
Representative Costello  was more concerned  with production                                                                    
than  rig  activity.  She  wondered  whether  ConocoPhillips                                                                    
would increase production  in the event that  HB 110 passed.                                                                    
Ms.  King   could  provide   no  guarantees   regarding  oil                                                                    
production. Even  if activity and investment  are increased,                                                                    
production  cannot  be  guaranteed.   She  stated  that  the                                                                    
passage  of  HB  110  may   lead  to  mitigating  production                                                                    
decline.                                                                                                                        
                                                                                                                                
Representative Costello wondered whether  changes in the tax                                                                    
structure would  lead to a  greater ability to  compete. Ms.                                                                    
King replied in the affirmative.                                                                                                
                                                                                                                                
Representative Costello  queried the marginal  and effective                                                                    
tax rates.  She asked about the  relationship between actual                                                                    
and  marginal  tax  rates.  Ms.  King  would  speak  to  the                                                                    
question later in the presentation.                                                                                             
                                                                                                                                
Co-Chair Stoltze  asked for further  elaboration of  the "no                                                                    
guarantee"  remark  made  earlier  by  Ms.  King.  Ms.  King                                                                    
replied that  "dry holes" are  sometimes drilled,  even with                                                                    
the  best  of intentions.  She  stressed  that the  geologic                                                                    
basin  is strong  in Alaska.  She hoped  that ConocoPhillips                                                                    
would be the  company to find additional oil  in Alaska. She                                                                    
stressed the importance of a good investment climate.                                                                           
                                                                                                                                
2:42:28 PM                                                                                                                    
                                                                                                                                
Ms.  King continued  with Slide  7: "Is  This the  Future We                                                                    
Want  for  Alaska."  The Energy  Information  Administration                                                                    
(EIA) provided  the projections of Alaska's  production over                                                                    
the next  10 years.  The graph compared  Alaska to  Lower 48                                                                    
onshore and Lower 48 offshore.  The EIA presented strong oil                                                                    
production from Lower 48 onshore.  The anticipated growth is                                                                    
26  percent over  the  next decade.  The  Lower 48  offshore                                                                    
would  continue to  grow production  by  another 44  percent                                                                    
over  the next  decade. Alaska,  however, is  anticipated to                                                                    
decline another 39 percent over the next decade.                                                                                
                                                                                                                                
Ms. King  moved on  to Slide  8: "ELF  Generated Significant                                                                    
Incremental  Production." The  Economic  Limit Factor  (ELF)                                                                    
was the tax  structure in place through  2006. She explained                                                                    
that  in  1989  the  Department   of  Revenue  (DOR)  had  a                                                                    
production  forecast illustrated  with  a grey  line on  the                                                                    
graph. The green line represents  the oil price. A number of                                                                    
new developments  occurred between  1989 and  2010 including                                                                    
Midnight  Sun, Polaris,  Prudhoe Bay,  Aurora, Borealis  and                                                                    
Orion.  She  highlighted  the  significance  of  the  Alpine                                                                    
field.  While low  production was  anticipated  as early  as                                                                    
1989, the  combination of  the tax  policy, the  good rocks,                                                                    
and the  investment levels provided  by the industry  led to                                                                    
incremental   production.  Wells   developed  in   1989  now                                                                    
comprise 2/3 to 3/4 of total production.                                                                                        
                                                                                                                                
Ms. King  discussed Slide 9:  "North Slope  Investment Under                                                                    
ELF." The  chart compared  industry investment  levels under                                                                    
the  ELF  tax  structure.  The  industry  was  investing  an                                                                    
average of $2.7 billion on an annual basis.                                                                                     
                                                                                                                                
Representative  Gara  referred  to  DOR  charts  citing  the                                                                    
highest investment year on the  North Slope as 2009 or 2010.                                                                    
The data in  the charts presented by DOR  was different than                                                                    
that provided by ConocoPhillips. He wondered why.                                                                               
                                                                                                                                
2:47:34 PM                                                                                                                    
                                                                                                                                
Ms. King  replied that different criteria  for the presented                                                                    
numbers such  as a  2010 dollar basis  and pure  capital may                                                                    
have been  used. She added that  the red dotted line  on the                                                                    
graph  represents   recent  numbers   for  the   purpose  of                                                                    
comparison.                                                                                                                     
                                                                                                                                
Ms.  King  returned  to  her  presentation  with  Slide  10:                                                                    
"Alaska  Not  Competitive  Marginal  Government  Take."  She                                                                    
explained   that  the   study   shown   was  performed   for                                                                    
ConocoPhillips   by  PFC   energy.  The   graph  illustrates                                                                    
marginal  government  take at  $100  barrel  oil price.  She                                                                    
offered  to provide  an additional  graph  to the  committee                                                                    
illustrating  total  government  take.  Marginal  government                                                                    
take is analyzed by  ConocoPhillips. The graph characterizes                                                                    
a component of the fiscal structure.                                                                                            
                                                                                                                                
Representative Hawker wondered who  PFC Energy was. Ms. King                                                                    
responded  that  PFC  Energy  was  a  consulting  firm.  She                                                                    
believed that  they were a  reputable company  that produced                                                                    
quality work.                                                                                                                   
                                                                                                                                
Representative  Hawker  had  heard  comments  and  testimony                                                                    
indicating that  marginal government take was  an irrelevant                                                                    
statistic.  He  wondered whether  that  was  true. Ms.  King                                                                    
believed that  it was clearly  not an  irrelevant statistic.                                                                    
She  noted  that the  information  described  an element  of                                                                    
Alaska's    fiscal   structure    and   was    critical   in                                                                    
ConocoPhillips' investment decisions.                                                                                           
                                                                                                                                
Representative  Gara wondered  about actual  government take                                                                    
and asked  to see a  chart similar to Slide  10 exemplifying                                                                    
taxes paid rather than marginal government take.                                                                                
                                                                                                                                
2:52:58 PM                                                                                                                    
                                                                                                                                
Ms. King  responded that they  did have the  requested chart                                                                    
prepared for average government  take and they would provide                                                                    
it to  the committee.  She assured that  marginal government                                                                    
take did affect ConocoPhillips.                                                                                                 
                                                                                                                                
Representative  Gara  requested  data including  actual  tax                                                                    
with last  year's oil prices.  Ms. King responded  that they                                                                    
would provide the information to the committee.                                                                                 
                                                                                                                                
Ms.   King  discussed   Slide  11:   "Progressivity  Removes                                                                    
Upside." The  red bars  represent ConocoPhillips  net income                                                                    
and  the blue  bar  represents the  average  oil price.  The                                                                    
company  observed  that if  the  oil  price increased  their                                                                    
income  would not  increase in  Alaska. ConocoPhillips  paid                                                                    
over $16  billion in  taxes and  royalties to  generate $7.8                                                                    
billion in net income.  Incremental investment decisions are                                                                    
thus  affected. The  net income  has become  desensitized to                                                                    
oil price, as  greater taxes are paid with  increases in oil                                                                    
prices.                                                                                                                         
                                                                                                                                
Representative  Doogan  expressed  disbelief  regarding  the                                                                    
constant net income. He requested further information.                                                                          
                                                                                                                                
2:57:48 PM                                                                                                                    
                                                                                                                                
Ms. King  replied that the  progressivity was so  steep that                                                                    
higher oil prices lead to increased taxes.                                                                                      
                                                                                                                                
Representative   Doogan   understood  that.   However,   the                                                                    
company's  take  continued  to   increase  and  he  did  not                                                                    
understand  how it  could stay  constant.  Ms. King  assured                                                                    
that the numbers presented were accurate.                                                                                       
                                                                                                                                
Representative Costello wondered whether  it was possible to                                                                    
answer the question.                                                                                                            
                                                                                                                                
Representative  Guttenberg asked  if  a point  in the  graph                                                                    
exists where  the company was  earning less money.  Ms. King                                                                    
guessed  that the  confusion for  Representative Doogan  and                                                                    
Representative   Guttenberg    might   be    benefitted   by                                                                    
understanding the  progressivity feature.  The progressivity                                                                    
applies  to  everything.  As the  tax  rate  increases,  the                                                                    
effect is compounded. She  mentioned the governor's proposed                                                                    
bracketing component.                                                                                                           
                                                                                                                                
Vice-chair  Fairclough   remarked  that  the   current  plan                                                                    
involved sweeping back  and taxing all of  the money instead                                                                    
of the portion of the additional dollar.                                                                                        
                                                                                                                                
