Legislature(2017 - 2018)HOUSE FINANCE 519

03/24/2017 01:30 PM FINANCE

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Audio Topic
01:37:47 PM Start
01:38:46 PM HB111
03:34:52 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 111                                                                                                            
                                                                                                                                
     "An Act  relating to  the oil  and gas  production tax,                                                                    
     tax  payments,   and  credits;  relating   to  interest                                                                    
     applicable to  delinquent oil  and gas  production tax;                                                                    
     and providing for an effective date."                                                                                      
                                                                                                                                
1:38:46 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg pointed  out  he  had provided  a                                                                    
handout to members with maps of "Middle Earth."                                                                                 
                                                                                                                                
1:40:26 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
1:41:08 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
1:41:23 PM                                                                                                                    
                                                                                                                                
COLLEEN   GLOVER,   COMMERCIAL    ANALYST,   TAX   DIVISION.                                                                    
DEPARTMENT OF REVENUE, introduced herself.                                                                                      
                                                                                                                                
RICH  RUGGIERO,   CONSULTANT,  CASTLE  GAP   ADVISORS,  LLC,                                                                    
presented  two  slides  from   a  PowerPoint  titled  "Model                                                                    
Session" (copy on file). He  relayed that he worked with the                                                                    
Department  of  Revenue  (DOR) to  ensure  that  the  models                                                                    
provided  by   Castle  Gap  and  DOR   were  compatible.  He                                                                    
explained that his  model contained a one  year "snapshot at                                                                    
various  price  levels"  that was  totally  interactive  and                                                                    
offered  comparisons  to  the  current  structure.  The  two                                                                    
models  offered   two  different   constructs:  one   was  a                                                                    
lifecycle and  the other was  a snapshot. He noted  that his                                                                    
snapshot  was  informative as  to  the  relative amounts  of                                                                    
revenue  based on  the inputs.  He  delineated that  neither                                                                    
model  provided  "fiscal  note  type  detail"  and  did  not                                                                    
contain  the   data  to   determine  impacts   for  specific                                                                    
geographic regions;  e.g., Cook  Inlet. The  models provided                                                                    
relative  data and  DOR could  provide specific  detail upon                                                                    
request. He turned to slide 2:                                                                                                  
                                                                                                                                
     Plan For Today's Meeting                                                                                                   
                                                                                                                                
      Today's session will be a combination of two                                                                              
     presentations                                                                                                              
     -Department of Revenue                                                                                                     
      Presentation to cover comparison results of new (large                                                                    
     and small) field or project under Status Quo and                                                                           
     CSHB111                                                                                                                    
     -Castle Gap Advisors                                                                                                       
                                                                                                                                
      Real-time model of CSHB111 components to see snapshot                                                                     
     results of a variety of desired scenarios at given                                                                         
     price points                                                                                                               
                                                                                                                                
      DOR and Castle Gap models are set up from two                                                                             
     different constructs                                                                                                       
     -Both assume the same logic in application of                                                                              
     legislation components                                                                                                     
                                                                                                                                
Mr. Ruggiero moved to slide 3:                                                                                                  
                                                                                                                                
      Model Constructs                                                                                                          
                                                                                                                                
     DOR                                                                                                                        
                                                                                                                                
      New project life-cycle model                                                                                              
                                                                                                                                
      Functionality: Can do what if scenarios on a project                                                                      
     lifecycle on request                                                                                                       
     Castle Gap Advisors                                                                                                        
                                                                                                                                
      Delta price model                                                                                                         
     -i.e. shows the revenue and net effective tax rate                                                                         
    changes for various parameters at different prices                                                                          
                                                                                                                                
      Functionality: Real-time what if scenarios on a one-                                                                      
     year snapshot basis                                                                                                        
     Limitations of Models                                                                                                      
                                                                                                                                
      Neither model has the detail to run fiscal note level                                                                     
     results or data specific to a particular field                                                                             
                                                                                                                                
      This further analysis can be requested through DOR                                                                        
                                                                                                                                
1:44:31 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Gara mentioned  industry testimony  from Conoco-                                                                    
Phillips'  Annual Report.  He  referred  to data  indicating                                                                    
that ConocoPhillips  [March 22, 2017 "HB  111 ConocoPhillips                                                                    
Supplemental Slide Testimony" (copy  on file)] net profit in                                                                    
Alaska was  approximately "a quarter  of a  billion dollars"                                                                    
at  $41  per  barrel  of  oil. He  noted  that  the  average                                                                    
breakeven point for a North  Slope field reported by DOR was                                                                    
$40 in FY  2017 and $42 in FY 2018.  He inquired whether Mr.                                                                    
Ruggiero knew  what ConocoPhillips breakeven point  was. Mr.                                                                    
Ruggiero responded  in the negative. He  remembered that the                                                                    
company's testimony contained  two slides [PowerPoint titled                                                                    
"House Finance Committee CSHB 111"  (copy on file) March 22,                                                                    
2017] that addressed Alaska. He  elaborated that the data on                                                                    
one slide reported  that the company reduced  its "all-in or                                                                    
all-inclusive 10  percent rate  of return price  level" from                                                                    
$63  to $40,  indicating that  at  the $40  price point  the                                                                    
company achieved  an all cost  included (all-in)  10 percent                                                                    
rate of return for its Alaska operations.                                                                                       
                                                                                                                                
1:47:06 PM                                                                                                                    
                                                                                                                                
Ms. Glover presented  the PowerPoint Presentation: "Alaska's                                                                    
Oil and  Gas Taxation - CSHB  111(RES)\N: Lifecycle Scenario                                                                    
Analysis"                                                                                                                       
                                                                                                                                
Ms. Glover turned to slide 2: "What Will Be Presented":                                                                         
                                                                                                                                
