State of Alaska

Department of Revenue

December 6, 2012

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What is the problem? In developing the forecast the Department & its consultant rely on input from industry to forecast production.

While this method works relatively well in the near term it has consistently been optimistic in the long-term.

The average forecast error for six to ten years in the future has been 40%-60%.

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The Department’s Approach The Production Forecast has been based on three tranches of future production: Currently Producing:

Oil from wells that are in production and following typical reservoir engineering optimization without major investment.

Under Development (UD): •Oil from projects that will add incremental oil to existing fields or will bring new fields into production. •Project must have senior management approval and be allocated funds in the companies budget.

Under Evaluation (UE): •Oil from projects that are likely to occur in the future, but have not meet the requirements of the previous category. •Requires that oil reserves are known and recovery is technically possible with current technology.

Under Development + Under Evaluation = “New Oil”

***These definitions are not equivalent to those used by the Society of Petroleum Engineers (SPE) or Securities & Exchange Commission (SEC) and should not be used as such***

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ANS Production Decline

Bounds of reasonable expectations for future production were developed based on historical production

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Accounting for the Risks Appropriately

Currently Producing oil was not risked because it is grounded in engineering principles.

The New Oil portion of the Forecast was adjusted using a scenario modeling method. Categories

Budgetary Technical

Confidence decreasing with time Higher confidence with near term, 1-3 years, than in out-year plans.

Reasonable to expect greater uncertainty in both under-development and under-evaluation tranches. Recognizing the impact of the known-knowns, known-unknowns and

unknown-unknowns.

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Testing the Traditional Forecast

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Forecasted ANS Production

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Applying the Refined Methodology

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

ANS Production Forecast

Summary Prior forecasts have over-estimated long-term (6 years out)

production by significant margins (40-60%).

The refined methodology is based on statistical analysis and tested against past performance. Reasonable and Prudent

The refined methodology does not impact near term revenues.

Provides a more prudent and reasonable forecast for the purposes on long-term planning.

Alaska still holds substantial discovered and undiscovered resources that may provide additional production in the future. Example – heavy and shale oil are not included in the forecast.

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