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Limitations on Upside Profit Potential under

Alaska’s Oil and Gas Production Tax(“The Problem with ACES”)

Roger MarksPresentation to Commonwealth North

October 8, 2010

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Tax Rate under ACES

• Base rate of 25% of net value (after deducting all costs)

• Progressivity element when net value per barrel exceeds $30/bbl:– (Net value per barrel value - $30) X .004

• So if oil price is $80/bbl:– Net value per barrel is about $55/bbl– Progressivity = ($55 - $30) X .004 = 10%– Total tax rate = 25% + 10% = 35%– APPLIES TO ENTIRE NET VALUE

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U.S. Tax Rate for Single Taxpayer

• First $8,350 10%• Next $25,600 15%• Next $48,300 25%• Next $89,300 28%• Next $201,400 33%• Anything over $372,950 35%

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20%25%30%35%40%45%50%55%60%

Tax

Rate

on

the

Firs

t Dol

lar

of V

alue

Net Value per Barrel ($/bbl)

What Happens to the First Dollar of Value under ACES

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$30 $50 $70 $90 $110 $130 $150

Mar

gina

l Tax

Rat

e

ANS West Coast Price ($/bbl)

Marginal Tax Rate (All State & Federal Taxes)How Much Gov't Gets When Price Goes Up $1

6

$0

$10

$20

$30

$40

$50

$60

$50 $70 $90 $110 $130 $150

Per B

arre

l Tax

es

ANS U.S. West Coast Price ($/bbl)

Relative Taxes Under ACES

royalty severance tax (ACES) property tax state & fed corp inc tax

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NPV

to P

rodu

cers

($)

Price ($/bbl)

Net Present Value to Producers:ACES vs. Bracketed Tax Structure

ACES Tax Structure Bracketed Tax Structure

8

0%

5%

10%

15%

20%

25%

$30 $50 $70 $90 $110 $130 $150 $170 $190 $210 $230 $250

Prob

abili

ty o

f Cer

tain

Pri

ce

Oil Price ($/bbl)

Hypothetical Expected Price Distribution

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International Competitiveness

10

$24

$56

$20

Where did $100/bbl in Alaska Go in 2008?

Producers Costs

State & Federal Government

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ConocoPhillips Financial Performance: Alaska vs. Rest of World 2008 & 2009 ($millions)*

(Oil Prices averaged $62/bbl in 2009 and $100/bbl in 2008)

Alaska : Non-Alaska Rest of World Additional : Additional

2009 2008 (Difference) : 2009 2008 (Difference) :

Pre-tax income 3,391 7,064 3,673 : 6,799 21,506 14,707 :

Total taxes 1,851 4,749 2,898 : 4,837 12,000 7,163 :

After-tax income 1,540 2,315 775 : 1,962 9,506 7,544 :

Percentage of additional pre-tax income : retained after-tax 21% : 51%

* includes natural gas

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0%10%20%30%40%50%60%70%80%90%

U.S. Gulf of Mexico

U.K. Alberta Australia Norway Alaska

Mar

gina

l Ta

x Ra

te @

$10

0/bb

lInternational Marginal Tax Rates @ $100/bbl

Tax and Royalty Regimes

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Evaluating ACES

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$0

$10

$20

$30

$40

$50

$60

$50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150Per B

arre

l Cre

dit/

Seve

ranc

e Ta

x

ANS U.S. West Coast Price ($/bbl)

Cash Flow Impact: Credits vs. ACES Severance Tax

per/bbl credits per/bbl sev tax

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$30 $50 $70 $90 $110 $130 $150

Mar

gina

l Tax

Rat

e

ANS West Coast Price ($/bbl)

Gold-PlatingHow Much of a Dollar of Spending is Picked Up by Gov't

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600,000

650,000

700,000

750,000

800,000

850,000

2010 2011 2012 2013 2014 2015 2016

ANS P

rodu

ction

For

ecas

t (Bb

l/day

)

Year

ANS Production Forecast Before & After ACES

Spring 2007 Forecast (before ACES) Current Spring 2010 Forecast

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Possible Fix?

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Fix?Bracketed Tax Rates

• HYPOTHETICAL EXAMPLE*• $0/bbl - $30/bbl 25.0%• Next $15/bbl ($30 - $45/bbl) 28.5% • Next $15/bbl ($45 - $60/bbl) 32.0%• Next $15/bbl ($60 - $75/bb l) 35.5%• Next $15/bbl ($75 - $90/bbl) 39.0%• Next $15/bbl ($90 - $105/bbl) 42.5%• Next $15/bbl ($105 - $120/bbl) 46.0%• Anything over $120/bbl 50.0%

* This example is only illustrative of a bracketed tax structure. The actual brackets and rates need to be designed very carefully and this by no means represents a proposal for suggested brackets and rates.

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0.5

0.6

0.7

0.8

0.9

1

$50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150

Mar

gina

l Tax

Rat

e

ANS U.S. West Coast Price ($/bbl)

Marginal Tax Rates (All State & Federal Taxes)ACES & Example Bracketed

ACES EXAMPLE BRACKETED