     Summary of CSHB 111(RES)\N Impacts on Modeling                                                                             
                                                                                                                                
     Modeling Assumptions                                                                                                       
                                                                                                                                
     Scenario Analysis -economics of changes                                                                                    
                                                                                                                                
          · Status Quo (HB247) Lifecycle analysis of two                                                                        
             potential new North Slope fields (small and                                                                        
             large).                                                                                                            
                                                                                                                                
          · Potential Impacts of HB111\N changes on new                                                                         
             North Slope fields.                                                                                                
                                                                                                                                
Ms. Glover  related that the modeling  analyzed hypothetical                                                                    
new fields; one  small and one large. The  model assumed the                                                                    
fields  were GVR  (gross value  reduction) eligible  and any                                                                    
other parameters  were adjustable. The model  calculated the                                                                    
total revenue  for the  state and  producer and  the federal                                                                    
and municipal revenue.                                                                                                          
                                                                                                                                
Ms.  Glover advanced  to slide  3: "What  are the  Major Tax                                                                    
Changes  in   HB  111\N."  She  commented   that  the  items                                                                    
highlighted in green  on the chart were  provisions from the                                                                    
CS (committee  substitute) that  impacted the  modeling. She                                                                    
listed  the changes  to the  CS. She  reported that  the Net                                                                    
Operating Loss Credit  (NOL) was changed from  35 percent to                                                                    
a NOL  carry forward  loss at "50  percent with  an uplift."                                                                    
Additionally,   sliding  scale   per  barrel   credits  that                                                                    
impacted  the economics  of the  field and  the minimum  tax                                                                    
rate  were   changed.  Finally,   the  CS   eliminated  cash                                                                    
repurchases for North Slope fields  and the minimum tax rate                                                                    
for a  GVR field was based  on its reduced gross  value. She                                                                    
noted that  the minimum tax  rate change was referred  to as                                                                    
hardening the floor.                                                                                                            
                                                                                                                                
Ms. Glover highlighted slide 4: "Modeling Assumptions":                                                                         
                                                                                                                                
     Modeling Assumptions                                                                                                       
                                                                                                                                
         · All Fields begin development 1/1/2018                                                                                
         · Does not include Exploration Costs                                                                                   
         · Includes price and cost inflation (based on                                                                          
           Callan 2.25% rate)                                                                                                   
         · For Status Quo modeling, after GVR ends the                                                                          
            producer opts to use their sliding scale per-                                                                       
            taxable barrel credits, which requires tax                                                                          
            payments not go below the minimum tax.                                                                              
        ·   For Status Quo modeling, producer opts to only                                                                      
          apply for $35 million of repurchasable credits                                                                        
          per year (and forgo the additional $35 million                                                                        
          with the 25% "haircut").                                                                                              
        ·   Modeling assumes North Slope tax treatment.                                                                         
                                                                                                                                
1:50:34 PM                                                                                                                    
                                                                                                                                
Ms. Glover scrolled to slide 6: "Lifecycle Modeling                                                                             
Assumptions":                                                                                                                   
                                                                                                                                
     Lifecycle Modeling Assumptions                                                                                             
                                                                                                                                
                                                                                                                                
     • 50 million barrels of oil (mmbo) field                                                                                   
     • 750 mmbo field                                                                                                           
                                                                                                                                
                                                                                                                                
     • $40, $60, and $80 real (inflated)                                                                                        
     • Fall 2016 Forecast prices in real prices extending                                                                       
     through life of field                                                                                                      
                                                                                                                                
                                                                                                                                
     • Status Quo                                                                                                               
     o All Provisions                                                                                                           
     o 1 and 4 Partner Scenarios (impacts total cash                                                                            
     repurchase per year)                                                                                                       
     • HB111\N                                                                                                                  
                                                                                                                                
Ms.   Glover  highlighted   slide  7:   "Lifecycle  Modeling                                                                    
Outputs":                                                                                                                       
                                                                                                                                
     Lifecycle Modeling Outputs                                                                                                 
                                                                                                                                
        ·   Each Scenario has a Dashboard with                                                                                  
            Four Quadrants                                                                                                      
                                                                                                                                
     1. Production Tax by year                                                                                                  
     2. State Revenue by year                                                                                                   
     3. Producer Revenue by year                                                                                                
     4. Summary Economics                                                                                                       
     a. Total Cash Flows                                                                                                        
     b. NPV Analysis                                                                                                            
     c. Split of Profits                                                                                                        
     d. Split of Gross                                                                                                          
                                                                                                                                
Ms.  Glover reviewed  slide  8:  "Dashboard -Net  Production                                                                    
Tax."                                                                                                                           
                                                                                                                                
        ·   Credits Repurchased by State                                                                                        
        ·   Production Tax Paid                                                                                                 
        ·   Minimum Tax Calculation                                                                                             
                                                                                                                                
Ms.  Glover   indicated  that  the  dashboard   slides  were                                                                    
depicting  what  type  of  information  the  model  quadrant                                                                    
contained   and  was   not  focused   on  data.   The  graph                                                                    
represented a  small field  over 30 years  and the  red bars                                                                    
represented  cash  outflows by  the  state;  the green  bars                                                                    
represented  cash inflows  through  production tax  payments                                                                    
made  to  the state  and  the  orange line  represented  the                                                                    
minimum tax level.                                                                                                              
                                                                                                                                
1:52:43 PM                                                                                                                    
                                                                                                                                
Ms.  Glover mentioned  slide 9:  "Dashboard  -State Gains  &                                                                    
Losses."                                                                                                                        
                                                                                                                                
     State Revenue                                                                                                              
             · Production Tax (negative numbers are credits                                                                     
               repurchased)                                                                                                     
             · Royalties                                                                                                        
             · State Share of Property Tax                                                                                      
             · State Corp Income Tax                                                                                            
                                                                                                                                