3:01:17 PM                                                                                                                    
                                                                                                                                
Ms.  King discussed  "Risk-Based Decision  Making" on  Slide                                                                    
12. She  informed that the  slide was a generic  example for                                                                    
illustrative purposes.  The slide presented an  example of a                                                                    
method  used by  ConocoPhillips.  The  concept of  assessing                                                                    
risk  and uncertainty  is conducted  by most  companies. She                                                                    
highlighted that delays in Alaska  are viewed differently as                                                                    
they can cost  the company an entire year  of valuable time.                                                                    
She  noted the  effect of  progressivity illustrated  on the                                                                    
left  side  of the  slide.  She  added that  the  cumulative                                                                    
probability was illustrated on the  right side of the slide.                                                                    
With  the progressive  feature,  the  probability of  losing                                                                    
money on  a project  increases. One  piece of  the structure                                                                    
included was capital credits.                                                                                                   
                                                                                                                                
Ms.   King  discussed   Slide   13:  "Progressivity   Breaks                                                                    
Risk/Reward  Balance."  The  chart  compares  a  $1  billion                                                                    
investment  in Alaska  to the  same  investment in  offshore                                                                    
Alaska or  Gulf of  Mexico. For  an offshore  investment, as                                                                    
oil price increases, the investor  and government share also                                                                    
increase.  Using  the same  $1  billion  investment made  in                                                                    
Alaska,  subject to  ACES tax  structure, the  percentage to                                                                    
the  state substantially  increases in  relationship to  the                                                                    
investors.                                                                                                                      
                                                                                                                                
Ms.   King  discussed   "Core  Fields   are  Key   to  State                                                                    
Production" on  Slide 14.  The core  fields of  Prudhoe Bay,                                                                    
Kuparuk,  and Alpine  produce  approximately  90 percent  of                                                                    
Alaska's  oil. The  core fields  are  forecasted to  deliver                                                                    
four billion barrels of oil production.                                                                                         
                                                                                                                                
Ms. King  detailed Slide 15: "Investment  Reduces Production                                                                    
Decline."    She    explained    that    specialists    with                                                                    
ConocoPhillips look  for ways to  glean additional  oil from                                                                    
the existing  fields. The  concept is  that "big  fields get                                                                    
bigger."    The    Kuparuk   satellites    are    generating                                                                    
approximately  20-25 percent  of Alaska's  total production.                                                                    
Subsequent   investments  from   the  original   development                                                                    
deliver  substantial volumes.  She  stated  that the  Alpine                                                                    
field  yields  40  percent  of  production  from  satellites                                                                    
developed subsequent to the  original development. She noted                                                                    
that  the technology  required  to  develop these  satellite                                                                    
fields was  available through  ConocoPhillips if  the fiscal                                                                    
structure was amenable.                                                                                                         
                                                                                                                                
Ms.  King continued  with Page  16 "HB  110 Improves  Alaska                                                                    
Investment Climate."                                                                                                            
                                                                                                                                
   · Existing Units                                                                                                             
        o Bracketing Progressivity is critical component                                                                        
        o Moves  Alaska toward  a more  balanced risk/reward                                                                    
          environment                                                                                                           
        o Incentivizes   investment  in   core  fields   and                                                                    
          existing units                                                                                                        
        o Support   longer   term  projects/   longer   term                                                                    
          investment                                                                                                            
   · Improved Well Credits                                                                                                      
        o Incentivizes well related activity                                                                                    
        o Increased  drilling/workovers  provide  additional                                                                    
          short-term jobs                                                                                                       
        o Support  language   being  clarified   to  include                                                                    
          workovers                                                                                                             
   · Administrative Improvements                                                                                                
        o Audit period  to 4 years  - provides  improved tax                                                                    
          payment predictability                                                                                                
        o Interest  -  eliminates  punitive  rate  for  good                                                                    
          faith tax filings                                                                                                     
        o Monthly  vs.   annual  progressivity   -  improves                                                                    
          alignment on cost and revenue calculations                                                                            
   · Effective Date                                                                                                             
        o COP   believes    effective   dates    should   be                                                                    
          accelerated by 1 year.                                                                                                
   · ConocoPhillips supports HB 110                                                                                             
                                                                                                                                
Ms. King  concluded with Slide  17: "Alaska's Oil  Future is                                                                    
at risk."  She reiterated that bracketing  progressivity was                                                                    
a critical component  of HB 110. She believed  that the bill                                                                    
would  incentivize investment  in  core  field and  existing                                                                    
units,  which is  critical  in support  of  the longer  term                                                                    
projects  needed  to  help offset  the  production  decline.                                                                    
Improved   well  credits   were   considered  important   to                                                                    
ConocoPhillips.  The  administrative   improvements  in  the                                                                    
original version of  the bill such as the  audit period, the                                                                    
interest rate,  and the monthly versus  annual progressivity                                                                    
were  viewed  as  positive. The  timing  was  critical.  She                                                                    
commented that high oil prices  generate revenue. Active rig                                                                    
use has increased  in the Lower 48, while  remaining flat in                                                                    
Alaska.  Production in  the Lower  48 continued  to increase                                                                    
while production  forecasts in Alaska decline.  The expected                                                                    
future  projection is  down, while  Lower  48 production  is                                                                    
expected to increase.  She opined that HB  110 could provide                                                                    
an important step in changing the picture.                                                                                      
                                                                                                                                
3:10:16 PM                                                                                                                    
                                                                                                                                
Representative Hawker wondered about  the role of additional                                                                    
front-end  credits. He  wondered whether  increasing credits                                                                    
that  the  state  is  offering   the  best  way  to  improve                                                                    
production. Ms.  King believed that credits  alone would not                                                                    
lead  to   improved  production,  but  the   combination  of                                                                    
progressivity change and credits were important.                                                                                
                                                                                                                                
Representative  Hawker asked  about  the difference  between                                                                    
well  credits and  front-end exploration  credits. Ms.  King                                                                    
explained  that   the  existing  exploration   credits  vary                                                                    
depending  upon distance  from existing  infrastructure. The                                                                    
governor's  bill proposed  that the  same mechanism  used in                                                                    
the  front-end exploration  credits  is given  a 40  percent                                                                    
well credit for  the portion of the  capital activity needed                                                                    
for any well drilled on the  North Slope. The purpose of the                                                                    
well credit is to stimulate additional drilling activity.                                                                       
                                                                                                                                
Representative Costello  referred to Slide 13.  She believed                                                                    
that  the  graph might  present  the  answer to  an  earlier                                                                    
question   by  Representative   Doogan  regarding   industry                                                                    
investment.  She wondered  if the  chart exhibited  the core                                                                    
issue  that  the  industry   voiced  with  progressivity  as                                                                    
established  by  ACES. She  understood  why  the idea  might                                                                    
prove  counterintuitive to  Representative Doogan.  Ms. King                                                                    
agreed and stated  that the graph was used  often to explain                                                                    
the uncertainty with progressivity.                                                                                             
                                                                                                                                
3:15:36 PM                                                                                                                    
                                                                                                                                
Representative    Wilson   requested    a   similar    graph                                                                    
illustrating  the  potential outcome  of  HB  110. Ms.  King                                                                    
agreed to provide the requested data.                                                                                           
                                                                                                                                
Vice-chair Fairclough  informed that an  additional question                                                                    
by Representative  Gara regarding slide  12 and 13  would be                                                                    
asked.                                                                                                                          
                                                                                                                                
Co-Chair  Stoltze remarked  that  the requested  information                                                                    
provided by DOR would be distributed shortly.                                                                                   
                                                                                                                                
3:17:31 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
3:26:13 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
ED  DUNCAN, PRESIDENT  AND  CHIEF  OPERATING OFFICER,  GREAT                                                                    
BEAR PETROLEUM (via  teleconference), introduced himself and                                                                    
his colleague.                                                                                                                  
                                                                                                                                
RYAN MOYNAGH, VICE PRESIDENT OF  FINANCE AND CHIEF FINANCIAL                                                                    
OFFICER,   GREAT   BEAR  PETROLEUM   (via   teleconference),                                                                    
discussed  a  PowerPoint  presentation  titled  "Great  Bear                                                                    
Petroleum   LLC,  Presentation   to   the  House   Resources                                                                    
Committee" dated February 18, 2011 (copy on file).                                                                              
                                                                                                                                
Mr. Moynagh  highlighted the  unprecedented high  oil price.                                                                    
He wished  to propose a  strategy to reverse the  decline of                                                                    
oil production  in Alaska. He acknowledged  that current oil                                                                    
production in  Alaska was  one-quarter of  that seen  at its                                                                    
peak. The combination of price  and production has disguised                                                                    
the problem.  He expected large  implications for  the state                                                                    
if the price of oil drops.                                                                                                      
                                                                                                                                