Ms. Glover  commented that the  state received such  a small                                                                    
portion of  property tax  on the North  Slope that  the line                                                                    
was  not  visible.  She stated  that  the  local  government                                                                    
received 7.5 percent of the property tax.                                                                                       
                                                                                                                                
1:53:15 PM                                                                                                                    
                                                                                                                                
Ms. Glover  moved to slide 10:  "Dashboard -Producer(s) Cash                                                                    
Flows."                                                                                                                         
                                                                                                                                
     Producer(s) Cash Outflows                                                                                                  
                                                                                                                                
        ·   Period when net cash is negative (typically                                                                         
          when haven't started production and have huge                                                                         
          cash outflows).                                                                                                       
                                                                                                                                
     Producer(s) Cash Inflows                                                                                                   
                                                                                                                                
        ·   Period when net cash is positive                                                                                    
                                                                                                                                
Ms.  Glover  turned  to  slide   11:  "Dashboard  -  Summary                                                                    
Economics."                                                                                                                     
                                                                                                                                
     Total Credits                                                                                                              
     Total State and Producer Cash Flows                                                                                        
     Lifecycle Totals                                                                                                           
        ·   Net Present Value (NPV) of discounted cash                                                                          
            flows for State and Producer(s).                                                                                    
     Split of Profits                                                                                                           
        ·   By entity                                                                                                           
     Split of Gross (wellhead value)                                                                                            
        ·   By entity                                                                                                           
                                                                                                                                
Ms. Glover  reported that the  bottom quadrant  depicted the                                                                    
compiled  total  economic  picture.  The  small  pie  charts                                                                    
represented  the municipal  and federal  percent of  profits                                                                    
and gross value.                                                                                                                
                                                                                                                                
Ms.   Glover  moved   to  slide   13:  "Lifecycle   Modeling                                                                    
Assumptions -Small Field":                                                                                                      
                                                                                                                                
     Lifecycle Modeling Assumptions - Small Field                                                                               
                                                                                                                                
     50 mmbo Field Assumptions                                                                                                  
                                                                                                                                
     • Life of Field = 30 Years                                                                                                 
     • Peak Oil Production = ~15,000 bbls/day                                                                                   
     • Transportation Cost = $10 / bbl                                                                                          
     • Royalty Rate = 12.5% (all State)                                                                                         
     • Capital Expenditures (Capex) $ = $18 / bbl                                                                               
     • Operating Expenditures (Opex) $ = $15 / bbl                                                                              
     • Property Tax Rate = $1.25 / bbl                                                                                          
     • State Corp Income Tax Rate = 6.5% of remaining                                                                           
       Production Tax Value (PTV) after Production Tax is                                                                       
       paid                                                                                                                     
     • Federal Corp Income Tax Rate = 35% of remaining PTV                                                                      
       after State Corp Income Tax is paid                                                                                      
                                                                                                                                
Ms.  Glover continued  to the  chart on  slide 14:  "Profile                                                                    
Curves -  Small Field." She  noted that the  chart contained                                                                    
the production  and cost profiles.  The blue  lines depicted                                                                    
the   capital  expenditure   investment.   She  noted   that                                                                    
production did not  begin for four years at  the point where                                                                    
the green production line sharply rose.                                                                                         
                                                                                                                                
1:55:48 PM                                                                                                                    
                                                                                                                                
Ms.   Glover  presented   the  information   on  slide   15:                                                                    
"Lifecycle  Modeling  -Small Field  (GVR  @  20%): 50  mmbo,                                                                    
Status  Quo,  Fall 2016  Forecast  Prices,  1 Partner."  She                                                                    
highlighted  that  the  slide contained  the  four  quadrant                                                                    
charts' data under current tax  law. She turned to slide 16:                                                                    
"Lifecycle Modeling  -Small Field (GVR  @ 20%): 50  mmbo, HB                                                                    
111\N, Fall 2016 Forecast Prices,  1 Partner." She explained                                                                    
that the tax was based on  the producer or "partner" and not                                                                    
on the field.  The model assumed that only  one producer was                                                                    
involved in  small fields, and that  multiple producers were                                                                    
involved  in  large fields.  She  pointed  to the  top  left                                                                    
quadrant on  slide 15 that  represented the status  quo cash                                                                    
credits  for  the producer  that  could  recover up  to  $35                                                                    
million  per year  in cashable  credits. The  state did  not                                                                    
receive  income until  year 7  from production  tax credits.                                                                    
She advanced  to the same quadrant  on slide 16 under  CS HB                                                                    
111  that  depicted the  elimination  of  cash credits.  She                                                                    
noted  that the  state  did not  receive  revenue until  the                                                                    
field began  production and received revenue  at the minimum                                                                    
tax  level. She  observed that  when the  green bars  on the                                                                    
graph  rose above  the  orange minimum  tax  line the  state                                                                    
would  receive more  in production  tax.  She displayed  the                                                                    
summary table for a small  field on slide 17: "Summary Table                                                                    
-Small Field."                                                                                                                  
                                                                                                                                
1:58:14 PM                                                                                                                    
Representative  Grenn asked  whether  the forecasted  prices                                                                    
for  the out  years on  the charts  were steady.  Ms. Glover                                                                    
responded  in the  negative. She  reiterated  that slide  16                                                                    
depicted that  the producer did  not pay any  production tax                                                                    
(upper left quadrant  chart) until oil was  produced in year                                                                    
5,  which  was paid  at  the  minimum  tax level  while  the                                                                    
producer  was utilizing  the NOL's,  and once  exhausted the                                                                    
full production tax  was paid. The chart in  the upper right                                                                    
quadrant showed that the state  did not receive a payment of                                                                    
any kind,  including royalties until  oil was  produced. She                                                                    
pointed  to   the  lower  left  chart   that  portrayed  the                                                                    
producer's  capital expenditure  investment depicted  as red                                                                    
lines. Losses occurred until oil  was produced. She moved to                                                                    
the lower  right-hand quadrant that  contained the  data for                                                                    
the  aggregate sums  (net production  tax  total, net  state                                                                    
gain or loss,  net producer cash flows) for  all the colored                                                                    
bars.                                                                                                                           
                                                                                                                                
Ms. Glover  continued to slide  18: "Summary  Results -Small                                                                    
Field."  The table  contained the  modeling  data from  four                                                                    
scenarios:   oil  price   points   at  $40/bbl.,   $60/bbl.,                                                                    
$80/bbl., the fall  2016 forecast under the  status quo, and                                                                    
CSHB  111  that was  included  in  the dashboard  data.  She                                                                    
indicated that  the green lines  represented the  state cash                                                                    
flow  and the  blue  lines represented  the producer's  cash                                                                    
flow.                                                                                                                           
                                                                                                                                
2:02:21 PM                                                                                                                    
                                                                                                                                
Ms.  Glover  scrolled  to   slide  20:  "Lifecycle  Modeling                                                                    
Assumptions -Large Field":                                                                                                      
                                                                                                                                
     750 mmbo Field Assumptions                                                                                                 
                                                                                                                                
            Life of Field = 40 Years                                                                                            
            Peak Oil Production = ~120,000 bbls/day                                                                             
            Transportation Cost = $10 / bbl                                                                                     
            Royalty Rate = 12.5% (all State)                                                                                    
            Capex $ = $13 / bbl                                                                                                 
            Opex $ = $12 / bbl                                                                                                  
            Property Tax Rate = $1.25 / bbl                                                                                     
            State Corp Income Tax Rate = 6.5% of remaining                                                                      
            Production Tax Value (PTV) after Production Tax                                                                     
            is paid                                                                                                             
            Federal Corp Income Tax Rate = 35% of remaining                                                                     
            PTV after State Corp Income Tax is paid                                                                             
                                                                                                                                
Ms.  Glover  highlighted  slide 21  "Profile  Curves  -Large                                                                    
Field." She  reported that  the profile  was similar  to the                                                                    
small field  production profile, with the  exception that it                                                                    
took five  years of investing  before oil  production began.                                                                    
She reviewed  the modeling on slide  22: "Lifecycle Modeling                                                                    
-Large Field  (GVR @ 20%):  750 mmbo, Status Quo,  Fall 2016                                                                    
Forecast Prices, 1  Partner." She pointed to  the upper left                                                                    
chart that  depicted repurchased production tax  credits and                                                                    
tax payments.  She reported that  the producer  received the                                                                    
$35  million  in  cash  credits through  year  12  when  oil                                                                    
production  began. The  minimum tax  was paid  to the  state                                                                    
until  all the  producer's  NOL credits  were exhausted  and                                                                    
production tax was paid. The  upper left chart indicated the                                                                    
same as  noted on  the previous chart  with the  addition of                                                                    
royalties   paid.  The   lower  left   chart  depicted   the                                                                    
producer's investment cost  and income over the  life of the                                                                    
field.  She reviewed  slide 23:  "Lifecycle Modeling  -Large                                                                    
Field (GVR @ 20%): 750  mmbo, Status Quo, Fall 2016 Forecast                                                                    
Prices, 4 Partners." She remarked  that the upper left chart                                                                    
reflecting  the   field  with  four  partners   looked  much                                                                    
different. The  partners could recoup $140  million per year                                                                    
in total,  which impacted the economics  quite significantly                                                                    
by the ability to recover their investment sooner.                                                                              
                                                                                                                                
2:05:16 PM                                                                                                                    
                                                                                                                                
Ms. Glover  discussed slide  24: "Lifecycle  Modeling -Large                                                                    
Field (GVR  @ 20%):  750 mmbo,  HB111\N, Fall  2016 Forecast                                                                    
Prices, 1  or 4  Partners." She pointed  to the  upper left-                                                                    
hand corner  chart that showed  the elimination of  the cash                                                                    
credits and oil production beginning  in year five, when the                                                                    
minimum  tax was  paid through  year 12.  The result  of the                                                                    
ability to  carry forward  losses. She  turned to  slide 25:                                                                    
"Lifecycle  Modeling  -Large  Field (GVR  @  30%):750  mmbo,                                                                    
Status  Quo, Fall  2016 Forecast  Prices,  4 Partners."  She                                                                    
indicated  that the  scenario included  a higher  GVR of  30                                                                    
percent that activated a higher  royalty rate. The slide was                                                                    
added at  the request of  Co-Chair Seaton. The  state "might                                                                    
be entitled  to" a higher  royalty rate of sixteen  and two-                                                                    
thirds  percent  at a  GVR  of  30  percent. The  net  state                                                                    
revenue increased by $2 billion  for the life of the project                                                                    
compared to  the figures  on slide  22. She  elucidated that                                                                    
the  state was  gaining more  in royalty  then it  lost with                                                                    
lower  production tax.  She reviewed  that  at a  GVR of  20                                                                    
percent production  taxes paid  over the  life of  the field                                                                    
was  $10.95 billion  [slide 22]  and at  the higher  royalty                                                                    
with the  higher GVR  (30 percent)  the production  tax paid                                                                    
was $9.9 billion but more was  paid in royalty than the loss                                                                    
in production tax.                                                                                                              
                                                                                                                                
2:08:14 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton asked what rate  of royalty increase she had                                                                    
used. Ms.  Glover responded  that she  used the  sixteen and                                                                    
two-thirds royalty rate.                                                                                                        
                                                                                                                                