3:31:42 PM                                                                                                                    
                                                                                                                                
Mr. Moynagh  stated that the  development of  new technology                                                                    
in  the  oil  industry  contributed  to  great  change.  The                                                                    
numbers of  opportunities in the  oil and gas  industry have                                                                    
increased  in  the  last few  years.  New  emerging  markets                                                                    
opened.  The  issue  then  becomes   one  of  which  mammoth                                                                    
resource will  be developed to  the exclusion of  others. He                                                                    
claimed  that  his company  could  not  control prices,  but                                                                    
could  control  volumes.  He   stressed  that  Great  Bear's                                                                    
strategy  could dramatically  increase production  levels in                                                                    
Alaska. Great Bear  was committed to invest  and reinvest in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Mr. Moynagh discussed Slide 4:  "Tough Fiscal Terms Suppress                                                                    
Activity."                                                                                                                      
                                                                                                                                
    · The most important factor in exploration investment is                                                                    
      Prospectivity, or the likelihood of discovering oil                                                                       
      or gas in commercial quantities. The industry will                                                                        
      focus where the rocks are good.                                                                                           
    · Effective   conversation    from   prospectivity    to                                                                    
      commercial production ultimately controls the terms                                                                       
      and the size of government revenue.                                                                                       
    · Fiscal terms will influence the conversion efficiency                                                                     
      from    prospectivity    to   commercial    production                                                                    
      ultimately controlling government revenue.                                                                                
                                                                                                                                
3:35:15 PM                                                                                                                    
                                                                                                                                
Mr. Moynagh stated that he  did not wish to compare Alaska's                                                                    
fiscal  regime to  others in  the  nation or  the world.  He                                                                    
stated that  his comments regarding HB  110 related directly                                                                    
to the  needs of Great  Bear. He mentioned four  key aspects                                                                    
of HB 110.                                                                                                                      
                                                                                                                                
   · Progressivity                                                                                                              
   · Tax bracket                                                                                                                
   · Monthly versus annual computation of progressivity                                                                         
   · Tax credits                                                                                                                
                                                                                                                                
Mr. Moynagh opined that HB  110 clearly addressed the taxing                                                                    
of  oil   production  in  Alaska.   He  detailed   Slide  5:                                                                    
"Recognition of Alaska as a  Global Oil and Gas Producer has                                                                    
Declined."                                                                                                                      
                                                                                                                                
   · The easy conventional oil has been found.                                                                                  
   · Remaining large volume potential in unconventional                                                                         
     plays, e.g. heavy oil, shale oil & gas, CBM.                                                                               
   · Costs will continue to rise on perbarrel basis and                                                                         
     economic returns will decline due to                                                                                       
        o Field sizes getting smaller                                                                                           
        o Challenging operating environment                                                                                     
        o Exploration for new play types becoming riskier                                                                       
        o Identified plays such as "shallow heavy oil" and                                                                      
          "oil and gas shale" are expensive                                                                                     
   · The ability to deliver unconventional resources to                                                                         
     market rests primarily on commercial risk rather than                                                                      
     technical risk factors.                                                                                                    
   · Discovery and development of Alaska's remaining                                                                            
     potential   would   be    significantly   enhanced   by                                                                    
     improvements in Alaska's fiscal terms such as those                                                                        
     terms in HB 110.                                                                                                           
                                                                                                                                
Mr. Moynagh added  that any reduction in  the production tax                                                                    
would   prove   positive  for   the   high   cost  of   this                                                                    
unconventional process.                                                                                                         
                                                                                                                                
3:39:19 PM                                                                                                                    
                                                                                                                                
Mr. Moynagh stated that a  combination of tax bracketing and                                                                    
reduction  of  progressivity   buffers  producers  from  the                                                                    
cyclicality  of   the  business.  The  current   tax  system                                                                    
prevents producers  from benefitting  from high  oil prices.                                                                    
The business  is cyclical and  upside options  are necessary                                                                    
for industry.                                                                                                                   
                                                                                                                                
Mr.  Moynagh   discussed  moving  from  monthly   to  annual                                                                    
computation of  the production  tax. The  annual computation                                                                    
allows a company to model  and foreword plan its operations.                                                                    
With  the   monthly  computation,  the  production   tax  is                                                                    
calculated based  on actual monthly  prices. With  an annual                                                                    
computation,  prices and  costs are  calculated on  the same                                                                    
basis,   which  provides   a  "smoothing   effect"  of   the                                                                    
calculation of  the production tax, allowing  better ability                                                                    
to monitor risks.                                                                                                               
                                                                                                                                
Mr. Moynagh  addressed tax credits. Great  Bear endorsed the                                                                    
application  of   tax  credits.   Tax  credits   entice  and                                                                    
encourage  participants  to  reinvest. He  stated  that  tax                                                                    
credits ultimately increase production levels.                                                                                  
                                                                                                                                
3:43:20 PM                                                                                                                    
                                                                                                                                
Representative Wilson asked about  Slide 8: "drill 250 wells                                                                    
per  year for  20 years  starting 2013."  She referred  to a                                                                    
quote stating  "we have an aggressive  program that supports                                                                    
250 wills  per year for  20 years starting 2013."  She asked                                                                    
if Great  Bear would begin  drilling in  2013 if HB  110 did                                                                    
not pass.                                                                                                                       
                                                                                                                                
Mr.  Moynagh answered  that the  information provided  was a                                                                    
success case production profile.  Great Bear must access the                                                                    
capital markets  to obtain the necessary  finance to deliver                                                                    
the production  levels presented. A commercial  case must be                                                                    
demonstrated to  investors. He  believed that  the proposals                                                                    
put forth  in HB  110 would  have a  dramatic impact  on the                                                                    
ability to secure the needed  investment capital. Without HB
110, the prospects become more challenging.                                                                                     
                                                                                                                                
Representative  Wilson noted  that the  feedback from  prior                                                                    
presentations that  the existing  credits were  working well                                                                    
for the drilling  of the wells and that the  issues exist in                                                                    
the production aspect rather. She  wondered if the 2013 goal                                                                    
was  possible.  She wondered  if  Great  Bear possessed  the                                                                    
resources to move forward with the goal.                                                                                        
                                                                                                                                
Mr. Moynagh  stated no.  The program outlined  in 2013  is a                                                                    
full  development program.  Great Bear's  approximate budget                                                                    
for 2013  is $2  billion. He mentioned  a work  program that                                                                    
will be enacted  later in the year.  Discussions are ongoing                                                                    
with a number  of parties to refine the  composition and the                                                                    
necessary cost of the program.                                                                                                  
                                                                                                                                
3:48:10 PM                                                                                                                    
                                                                                                                                
Representative Hawker  acknowledged his own presence  at the                                                                    
House Resources  Committee presentation. He  mentioned Slide                                                                    
9, "Great Bear Petroleum  Potential Oil Production Profile."                                                                    
The   slide's   graph   illustrates   production   increases                                                                    
predicted  from 2012  through 2028.  He asked  if the  graph                                                                    
presents the  argument that the  state should not  amend the                                                                    
progressivity feature of the state's tax regime.                                                                                
                                                                                                                                
Mr. Moynagh clarified  that the purpose of the  slide was to                                                                    
argue  that changes  in progressivity  should  be made.  The                                                                    
graph  was   intended  to  demonstrate  the   magnitude  and                                                                    
potential  of  Great  Bear's  project.   The  issue  is  not                                                                    
exploration,  but   instead  the  ability   to  commercially                                                                    
extract  them. The  graph demonstrates  the impact  that the                                                                    
project  could  have on  a  state  level if  the  commercial                                                                    
environment was supportive.                                                                                                     
                                                                                                                                
Representative   Hawker   noted   Great   Bear's   expressed                                                                    
potential. He  asked for clarification  of status  in Alaska                                                                    
in terms of  equipment and capital. He  wondered whether the                                                                    
capital  was  contingent on  fiscal  terms  provided by  the                                                                    
state. Mr.  Moynagh clarified that Great  Bear was currently                                                                    
demonstrating the  viability of  the plan to  the investment                                                                    
community.  He  stated  that   Great  Bear  would  establish                                                                    
permanent  headquarters in  Anchorage. The  2013 program  is                                                                    
contingent upon  the significant capital of  several billion                                                                    
dollars raised  from the financial markets.  Alaska's fiscal                                                                    
regime will impact access of the markets.                                                                                       
                                                                                                                                
3:53:03 PM                                                                                                                    
                                                                                                                                
Representative  Gara referred  to Slide  7, "High  Bidder on                                                                    
537,500 Acres in the 2010  North Slope Areawide Lease Sale."                                                                    
He  assumed  that  Great   Bear  anticipated  prospects  for                                                                    
development  that  existed  under current  law  rather  than                                                                    
under the guidelines of HB  110, which was not introduced at                                                                    
the time  that the  prospects were  initiated.   Mr. Moynagh                                                                    
responded that  his company  bid for  the leases  before the                                                                    
proposed change  in legislation. He mentioned  his company's                                                                    
aggressive financing  strategy, which  is a function  of the                                                                    
proposal  of  eventual  legislative change.  Three  elements                                                                    
provide an  attractive outcome  for all  parties: technical,                                                                    
operational  and commercial.  The technical  and operational                                                                    
elements  of  the  strategy have  been  addressed,  but  the                                                                    
legislative changes must occur  to support an unconventional                                                                    
operation within the state.                                                                                                     
                                                                                                                                
Representative Gara admitted that  he may have misunderstood                                                                    
Mr.  Moynagh. He  wondered whether  the company  intented to                                                                    
invest $2 billion  later in the year.  Mr. Moynagh responded                                                                    
that the investment was planned for the 2013 timeframe.                                                                         
                                                                                                                                
Vice-chair Fairclough referred to  an article from Petroleum                                                                    
News  dated March  6, 2011  citing  testimony regarding  the                                                                    
investment  structure for  the  new  company assembled.  She                                                                    
quoted the article "Great Bear  is not looking for investors                                                                    
or   partners  except   for  a   possible  share   in  three                                                                    
dimensional seismic  shooting next  winter across  the North                                                                    
Slope." She  felt that the testimony  offered today differed                                                                    
from that in the article.  She requested clarification.  Mr.                                                                    
Duncan replied  that the publication's comment  was directed                                                                    
toward  an  inquiry  regarding Great  Bear  "shopping  their                                                                    
company for sale." The question  was directed at significant                                                                    
joint  venture plans  for  Great Bear.  His  answer was  the                                                                    
quote stated.                                                                                                                   
                                                                                                                                
Vice-chair  Fairclough  wondered   whether  Great  Bear  had                                                                    
drilled  a  single  well  on the  North  Slope.  Mr.  Duncan                                                                    
replied that  Great Bear had  not. He noted that  the leases                                                                    
were not awarded to his company.                                                                                                
                                                                                                                                
Vice-chair  Fairclough wondered  if Alaska  had not  awarded                                                                    
the lease, or payment for the lease was not received.                                                                           
                                                                                                                                
3:59:22 PM                                                                                                                    
                                                                                                                                
Mr.  Duncan replied  that the  state had  not presented  the                                                                    
final award or  request for payment. The  company would make                                                                    
the  payment  immediately  following the  state's  award  or                                                                    
request for payment.                                                                                                            
                                                                                                                                
Vice-chair  Fairclough thanked  Mr. Duncan  and Mr.  Moynagh                                                                    
for their testimony.                                                                                                            
                                                                                                                                
Vice-chair  Fairclough  asked  whether  the  company  had  a                                                                    
contract to  access the pipeline for  production. Mr. Duncan                                                                    
replied that they did not.                                                                                                      
                                                                                                                                
4:00:57 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
4:05:33 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Representative   Wilson  requested   information  from   the                                                                    
Department  of  Natural   Resources  (DNR)  regarding  Great                                                                    
Bear's   lease.   Co-Chair   Stoltze  responded   that   the                                                                    
administration would address the inquiry.                                                                                       
                                                                                                                                
4:06:29 PM                                                                                                                    
                                                                                                                                
DALE  PITTMAN,   ALASKA  PRODUCTION  MANAGER,   EXXON  MOBIL                                                                    
ALASKA, read  from a  letter dated March  23, 2011  (copy on                                                                    
file).                                                                                                                          
                                                                                                                                
     For  the record,  my name  is  Dale Pittman.  I am  the                                                                    
     Alaska  Production  Manager  for ExxonMobil,  based  in                                                                    
     Anchorage.  I  want  to thank  the  committee  for  the                                                                    
     opportunity  to  express ExxonMobil's  views  regarding                                                                    
     the  Committee Substitute  to  HB  110, the  Governor's                                                                    
     proposed amendments to Alaska's  oil and gas production                                                                    
     tax or ACES.                                                                                                               
                                                                                                                                
     Let  me  start  by  saying that  Alaska  has  been  and                                                                    
     continued to be an  important component of ExxonMobil's                                                                    
     world-wide   investment  portfolio.   We  have   had  a                                                                    
     presence in  Alaska for over  50 years and have  been a                                                                    
     key  player  in   Alaska's  oil  industry  development,                                                                    
     investing over $12 billion dollars  to date. We are the                                                                    
     operator  of Point  Thomson, hold  the largest  working                                                                    
     interest at  Prudhoe Bay (36.4%) and  the largest lease                                                                    
     holder of  discovered Alaska  gas resources.  We expect                                                                    
     to be  involved in  Alaska for many  years to  come and                                                                    
     will   continue  to   evaluate  potential   development                                                                    
     opportunities.                                                                                                             
                                                                                                                                
     At the  outset, so  our position is  clear, let  me say                                                                    
     that  ExxonMobil supports  the  presentation you  heard                                                                    
     today from  the Alaska  Oil and  Gas Association.  I do                                                                    
     not intend  to repeat  the thorough  technical comments                                                                    
     from that testimony.                                                                                                       
                                                                                                                                
     As for  our specific comments,  I would like  to state,                                                                    
     consistent   with  our   prior  testimony   during  the                                                                    
     hearings on both the PPT  and ACES, and on the proposed                                                                    
     tax  reform legislation  last session,  that ExxonMobil                                                                    
     believes  the  changes made  to  Alaska's  oil and  gas                                                                    
     production tax  since 2005 have  had a  negative impact                                                                    
     on  business activity  in Alaska  and Alaska's  overall                                                                    
     investment climate.  Alaska's current  production taxes                                                                    
     are  simply  too  high   to  stimulate  the  additional                                                                    
     investment required  to fully develop Alaska's  oil and                                                                    
     gas resources.                                                                                                             
                                                                                                                                
     It  is for  this reason  ExxonMobil is  pleased to  see                                                                    
     that  the   Administration  recognizes  the   need  for                                                                    
     material  change  to  Alaska's   current  oil  and  gas                                                                    
     production tax  system. We  are encouraged  by Governor                                                                    
     Parnell's  desire  to  see  increased  investments  and                                                                    
     further  oil  and  gas   development.  We  support  his                                                                    
     efforts to reform ACES and believe  CS HB 110 is a good                                                                    
     first step  towards what we  hope is a  thorough review                                                                    
     and  revision  of  Alaska's production  tax  regime  to                                                                    
     allow the state to fully develop its vast resources.                                                                       
                                                                                                                                
     ExxonMobil supports  CS HB 110,  and if enacted  in its                                                                    
     current form,  we would  expect investment  activity in                                                                    
     Alaska  to  increase,   resulting  in  a  corresponding                                                                    
     benefit of more work for  Alaskans. With passage of the                                                                    
     Governor's  proposed changes  to  ACES  in its  current                                                                    
     form, we  anticipate that  industry will  reexamine the                                                                    
     inventory of Alaska North  Slope opportunities and move                                                                    
     forward with  those projects that are  made competitive                                                                    
     by the reduced production  tax burden. For example, the                                                                    
     proposed  enhanced in-field  drilling  tax credits  and                                                                    
     reduction to  the progressivity tax  would allow  us to                                                                    
     consider additional drilling and  well work activity at                                                                    
     the  Prudhoe  Bay  Unit.  This  kind  of  developmental                                                                    
     drilling  in  the core  field  on  the North  Slope  is                                                                    
     critical  to  Alaska's  future, particularly  over  the                                                                    
     next  five to  ten  years. Production  decline must  be                                                                    
     stemmed  until  new  developments  can  be  discovered,                                                                    
     progressed and brought on production.                                                                                      
                                                                                                                                
     While the  enhanced in-field  drilling tax  credits and                                                                    
     reduction  to the  progressivity  tax  are much  needed                                                                    
     revisions  to ACES,  we  would  urge earlier  effective                                                                    
     dates   to  accelerate   the  resulting   ramp  up   in                                                                    
     investment  activity,  Alaskan  jobs and  future  state                                                                    
     revenues.                                                                                                                  
                                                                                                                                