Ms.  Glover moved  to slide  26: "Lifecycle  Modeling -Large                                                                    
Field (GVR  @ 30%):  750 mmbo,  HB111\N, Fall  2016 Forecast                                                                    
Prices,  1 or  4  Partners." She  mentioned  that the  slide                                                                    
depicted the impacts under the  CS version. She continued to                                                                    
slide 27: "Summary  Table -Large Field." She  noted that the                                                                    
dashboard information was included on  the table for ease of                                                                    
comparison.  She scrolled  to slide  28: "Summary  Results -                                                                    
Large Field."  She mentioned that the  graph represented the                                                                    
summary  of the  different scenarios  for large  fields when                                                                    
comparing the state revenues to the producer's revenues.                                                                        
                                                                                                                                
Ms. Glover  highlighted slide  29: "Further  Analysis -Large                                                                    
Field":                                                                                                                         
                                                                                                                                
     What's Driving the Changes from Status Quo by Tax                                                                          
     Component Change                                                                                                           
                                                                                                                                
          Compared Two Scenarios                                                                                                
             o 2016 Fall Forecast Prices                                                                                        
             o 1 Partner Scenario vs HB111\N                                                                                    
                                                                                                                                
          Five Components to Tax Change                                                                                         
                                                                                                                                
             o Net Operating Losses (NOLs) changed from 35%                                                                     
               credit to 50% carry forward loss                                                                                 
             o Sliding Scale Credits shifted from maximum                                                                       
               of $8/bbl @ <$80 Wellhead value to $6/bbl @                                                                      
               <$60 Wellhead value                                                                                              
             o Hardened the Floor                                                                                               
             o Minimum Tax increased from 4% to 5% @ $50                                                                        
               ANS $                                                                                                            
             o Cash Repurchases Eliminated for North Slope                                                                      
                                                                                                                                
Ms.  Glover  relayed  that the  following  slides  contained                                                                    
further analysis for a large  field development based on the                                                                    
tax change  components and their relative  impact on revenue                                                                    
and net present  value for the state and  the producers. She                                                                    
reviewed the chart on slide  30: "Status Quo vs HB111 -State                                                                    
Net Cash  Flows." She indicated  that the chart  portrayed a                                                                    
hypothetical project  that brought $22.4 billion  in revenue                                                                    
under the  status quo. The  NOL tax change  component gained                                                                    
$1.8 billion  in revenue  for the  state. The  sliding scale                                                                    
credit change  added $1.3 billion  and the hardening  of the                                                                    
floor,  minimum   tax,  and  elimination  of   cash  credits                                                                    
resulted in  negligible changes. The yellow  bar represented                                                                    
the total cash flow for the  state under the CS amounting to                                                                    
$25.4 billion.                                                                                                                  
                                                                                                                                
2:11:44 PM                                                                                                                    
                                                                                                                                
Ms. Glover  highlighted slide  31: "Status Quo  vs HB  111 -                                                                    
State  Net Present  Value." She  elucidated  that the  chart                                                                    
depicted the state's  NPV from the scenario.  She noted that                                                                    
some of the  tax change items had an impact  due to the time                                                                    
value of  money. She discussed  slide 32: "Status Quo  vs HB                                                                    
111 -Producer  Net Cash  Flows." She  stated that  the chart                                                                    
portrayed the net  cash flows for the  producer. She pointed                                                                    
to  the  gains  and  losses  and  noted  the  CS  reduced  a                                                                    
producer's total cash  flow compared to the  status quo. She                                                                    
turned  to slide  33: Status  Quo  vs HB  111 -Producer  Net                                                                    
Present Value."  She specified that  the elimination  of the                                                                    
cash  credits had  a  larger impact  on  the producer's  NPV                                                                    
calculations.                                                                                                                   
                                                                                                                                
2:13:33 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  asked about the higher  royalty in relation                                                                    
to the  GVR and  wondered how she  modeled the  scenario. He                                                                    
deduced that  she only  modeled the  higher royalty  rate of                                                                    
16.67 (two-thirds) percent rather  than the usual 12 percent                                                                    
royalty along  with the 10  percent higher GVR  [30 percent]                                                                    
rate.  He  noted  that some  fields  maintained  the  higher                                                                    
royalty rate  regardless of the  GVR. He requested  that the                                                                    
model  include the  lifecycle  of the  field  at the  higher                                                                    
royalty rate and  the lifecycle of the field  with the 16.67                                                                    
percent royalty rate and the  additional 10 percent GVR. Ms.                                                                    
Glover  affirmed his  statement and  stated she  would model                                                                    
both scenarios  and provide the  data to the  committee. Co-                                                                    
Chair  Seaton  wanted  her  to do  so  because  some  fields                                                                    
received  a higher  royalty prior  to the  implementation of                                                                    
the GVR.                                                                                                                        
                                                                                                                                
2:15:34 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  asked her to  revert to slide 14.  He asked                                                                    
whether the  green bar [depicting daily  oil production] was                                                                    
typical for  a field that  ramped up to production  and then                                                                    
declined.   Ms.  Glover   affirmed   that   the  curve   was                                                                    
characteristic   of  the   "ramp   up  and   ramp  down   of                                                                    
production." Vice-Chair Gara raised  concerns with the lower                                                                    
tax GVR fields that were  exempt from production tax for the                                                                    
first  seven  years  of  production   at  oil  prices  under                                                                    
$70/bbl. He  ascertained that  on slide  14 the  first seven                                                                    
oil producing years were years 4  to year 11, well after the                                                                    
peak of  production {year  7] and  taxation began  after the                                                                    
peak production  fell by half.  He asked  for clarification.                                                                    
Ms.  Glover  explained  that  under   the  fall  forecast  a                                                                    
producer only qualified  for three years of the  GVR and not                                                                    
seven because  they achieved the three-year  maximum of over                                                                    
$70/bbl.  under the  model. Vice-Chair  Gara deemed  that if                                                                    
the price  remained below $70/bbl.  the taxes  were exempted                                                                    
for 7 years. Ms. Glover answered in the affirmative.                                                                            
                                                                                                                                
2:18:04 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara referred  to the summary table  on slide 17.                                                                    
He  cited  line 2  at  $50/bbl.  under  the status  quo.  He                                                                    
referred to  the negative $41  million figure under  the Net                                                                    
Production  Tax Paid  column and  the  negative $89  million                                                                    
listed under the Production Tax  NPV 6.95 percent column. He                                                                    
inquired whether  the NPV amounted  to production  tax minus                                                                    
deductions and  credits. Ms. Glover  answered affirmatively.                                                                    
He pointed  to the last  column titled Producer IRR  (%) and                                                                    
noted the producers  rate of return of 11  percent. He asked                                                                    
whether  the percentage  represented  a  profit. Ms.  Glover                                                                    
replied  that   the  internal  rate  of   return  (IRR)  was                                                                    
different  for different  companies, but  typically the  IRR                                                                    
was  calculated on  a  NPV of  zero.  Vice-Chair Gara  asked                                                                    
whether there was a translation  for an IRR that represented                                                                    
a  net value  or rate  of  return. Ms.  Glover replied  that                                                                    
producers were profitable at  11 percent, which incorporated                                                                    
the time  value of money.  She reported that  the producer's                                                                    
NPV  was positive  indicating a  positive investment  value.                                                                    
Vice-Chair Gara referred  to the GVR rate of  20 percent and                                                                    
asked  whether  the  rate translated  to  an  equivalent  20                                                                    
percent discount  on the  tax rate  or represented  a larger                                                                    
tax discount. Ms.  Glover responded that the  20 percent GVR                                                                    
was  a  reduction off  the  gross  value before  taxes  were                                                                    
calculated and could have a larger impact on taxes.                                                                             
                                                                                                                                
2:21:26 PM                                                                                                                    
Representative Guttenberg had questions  about the small and                                                                    
large  field  assumptions.  He  observed  that  the  Capital                                                                    
Expenditure  (Capex) and  the Operating  Expenditures (Opex)                                                                    
were significantly  lower for the larger  field. He wondered                                                                    
why the difference was so large  when the scale of the costs                                                                    
was so high  on large fields. Ms. Glover  responded that the                                                                    
assumptions were  based on previously  developed assumptions                                                                    
by past consultants  for the Department of  Revenue DOR) and                                                                    
was unaware of the  basis of the assumptions. Representative                                                                    
Guttenberg asked whether  other transportation costs outside                                                                    
of TAPS (Trans Alaska Pipeline  System) were included in the                                                                    
model. Ms.  Glover responded  that the  transportation costs                                                                    
were all inclusive.                                                                                                             
                                                                                                                                
Representative  Wilson referred  to the  chart of  slide 17.                                                                    
She asked  whether the  $60 price  range was  projected over                                                                    
the  life  of  the  field.   Ms.  Glover  responded  in  the                                                                    
affirmative and  added that 2.25 percent  per year inflation                                                                    
was factored  in. Representative  Wilson commented  that she                                                                    
observed much larger price swings  over the lifecycle years.                                                                    
Ms. Glover  explained that the  model was done  around price                                                                    
points, which  was the  way fiscal  notes were  written. The                                                                    
model was designed to show  "some representative price point                                                                    
analysis."  Representative   Wilson  asked  what   the  $437                                                                    
million  [on  line  2]  under  the  Net  State  Gain  column                                                                    
represented.   Ms.   Glover   answered   that   the   figure                                                                    
represented  total state  revenue  that included  production                                                                    
tax,  royalties,  property  tax and  corporate  income  tax.                                                                    
Representative  Wilson  asked   about  the  revenue  columns                                                                    
totals for the state and  producer. She wanted to understand                                                                    
the total  revenue for both  under the scenario.  Ms. Glover                                                                    
explained  that  the  $113 million  under  the  state's  NPV                                                                    
column included  the total  revenue for  the state  over the                                                                    
life of  the field  (30 years) and  "converted it  into like                                                                    
dollars  to  represent  today's time  value  of  money.  The                                                                    
revenue  columns were  not additive.  The  $437 million  net                                                                    
state gain was the amount  the state received over 30 years.                                                                    
The value of $1 today was not the same in 30 years.                                                                             
                                                                                                                                
2:25:45 PM                                                                                                                    
                                                                                                                                
Representative Wilson asked whether  the states $437 million                                                                    
net state  gain was equivalent  to the Producer's  Cash Flow                                                                    
column showing  $550 million. Ms. Glover  indicated that she                                                                    
was correct.  The state's  gain and  the producer  cash flow                                                                    
were the  total revenue over  the lifecycle of  the project.                                                                    
Representative Wilson  wondered whether  it was fair  to say                                                                    
that the state  made almost as much as  the producer without                                                                    
the  risk.   Ms.  Glover   responded  in   the  affirmative.                                                                    
Representative Wilson asked that at  the $80 price point the                                                                    
state made more  revenue at $1.108 billion  than the company                                                                    
made at $973 million. Ms.  Glover replied in the affirmative                                                                    
and  added  that the  figures  were  under the  status  quo.                                                                    
Representative  Wilson  wanted to  make  sure  there was  an                                                                    
apples-to-apples comparison. She thought  that the state was                                                                    
benefitting without risk under the status quo modeling.                                                                         
                                                                                                                                
Co-Chair  Foster asked  about the  discount factor  used for                                                                    
the state  and the  producer. He wondered  why she  chose to                                                                    
use  6.95 percent  for  the  state and  10  percent for  the                                                                    
producer  and why  they differed.  Ms. Glover  answered that                                                                    
6.95 percent  was the  figure the Permanent  Fund used  as a                                                                    
rate  of   return  and  was  the   state's  expectation  for                                                                    
investment.  She  indicated  that since  the  producer  took                                                                    
risks  and  depended  on  cost   recovery,  10  percent  was                                                                    
allotted to the producer. Co-Chair  Foster deduced that if a                                                                    
lower discount  factor was  used for  the producer  than the                                                                    
NPV would rise. Ms. Glover responded in the affirmative.                                                                        
                                                                                                                                