     However, merely providing  additional tax credits while                                                                    
     keeping the overall effective rate  of the ACES tax too                                                                    
     high  is  not  the  long  term  solution  to  improving                                                                    
     Alaska's investment  climate. While  the system  of tax                                                                    
     credits under ACES  does provide significant incentives                                                                    
     for  investing  in  capital   assets  to  explore  for,                                                                    
     develop, and  produce more oil  and gas,  the deduction                                                                    
     of lease expenditures or the  allowance of a tax credit                                                                    
     is simply part of the  calculation about how much tax a                                                                    
     producer  owes. The  bottom line  is that,  between PPT                                                                    
     and  ACES, the  industry's  production tax  obligations                                                                    
     have more than tripled over the past five years.                                                                           
                                                                                                                                
     ExxonMobil  supports  the  Governor's  proposal  as  an                                                                    
     important first step, but additional  reform of ACES is                                                                    
     needed.                                                                                                                    
                                                                                                                                
     Additional  reforms  are  needed  to  improve  Alaska's                                                                    
     overall   investment  climate   over  the   long  term.                                                                    
     Evaluation  of a  further reduction  in the  production                                                                    
     tax  rates should  also be  considered.  Even with  the                                                                    
     Governor's  proposal,  Alaska's  production  taxes  are                                                                    
     high  in comparison  to other  investment alternatives,                                                                    
     making  Alaska  one of  the  most  expensive states  in                                                                    
     which the oil and gas industry does business.                                                                              
                                                                                                                                
     As you have  heard in prior testimony or  may have read                                                                    
     in  recent newspaper  articles, spending  on the  North                                                                    
     Slope has remained relatively  flat since the enactment                                                                    
     of ACES.  But what  needs to be  clarified is  that the                                                                    
     majority   of  the   investment  has   been  made   for                                                                    
     maintenance  or  production   enhancement  efforts  for                                                                    
     existing  operations,  not   for  new  exploration  and                                                                    
     development  opportunities  that  would  bring  on  new                                                                    
     production.  It is  also worth  noting  that costs  for                                                                    
     this investment  activity have gone  up, so  while some                                                                    
     may  argue there  has  been  additional investment,  it                                                                    
     doesn't necessarily  translate into more  activity. For                                                                    
     example costs to  drill a well have  increased over the                                                                    
     years,   so  higher   spend   on   drilling  does   not                                                                    
     necessarily mean more wells are being drilled.                                                                             
                                                                                                                                
     Alaska  is  currently producing  approximately  600,000                                                                    
     barrels of oil  per day from the  North Slope. Industry                                                                    
     currently invests  more than  $1 billion per  year just                                                                    
     to maintain current North  Slope oil production decline                                                                    
     at  six  to  seven   percent.  Without  that  continued                                                                    
     investment, the  annual production decline would  be in                                                                    
     the range of 12 to 15 percent annually.                                                                                    
                                                                                                                                
     The  Alaska Department  of Revenue  is forecasting  the                                                                    
     production from Alaska's  currently producing fields to                                                                    
     decline by 60,000 barrels of  oil per day this year. It                                                                    
     goes on  to predict that current  field production will                                                                    
     decline to half  of its current 600,000  barrels of oil                                                                    
     per day  rate in just  seven years, as decline  of over                                                                    
     300,000 barrels  of oil  per day. Allow  me to  put the                                                                    
    challenge of stemming that decline in perspective.                                                                          
                                                                                                                                
     Alaska's  newest  development,  the  Nikaitchuq  field,                                                                    
     began production  early this  year. The field  has been                                                                    
     more  than  six  years  in  planning,  development  and                                                                    
     construction  and  carries  a  total cost  of  over  $2                                                                    
     billion.  The   field  is  forecasted  to   reach  peak                                                                    
     production of  about 25,000 barrels per  day four years                                                                    
     from now.  So using this  as an example, it  would take                                                                    
     the  startup  of  two to  three  Nikaitchuq  equivalent                                                                    
     fields  every year  in perpetuity  just  to hold  North                                                                    
     Slope  production at  600,000 barrels  of oil  per day.                                                                    
     Pioneer's Oooguruk  field is another example.  It would                                                                    
     take three  to four fields  the size of  Oooguruk every                                                                    
     year  to match  the forecasted  North Slope  production                                                                    
     decline.                                                                                                                   
                                                                                                                                
     Clearly, the current outlook  for development falls far                                                                    
     short, and new fields are  urgently needed to stem this                                                                    
     decline.                                                                                                                   
                                                                                                                                
     Such  development  will  only  occur  if  there  is  an                                                                    
     improvement  in the  Alaska investment  climate. Alaska                                                                    
     production tax  policy is key to  fostering a favorable                                                                    
     investment climate.                                                                                                        
                                                                                                                                
     Alaska's overall  high production tax  rates discourage                                                                    
     investment.  Companies like  ExxonMobil are  willing to                                                                    
     accept  the  risks   of  long-term,  capital  intensive                                                                    
     investments when there is a  stable and competitive tax                                                                    
     structure  that  encourages  investment and  ensures  a                                                                    
     corresponding  opportunity for  upside potential.  When                                                                    
     you  take  away the  upside  potential  through a  high                                                                    
     progressivity    tax    you    reduce    the    overall                                                                    
     attractiveness of those  capital intensive investments,                                                                    
     which  in turn  could  lead to  reduced investment  and                                                                    
     resource  recovery and,  in  the long-term,  diminished                                                                    
     state revenues.  Let me  reemphasize this  point, while                                                                    
     higher  taxes  may  bring additional  revenues  in  the                                                                    
     short-term,  it's  reasonable  to anticipate  that  any                                                                    
     reduction  in investment  will decrease  production and                                                                    
     significantly  reduce  those  revenues  in  the  longer                                                                    
     term.                                                                                                                      
                                                                                                                                
     As many of you heard me  testify last year, time in the                                                                    
     oil  and  gas  industry  is not  measured  in  business                                                                    
     cycles. It  is measured in decades  and in generations.                                                                    
     Today's production rates are  the product of government                                                                    
     policies,  technical  work,  and  investment  decisions                                                                    
     made  years ago.  Increasing  production  rates in  the                                                                    
     decades  to come  will be  a direct  result from  sound                                                                    
     policies,  decisions,  and  commitments that  are  made                                                                    
     today.  The   Governor's  proposed  ACES   changes  are                                                                    
     clearly  a  significant  step in  the  right  direction                                                                    
     towards  much needed  reform of  Alaska's high  oil and                                                                    
     gas production tax system.                                                                                                 
                                                                                                                                
     Alaska  needs a  long-term resource  development policy                                                                    
     that will  encourage increasing investment  to maximize                                                                    
     its resource potential while receiving  a fair share of                                                                    
     the  resource revenues;  addressing its  high level  of                                                                    
     government take  is a start.  The reform of  ACES needs                                                                    
     to  result in  a  competitive,  stable and  predictable                                                                    
     fiscal  environment  that  will  encourage  investment,                                                                    
     recognize    that   the    remaining   resources    are                                                                    
     economically challenged, including  both new fields and                                                                    
     resource development opportunities  in existing fields.                                                                    
     The  primary  driver  of  Alaska's  long-term  resource                                                                    
     development   policy   should   be  to   maximize   the                                                                    
     development  of its  resource base,  not just  maximize                                                                    
     short-term state revenues.                                                                                                 
                                                                                                                                
     Let me  conclude my testimony  by reiterate  that while                                                                    
     we hope to continue  to pursue investment opportunities                                                                    
     in  Alaska  in  the   future,  the  resource  and  cost                                                                    
     structure   in   Alaska    is   becoming   increasingly                                                                    
     challenging.  Governor  Parnell's proposed  changes  to                                                                    
     ACES  are a  good start  to needed  fiscal reform-  but                                                                    
     more is still needed.                                                                                                      
                                                                                                                                
     ExxonMobil   looks   forward   to  working   with   the                                                                    
     Administration,  the  legislators,   industry  and  the                                                                    
     people of Alaska in the  future pursuit and development                                                                    
     of Alaska's oil and gas resources.                                                                                         
                                                                                                                                
4:14:33 PM                                                                                                                    
                                                                                                                                
                                                                                                                                
Representative Gara requested an estimate number of                                                                             
exploration wells that Exxon Mobile drilled in the past 10                                                                      
years excluding Point Thompson. Mr. Pittman replied that                                                                        
the corporation had not drilled any exploration wells since                                                                     
1992. The Alaska Oil and Gas Conservation Commission                                                                            
(AOGCC) did classify two new Point Thompson development                                                                         
wells as exploration wells, due to the lack of a better                                                                         
category.                                                                                                                       
                                                                                                                                
Representative Gara  wondered why reducing taxes  would lead                                                                    
ExxonMobil to  increase exploration wells when  they had not                                                                    
drilled an  exploration well since  1992, when  the Economic                                                                    
Limit  Factor (ELF)  system was  in  place. He  asked why  a                                                                    
reduction  in  taxes  would now  lead  to  exploration.  Mr.                                                                    
Pittman  could   not  guarantee  that  the   change  in  tax                                                                    
structure would  lead to exploration  wells but  he believed                                                                    
that  the  change  would lead  to  increased  investment.  A                                                                    
constant evaluation  and assessment of  Alaska's exploration                                                                    
opportunities  remained  a  part of  the  global  ExxonMobil                                                                    
portfolio.  Although  Alaska  presents  certain  challenges,                                                                    
ExxonMobil is active in arctic  areas and will remain poised                                                                    
to   return   to  Alaska   given   the   right  balance   of                                                                    
prospectivity, fiscal terms and regulatory policies.                                                                            
                                                                                                                                
Representative Gara  stated that  other major  oil companies                                                                    
share    information    about    their    Alaska    profits.                                                                    
ConocoPhillips and  British Petroleum  have taken  in excess                                                                    
of  $15 billion  in Alaska  profits.  He asked  to know  the                                                                    
Alaska  profits received  by ExxonMobil  over the  last four                                                                    
years.                                                                                                                          
                                                                                                                                
Mr.  Pittman  responded  that  as   a  matter  of  corporate                                                                    
practice, the  company did not divulge  profits or earnings.                                                                    
He did not  know what the profits were. He  replied that the                                                                    
company   did  supply   the  information   to  the   federal                                                                    
government and the Department of Revenue (DOR).                                                                                 
                                                                                                                                
4:20:31 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  referred   to  comments  in  Mr.                                                                    
Pittman's testimony  regarding fiscal regime  and stability.                                                                    
He  understood  the  importance   of  fiscal  stability  and                                                                    
wondered how  the tax regime  and stability  worked together                                                                    
for   ExxonMobil.  Mr.   Pittman  replied   that  ExxonMobil                                                                    
observed  30   year  investments  with  an   expectation  of                                                                    
competitiveness and stability of projects.                                                                                      
                                                                                                                                
Representative Guttenberg  wondered if the sanctioning  of a                                                                    
project  included   the  commitment  of  resources   to  the                                                                    
project. He wondered about  deeming a project "competative."                                                                    
Mr. Pittman responded  that a better word  would be "viable"                                                                    
as  opposed to  "competitive." He  stated that  multibillion                                                                    
dollar  decisions   are  made  on  30   year  projects.  The                                                                    
uncertainties that  are encountered are sometimes  fiscal in                                                                    
their nature.                                                                                                                   
                                                                                                                                
Representative  Wilson  discussed   the  difference  between                                                                    
exploration  wells  and  production.  She  wondered  whether                                                                    
there was a  method to determine the  oil's location without                                                                    
the need  to drill  another well.  Mr. Pittman  replied that                                                                    
multiple  resources  such  as heavy  oil,  viscous  oil  and                                                                    
frozen  gas  continue  to  exist in  both  Prudhoe  Bay  and                                                                    
Kuparuk fields.  Today those resources are  not economically                                                                    
viable.   The   responsibilities   of   ExxonMobil   include                                                                    
technology,  development and  operating cost  reductions. He                                                                    
claimed  that current  drilling  practices were  unavailable                                                                    
ten years  ago. He expressed amazement  about the technology                                                                    
advances made and the skills  built in drilling multilateral                                                                    
wells.                                                                                                                          
                                                                                                                                
Representative Wilson mentioned  the "straight tax" employed                                                                    
in states  like Texas  and North Dakota.  She wondered  if a                                                                    
straight tax might be considered for Alaska.                                                                                    
                                                                                                                                
4:26:31 PM                                                                                                                    
                                                                                                                                
Mr.  Pittman opined  that simple  was better.  The challenge                                                                    
was  how  to attract  as  many  producers and  explorers  to                                                                    
Alaska  as  possible. Large  and  small  producers look  for                                                                    
different benefits in a tax regime.                                                                                             
                                                                                                                                
Representative Doogan  reflected on Mr.  Pittman's statement                                                                    
that "proposed  changes provide a  good start but  that more                                                                    
was still needed."  He asked for elaboration  of "more." Mr.                                                                    
Pittman replied that over the  long term it was important to                                                                    
ensure  that  projects  were  economically  viable  for  the                                                                    
future.  Many  resources  in  Alaska  will  be  increasingly                                                                    
difficult  to  produce  economically. Over  the  long  term,                                                                    
methods must  be sought to  increase economic  viability due                                                                    
to  the necessary  cost of  technology advances.  ExxonMobil                                                                    
requires  a  balance  between the  state's  take  to  ensure                                                                    
future  viability.  The  envelope  of  viable  resources  in                                                                    
Alaska requires expansion.                                                                                                      
                                                                                                                                
Representative  Doogan ascertained  that  the  price of  oil                                                                    
would  increase and  as the  less accessible  oil decreases,                                                                    
the  more challenged  resource required  the  state to  take                                                                    
less of  the value  of the oil.  Mr. Pittman  suggested that                                                                    
the state look to the future.                                                                                                   
                                                                                                                                
Vice-chair Fairclough asked how  ExxonMobil would proceed if                                                                    
HB 110 passed  and the legislature accepted  bracketing as a                                                                    
new method  of reducing industry taxes.  Mr. Pittman replied                                                                    
that when  he looked at  major projects  8 to 10  years out,                                                                    
known fields and known resources are accessed first.                                                                            
                                                                                                                                
Vice-chair Fairclough discussed  yearly taxation calculation                                                                    
in  the governor's  bill. She  wondered whether  Mr. Pittman                                                                    
could speak  to their  opinion on  the preferable  timing of                                                                    
calculation.  Mr.  Pittman   replied  that  tax  calculation                                                                    
includes  every  dollar of  revenue  and  a yearly  taxation                                                                    
calculation would  provide an average and  remove the spikes                                                                    
that  result  from changes  in  oil  prices. He  noted  that                                                                    
quarterly or biannually would also  be preferable to monthly                                                                    
calculations.                                                                                                                   
                                                                                                                                
4:32:48 PM                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough expressed  concern  that waiting  one                                                                    
year to  average the price  might prove difficult  for state                                                                    
revenue forecasts. She thought  that a quarterly or biannual                                                                    
calculation   would   provide   increased   certainty   when                                                                    
predicting the  future year's  budget cycle.  She understood                                                                    
from a producer's auditing that  yearly calculation would be                                                                    
simpler  than monthly.  Mr. Pittman  added  that the  spikes                                                                    
prove punitive to  the company leading to  the suggestion of                                                                    
a yearly calculation.                                                                                                           
                                                                                                                                
Co-Chair Stoltze recalled claims that  the U.S. tax code was                                                                    
the primary agent  of influence in behavior  both social and                                                                    
economic. He wondered whether Exxon  was immune to the agent                                                                    
of tax  code influence. Mr. Pittman  replied that ExxonMobil                                                                    
observed  the   appropriate  federal  tax  codes   and  paid                                                                    
billions of dollars annually.                                                                                                   
                                                                                                                                
Co-Chair Stoltze  discussed the difference between  U.S. tax                                                                    
codes and the  Alaska tax codes. He wondered  how the Alaska                                                                    
tax  code impacted  Exxon's  behavior.  Mr. Pittman  replied                                                                    
that  the  Alaska tax  code  was  observed  as part  of  the                                                                    
company's investment decision.                                                                                                  
                                                                                                                                
Representative Gara stated  that ConocoPhillips attempted to                                                                    
access National  Petroleum Reserve  Alaska (NPRA)  under the                                                                    
ACES tax structure. He spoke  about other companies who were                                                                    
willing  to   risk  exploration  despite  the   various  tax                                                                    
structures  available  in  Alaska.  He  wondered  why  other                                                                    
companies  were willing  to explore  areas  in Alaska  while                                                                    
ExxonMobil  was  not.  Mr.  Pittman did  not  know,  but  he                                                                    
offered  that  ExxonMobil  had not  operated  in  the  North                                                                    
Slope. He  added that the event  in 1989 led the  company to                                                                    
be cautious. He  stated that the company  would move forward                                                                    
with Point Thompson with or without tax changes.                                                                                
                                                                                                                                