2:28:54 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  did not understand  the question  about the                                                                    
state not  assuming risk. He  remarked that the  state still                                                                    
offered  tax  credits  under  the  status  quo.  Ms.  Glover                                                                    
agreed.  Vice-Chair Gara  disagreed that  the state  took no                                                                    
risk  because  even  under  HB 111  the  state  would  still                                                                    
reimburse producers but as a  deduction from taxes owed. Ms.                                                                    
Glover answered  that under HB  111 the losses  were carried                                                                    
forward and treated like any other costs.                                                                                       
                                                                                                                                
2:30:06 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:34:49 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair  Foster stated  that the  forthcoming modeling  was                                                                    
interactive.  [Secretary's  Note: The  interactive  modeling                                                                    
was a  live model  and static copies  were not  available at                                                                    
the time  of the meeting.  The excel model  titled "20170327                                                                    
Castle  Gap  Advisors  Dashboard" and  the  document  titled                                                                    
"Petroleum Fiscal  Design Model Instructions"  were provided                                                                    
to the committee on March 28, 2017 (copy on file)]                                                                              
                                                                                                                                
Mr.  Ruggiero  provided  a  PowerPoint  presentation  titled                                                                    
"Model  Session" dated  March 24,  2017 (copy  on file).  He                                                                    
explained  that he  had  been working  on  a full  lifecycle                                                                    
model  to  present  to  the   committee  along  with  DOR's.                                                                    
However, issues arose with the  data when modeling the NOL's                                                                    
at half the  amount. He expected that the  cut would produce                                                                    
a  "significant hit"  to the  companies' "economics"  but it                                                                    
did not. He relayed that he  checked the data and the result                                                                    
had to do with utilizing the  NOL's down to a zero-tax value                                                                    
even  with a  minimum tax.  He furthered  that building  the                                                                    
model utilizing the NOL's down  to the production tax value,                                                                    
which  yielded  the same  tax  as  the  minimum was  a  huge                                                                    
difference in how the NOL's  were used. He related that when                                                                    
he modeled a  $10 billion project and the NOL's  were cut 50                                                                    
percent,  the deductions  were cut  by $5  billion. In  a 35                                                                    
percent  tax  bracket  for   the  deductions  totaling  $1.8                                                                    
billion, a  credit of  $1.4 billion was  owed to  the state,                                                                    
yet the numbers were one  quarter of that amount. He thought                                                                    
that  the  reason   was  nuanced,  and  he   did  not  fully                                                                    
understand it yet,  therefore he did not  present his model.                                                                    
He  concluded   that  lots  of  moving   parts  raised  many                                                                    
questions. He offered a "snap shot" one-year model.                                                                             
                                                                                                                                
Mr.   Ruggiero  continued   that  any   of  the   parameters                                                                    
highlighted  in yellow  in the  model  were changeable.  The                                                                    
model assumed 450 barrels per  day of non-GVR production and                                                                    
50 barrels per day of  GVR. In addition, the cost structure,                                                                    
tax rates,  GVR rates,  federal rates,  royalty percentages,                                                                    
and the  gross minimum tax  were all changeable.  He pointed                                                                    
to two plots [graphs] on  the right-hand side that portrayed                                                                    
the  net  effective   tax  on  the  left  line   [y  axis  -                                                                    
percentages zero at bottom and 50  percent at the top. The x                                                                    
axis represents  price from  $20 to  $200] The  orange line,                                                                    
which was  flat, portrayed the  revenue to the state  in the                                                                    
current status  quo. He noted that  a change to the  net tax                                                                    
curve changed the  revenue to the state. He  changed the GVR                                                                    
per barrel  credit to  $5. The graph  showed the  orange net                                                                    
tax curve moved to a  blue curve that represented changes in                                                                    
the model. The right axis opposite  the y axis was read from                                                                    
the bottom  to the top  and began  at minus $600  million to                                                                    
$1.4  billion.  A green  curve  representing  the change  in                                                                    
state take rose up and over  to $404 million at the price on                                                                    
the x axis of $80/bbl.  Alaska North Slope (ANS) West Coast.                                                                    
The change  to $5  from $8 increased  the state's  take from                                                                    
the status quo  to $404 million at $80 per  barrel. He noted                                                                    
that  the  figures were  not  exact,  and the  $404  million                                                                    
figure was in the range of  $375 million to $425 million but                                                                    
offered "an order of magnitude" of results.                                                                                     
                                                                                                                                
2:41:58 PM                                                                                                                    
                                                                                                                                
Representative Wilson  emphasized that the  model determined                                                                    
what the state would lose  or gain after changing inputs but                                                                    
did  not predict  production. Mr.  Ruggiero answered  in the                                                                    
affirmative.  He  offered  that  only a  company  knew  it's                                                                    
"tipping point." There was a  point at which companies could                                                                    
slow or stop investments, but  he was unaware of the changes                                                                    
that would  drive that  result. He  added that  the decision                                                                    
was specific to  each company based on  its economics. Small                                                                    
changes could play  a negligible or large  role depending on                                                                    
the   company's  future   forecast.  Representative   Wilson                                                                    
cautioned  that members  should be  careful of  "pulling too                                                                    
many levers" at once unless  the full impact was understood.                                                                    
She  suggested  that dealing  with  the  cash credits  alone                                                                    
brought  consequences; whether  positive or  negative, would                                                                    
be   known   next   year.    Mr.   Ruggiero   thought   that                                                                    
Representative  Wilson's approach  was  easier but  required                                                                    
adjustments each year. He maintained  that the model enabled                                                                    
the legislature to look at  collective changes or individual                                                                    
changes and  measure impacts and  compare them to  achieve a                                                                    
desired  result. Representative  Wilson maintained  that the                                                                    
model  did not  predict production.  Mr. Ruggiero  responded                                                                    
that the model employed  average costs, which was imperfect.                                                                    
He  pointed out  that different  fields had  cost structures                                                                    
that   were   lower   or   higher.   He   exemplified   that                                                                    
ConocoPhillips  reported  a 10  percent  rate  of return  at                                                                    
$40/bbl. and  the model used  $40 as the cost;  real numbers                                                                    
were different.  He stressed that  the benefit of  the model                                                                    
was that  all the inputs  were changeable and the  shifts on                                                                    
the plot's  curve were instructive.  He pointed to  the plot                                                                    
on  the right  side of  the  slide and  reiterated that  the                                                                    
model assumed that 90 percent  of production was non-GVR and                                                                    
the plot  on the bottom  right portrayed net tax  plotted on                                                                    
the left  scale and  state take plotted  on the  right scale                                                                    
where the model assumed the 10 percent GVR production.                                                                          
                                                                                                                                