4:38:10 PM                                                                                                                    
                                                                                                                                
Representative  Gara  hoped  that  ExxonMobil  would  remain                                                                    
serious  about the  pipeline.  He pointed  out  the lack  of                                                                    
exploration in the past. He  wondered if ExxonMobil would be                                                                    
hard pressed to commit to  exploration even with the passage                                                                    
of  the   bill.  Mr.  Pittman   affirmed.  He   stated  that                                                                    
ExxonMobil   had  a   business   model   focused  on   large                                                                    
accumulation.  He  spoke of  the  challenge  of balancing  a                                                                    
large accumulation  with the uncertainties of  operating and                                                                    
development costs.                                                                                                              
                                                                                                                                
Representative Guttenberg referred  to Mr. Pittman's comment                                                                    
"minor  pause"  in 1989.  He  discussed  that oil  companies                                                                    
might not  change their  behavior in the  event that  HB 110                                                                    
passed.  He asked  if oil  companies might  consider leaving                                                                    
well enough  alone, as the  profit is so great  even without                                                                    
the passage  of HB  110. Mr.  Pittman did  not think  so. He                                                                    
remarked that  Exxon Mobile remained  bullish in  Alaska and                                                                    
continues  to invest  in viable  projects,  but the  company                                                                    
could offer no guarantees.                                                                                                      
                                                                                                                                
Representative  Costello  discussed   her  attendance  at  a                                                                    
presentation featuring entities that  were hopeful about the                                                                    
prospects  in Alaska.  She  mentioned geologist's  testimony                                                                    
citing  that Alaska  contains a  world  class resource.  The                                                                    
legacy  companies provide  a much  different  story, one  of                                                                    
lack  and turmoil.  The tax  credits work  to incentivize  a                                                                    
particular behavior. She asked if  the tax credits in Alaska                                                                    
truly incentivize production.                                                                                                   
                                                                                                                                
4:43:16 PM                                                                                                                    
                                                                                                                                
Mr. Pittman  asked if Representative Costello  was referring                                                                    
to  exploration or  development tax  credits. Representative                                                                    
Costello listed  the available credits. Mr.  Pittman replied                                                                    
that the  credits absolutely  help incentivize  expansion of                                                                    
infrastructure. He explained  that two-thirds of development                                                                    
was for infrastructure alone. He  believed that Alaska would                                                                    
eventually require  methods such  as building roads  to help                                                                    
industry access the areas open to exploration.                                                                                  
                                                                                                                                
Representative Costello  pointed out the proposed  fact that                                                                    
4.5 billion  barrels of oil  in the ground. She  wondered if                                                                    
the lack of exploration was  the result of current awareness                                                                    
of the  location of  the oil  reserves. Mr.  Pittman replied                                                                    
that Prudhoe Bay  was a well known field  and drilling there                                                                    
would  be  classified as  "appraisal."  He  noted that  true                                                                    
exploration  required  a hint  as  to  the presence  of  oil                                                                    
because of the rocks available.                                                                                                 
                                                                                                                                
Representative Costello  asked about  marginal tax  rate and                                                                    
wondered  whether it  was important  in making  decisions on                                                                    
production   investment.  Mr.   Pittman  replied   that  the                                                                    
importance of the  marginal tax rate varies  from company to                                                                    
company.   The  effective   tax   rate  provides   important                                                                    
information.                                                                                                                    
                                                                                                                                
Vice-chair  Fairclough asked  about  cost  recovery and  the                                                                    
company's business model. She  wondered about the investment                                                                    
opportunity  time frame  and how  ExxonMobil captured  costs                                                                    
for return on investment using the 30 year model.                                                                               
                                                                                                                                
Mr.  Pittman   responded  that   30  year   models  comprise                                                                    
significant  investments.   Investments  are  viewed   in  a                                                                    
variety of time frames.                                                                                                         
                                                                                                                                
Vice-chair  Fairclough wondered  whether  costs incurred  by                                                                    
ExxonMobil  were  allocated to  a  project  or a  geographic                                                                    
unit. She  wondered about the  corporation's method  of cost                                                                    
calculation.  Mr.  Pittman  replied that  the  rules  varied                                                                    
across  the   state  and   the  globe   in  terms   of  cost                                                                    
calculation. He admitted that there  was no simple answer to                                                                    
the question.                                                                                                                   
                                                                                                                                
Vice-chair Fairclough  alluded that  the legacy  fields were                                                                    
taking  the "gravy"  on the  top. She  wondered whether  the                                                                    
company  was  accessing  "gravy" or  recovering  costs  from                                                                    
exploration or investment over a  longer period of time. She                                                                    
wondered if  the costs were ring-fenced  or calculated based                                                                    
on  an  investment  in  cost incurred  in  a  geographic  or                                                                    
unitized lease  space. Mr.  Pittman replied  that ExxonMobil                                                                    
observed  the  life  of  the   investment  within  the  same                                                                    
framework required by regulators.                                                                                               
                                                                                                                                
4:50:22 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
4:52:06 PM                                                                                                                    
RECOVENED                                                                                                                       
                                                                                                                                
MARK  LANDT, EXECUTIVE  VICE PRESIDENT,  RENAISSANCE ALASKA,                                                                    
read from a statement to  the House Finance Committee, dated                                                                    
March 23, 2011 (copy on file).                                                                                                  
                                                                                                                                
     Representative  Stoltze,  members   of  the  committee,                                                                    
     thank-you for  the opportunity to speak  with you today                                                                    
     on House Bill 110.                                                                                                         
                                                                                                                                
     Firstly,  let  me   introduce  myself  and  Renaissance                                                                    
     Alaska, LLC (Renaissance). My name  is Mark Landt and I                                                                    
     am   the    Executive   Vice   President,    Land   and                                                                    
     Administration for Renaissance,  which is headquartered                                                                    
     in Houston,  Texas. Renaissance is the  Umiat Oil Field                                                                    
     on the North Slope.                                                                                                        
                                                                                                                                
     Since its  formation, Renaissance has acquired  BLM and                                                                    
     State oil  and gas  leases on  19,358 acres  located on                                                                    
     the Umiat  Oil Field located in  the National Petroleum                                                                    
     Reserve-Alaska (NPRA)  and the  Gubik Gas Field  on the                                                                    
     North Slope, Alaska.                                                                                                       
                                                                                                                                
     Since we last  testified on Senate Bill  309, the State                                                                    
     of Alaska  has made  significant progress  in providing                                                                    
     the  incentives  necessary  to encourage  drilling  and                                                                    
     development  in the  Cook  Inlet, Alaska.  Specifically                                                                    
     the Special Credits for drilling  the first three wells                                                                    
     drilled  to  a  Pre-Tertiary prospect  from  a  Jack-up                                                                    
     drilling  rig  and  the  repeal  of  the  future  spend                                                                    
     requirements to  monetize the  tax credits  provided in                                                                    
     SB 309  and the  additional 20  percent tax  credit for                                                                    
     all drilling in the Cook  Inlet basin under HB 280. The                                                                    
     combined tax  credits and being exempt  from production                                                                    
     tax in ACES,  makes the fiscal environment  in the Cook                                                                    
     Inlet one of the most competitive in the world.                                                                            
                                                                                                                                
     The  State   of  Alaska  has   demonstrated  tremendous                                                                    
     leadership and  acted decisively to revitalize  oil and                                                                    
     gas exploration and development  activities in the Cook                                                                    
     Inlet.  Similar leadership  and  progressive action  is                                                                    
     required  to revitalize  oil  and  gas through-put  for                                                                    
     TAPS  continues to  fall and  now stands  below initial                                                                    
     estimates  regarding the  economic  life  of the  line.                                                                    
     Alaska will  increasingly depend  on the  discovery and                                                                    
     the   development   of  smaller   fields,   technically                                                                    
     challenged  resources and  known  reserves remote  from                                                                    
     existing infrastructure.  This testimony is  to address                                                                    
     the significant  challenges we see for  the development                                                                    
     of the  North Slope's  extensive, untapped oil  and gas                                                                    
     resources  and  specifically the  undeveloped  reserves                                                                    
     located at the Umiat oil field.                                                                                            
                                                                                                                                
     The Umiat  oil field was  discovered in the  late 1940s                                                                    
     by the U.S. Navy in search  of new sources of oil after                                                                    
     World War  II. It  remains undeveloped  to this  day in                                                                    
     spite of  delineation by 12  legacy wells;  the shallow                                                                    
     depth  of  its   consolidated,  productive  reservoirs;                                                                    
     sweet,  light  37                                                                                                          
     billion  barrels  of  original oil  in-place.  To  this                                                                    
     point,  remoteness (92  miles from  TAPS), part  of the                                                                    
     reservoir in permafrost, and  low reservoir energy have                                                                    
     been  the main  development  challenges.  All of  these                                                                    
     challenges   have   been   addressed   through   modern                                                                    
     technological   advancements   such  as   multi-lateral                                                                    
     horizontal  drilling, electric  submersible pumps,  and                                                                    
     cold gas  injection for  pressure maintenance  to bring                                                                    
     the  Umiat development  closer to  fruition. Remoteness                                                                    
     given the arctic environment is still a key challenge.                                                                     
                                                                                                                                
     Renaissance, through  Renaissance Umiat,  LLC, controls                                                                    
     the undeveloped  Umiat oil field  and a portion  of the                                                                    
     undeveloped  Gubik  gas field  12  miles  to the  east-                                                                    
     northeast.  Since acquiring  the  acreage  in 2006  and                                                                    
     2007, Renaissance has de-risked  the project through an                                                                    
     86 square mile 3-D seismic  survey acquired in 2008 and                                                                    
    extensive geoscience and development cost studies.                                                                          
                                                                                                                                
     Renaissance   has  also   focused   on   the  plan   of                                                                    
     development  and  contracted third  parties,  including                                                                    
     NANAWorleyParsons,    Schlumberger,     ASRC,    Cardno                                                                    
     (previously Entrix)  and Umiaq  (subsidiary of  UIC) on                                                                    
     pipeline  route and  cost, facility  layout and  costs,                                                                    
     horizontal   (lateral)   development  techniques,   and                                                                    
     obtained  an  independent  reserve  report  from  Ryder                                                                    
     Scott  and  Associates (one  of  the  top oil  and  gas                                                                    
     reservoir engineering firms in  the world). This report                                                                    
     has estimated  250 million  barrels of  recoverable oil                                                                    
     from  the  shallow  zones  at  Umiat  with  peak  field                                                                    
     production of approximately 50  MBOPD. In addition, the                                                                    
     University of Alaska  at Fairbanks has a  DOE grant to,                                                                    
     among other  things; confirm cold gas  injection as the                                                                    
     preferred pressure maintenance mechanism.                                                                                  
                                                                                                                                
     One of  the development  considerations is  the ability                                                                    
     to bury  the pipeline  in the shoulder  of the  road to                                                                    
     lower the pipeline  costs and to have less  of a visual                                                                    
     impact  to  the environment.  Since  the  oil is  being                                                                    
     produced cold (28-32  degrees F) and the  gravity is 37                                                                    
     degrees, this  option to  move the  oil exists  with no                                                                    
     risk  of  melting  the permafrost.  The  oil  would  be                                                                    
     heated to pipeline specs at the TAPS connection.                                                                           
                                                                                                                                
     The Umiat oil  field is unique. There is  no analogy in                                                                    
     the world  of light sweet  oil being produced  at these                                                                    
     shallow  depths  with a  portion  of  the reservoir  in                                                                    
     permafrost.  The  lack  of analogy  and  distance  from                                                                    
     infrastructure has  made this project and  the multiple                                                                    
     winter seasons required to  develop the field. Although                                                                    
     Renaissance feels  it has  addressed the  key technical                                                                    
     concerns, the  distance from infrastructure is  still a                                                                    
     major   risk  factor.   Your  support   of  "Roads   to                                                                    
     Resources"  and specifically  the Environmental  Impact                                                                    
     Statement   being  prepared   by   the  Department   of                                                                    
     Transportation   and   Public    Facilities   for   the                                                                    
     transportation  corridor  between  Umiat  and  TAPS  is                                                                    
     going  a   long  way  to  reduce   this  risk.  Current                                                                    
     development  cost  is  estimated  to  be  $1.3  billion                                                                    
     dollars and  further technical studies are  underway to                                                                    
     finalize the  Plan of Development prior  to raising the                                                                    
     funding necessary for  project development. Renaissance                                                                    
     has spent  in excess of  $43MM on the Umiat  project to                                                                    
     date.                                                                                                                      
                                                                                                                                
     Although  Renaissance is  solely focused  at Umiat,  we                                                                    
     must   compete  for   capital   in  the   international                                                                    
     financial  markets. We  strongly  support the  proposed                                                                    
     amendments  to ACES  to increase  the  tax credits  and                                                                    
     reduce  the progressivity  factor to  make Alaska  more                                                                    
     competitve as an oil producing state.                                                                                      
                                                                                                                                
4:58:35 PM                                                                                                                    
                                                                                                                                
Representative Wilson queried  the location of Renaissance's                                                                    
wells.  Mr. Landt  replied that  the company's  only project                                                                    
was the  Renaissance Umait Oil Field.  Representative Wilson                                                                    
asked  to know  the  company's proposed  start-up date.  Mr.                                                                    
Landt replied  that his company could  commence construction                                                                    
in 2013.                                                                                                                        
                                                                                                                                
Vice-chair Fairclough wondered about  an exact dollar amount                                                                    
that the company sought in  tax credits. Mr. Landt explained                                                                    
that  the project  existed over  25 miles  from an  existing                                                                    
unit  at Umiat  and  would  be entitled  to  55 percent,  65                                                                    
percent with the governor's proposal.                                                                                           
                                                                                                                                
Vice-chair Fairclough  wondered whether  there was  a dollar                                                                    
amount  that  would  incentivize  the  proposal.  Mr.  Landt                                                                    
stated that  Renaissance was located  over 25 miles  from an                                                                    
existing unit at Umiat, which  allowed qualification for the                                                                    
30  percent  exploration  credit.  The  governor's  proposal                                                                    
would increase the company's tax  credits from 55 percent to                                                                    
65 percent.  Vice-chair Fairclough asked again  for a dollar                                                                    
amount  of tax  credit  value necessary  to incentivize  the                                                                    
project. Mr. Landt replied that  the total development costs                                                                    
are  $1.3  billion,  but  he  required  additional  time  to                                                                    
calculate the exact amount. He  offered to provide an answer                                                                    
to the committee.                                                                                                               
                                                                                                                                
Co-Chair  Thomas  wondered  whether any  fields  existed  in                                                                    
between the  Umiat field  and the  existing unit.  Mr. Landt                                                                    
replied that  exploration occurred  nearby, but  the results                                                                    
have yet to be released. He  knew of a significant amount of                                                                    
gas reserves in the vicinity.                                                                                                   
                                                                                                                                
Representative Hawker  retained a personal  understanding of                                                                    
the  challenges in  the Umiat  area. He  sincerely respected                                                                    
the  effort and  commitment  that Renaissance  put forth  in                                                                    
investing  in the  area.  Mr.  Landt thanked  Representative                                                                    
Hawker.                                                                                                                         
                                                                                                                                
5:03:15 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
5:03:51 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
JOE MICHEL, STAFF TO  REPRESENTATIVE BILL STOLTZE, discussed                                                                    
the following day's schedule.                                                                                                   
                                                                                                                                
Vice-chair  Fairclough wondered  whether  there  would be  a                                                                    
second  opportunity for  the public  to testify.  Mr. Michel                                                                    
responded  that public  testimony  was  available on  Friday                                                                    
from 3 pm to 6 pm.                                                                                                              
                                                                                                                                
Vice-chair  Fairclough thanked  all  of  the presenters  for                                                                    
taking  time  to  testify. She  thanked  the  co-chairs  for                                                                    
organizing the testifiers.                                                                                                      
                                                                                                                                
HB  110  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
5:09:22 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 5:09 PM.                                                                                           
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
ConocoPhillips HB110 House Finance.03.23.2011.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
Great_Bear_HB_110_Presentation_Juneau_Feb_18_2011[1].pdf HFIN 3/23/2011 1:30:00 PM
HB 110
HB110 Pioneer Testimony032311.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
HB110 Exxon PittmanHFIN.03.23.2011.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
HB110 Ultra Star HFIN032311.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
HB110 Apache Testimony 032311.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
HB110 Marathon HFIN032311.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
Eni HB110 Testimony Ltr.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
HB110 Statoil HFIN032311.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
Renaissance HB110 Testimony Final.pdf HFIN 3/23/2011 1:30:00 PM
HB 110
Conoco Phillips Reponses to Questions HFIN.pdf HFIN 3/23/2011 1:30:00 PM
HB 110