2:46:47 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  wanted the GVR  readjusted to $5.  He asked                                                                    
at what price the adjustment "kicked in."                                                                                       
                                                                                                                                
CHRISTINA  RUGGIERO, CONSULTANT,  CASTLE GAP  ADVISORS, LLC,                                                                    
answered that  the price was  $75 at the crossover  point of                                                                    
zero.                                                                                                                           
                                                                                                                                
Vice-Chair  Gara wondered  what dollar  amount initiated  an                                                                    
impact. Ms. Ruggiero responded that the amount was $65.                                                                         
                                                                                                                                
Vice-Chair  Gara  referenced  prior  industry  testimony  on                                                                    
royalty  relief. He  believed  that royalty  relief was  not                                                                    
factored into the model. He  suggested that a change from $0                                                                    
to $5 "could  be far more offset by the  amount of reduction                                                                    
in  the royalty  from  12.5  percent or  16.5  percent to  7                                                                    
percent  to 11  percent in  gross tax.  He inquired  whether                                                                    
royalty relief  was a  greater benefit than  a zero  to five                                                                    
change. Mr. Ruggiero suggested that  he run the numbers from                                                                    
the CS  into the model. He  input $56 and $62  for the gross                                                                    
minimum  that initiated  a change  to  6 to  8 percent,  and                                                                    
additionally inserted the $60 per  barrel credit, cut off at                                                                    
3  percent GVR  per barrel  and going  to zero  at $120.  He                                                                    
returned  to looking  at the  state take  (green line)  that                                                                    
depicted a $200  million benefit to the state at  a price of                                                                    
$70 to  $80 per barrel.  He changed the field  production to                                                                    
450 thousand  barrels and applied  the changes  to determine                                                                    
how much royalty relief a  company needed to bring them back                                                                    
to zero. He  ascertained that deducting 2.5  points from the                                                                    
royalty zeroed out  the revenue. He recapped  that most non-                                                                    
GVR  fields  were  at  the 12.5  percent  royalty  rate  and                                                                    
royalty relief  could reduce  up to  9 percent.  The changes                                                                    
from the 2.5  percent reduction negated the  changes made to                                                                    
the  gross minimum  tax  and the  per  barrel sliding  scale                                                                    
credits.                                                                                                                        
                                                                                                                                
2:51:46 PM                                                                                                                    
                                                                                                                                
Co-Chair   Seaton  referenced   the  DOR   presentation.  He                                                                    
hypothesized that  if the state  allowed "100  percent carry                                                                    
forward of the  expenditures and they were  written off over                                                                    
the first life  of the field" how that  impacted the minimum                                                                    
tax. Mr.  Ruggiero explained  that in the  early years  of a                                                                    
field, once  production began a company  deducted investment                                                                    
capital to bring the tax to  zero, however, a minimum tax or                                                                    
hard  floor could  still apply,  the minimum  was paid  even                                                                    
though  the  company  had large  amounts  of  carry  forward                                                                    
losses to deduct.                                                                                                               
                                                                                                                                
Vice-Chair Gara returned to his  royalty relief question and                                                                    
asked what the  extra revenue to the state was  at $60, $70,                                                                    
and $80  per barrel  employing a zero  to 5  percent credit.                                                                    
Ms. Ruggiero  reported that at  a $60 price point  the state                                                                    
generated  $135 million,  at  a $70  price  point the  state                                                                    
gained $240  million, and  at an $80  price point  the state                                                                    
made $270 million.                                                                                                              
                                                                                                                                
2:54:17 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked whether the  $5, $6, and $7 credit and                                                                    
the zero to  $5 credit "kicked-in" at  $65/bbl. were stacked                                                                    
or alternative.  Mr. Ruggiero responded that  the results in                                                                    
the  graph  were  additive  to  all  the  changes  made.  He                                                                    
indicated that the  way to isolate a specific  impact was to                                                                    
only change one item.                                                                                                           
                                                                                                                                
Ms.  Ruggiero  interjected  that the  figures  she  provided                                                                    
included  a  per barrel  credit  range  from  $8 to  $3  and                                                                    
offered to change  the number from $5 to  zero. She reported                                                                    
that at a $60 price  point the state generated $135 million,                                                                    
at a $70  price point the state gained $240  million, and at                                                                    
an $80 price point the state made $670 million.                                                                                 
                                                                                                                                
Co-Chair  Seaton  asked   for  clarification  regarding  the                                                                    
bottom right  graph. Mr. Ruggiero  answered that  the bottom                                                                    
right  graph represented  GVR.  He  exemplified employing  a                                                                    
hard floor.  He reset the model  back to normal and  input a                                                                    
hard floor that  resulted in a minimum tax.  The minimum tax                                                                    
was initiated at roughly $90/bbl.  ANS West Coast price, but                                                                    
the amount of revenue  was relatively small at approximately                                                                    
$10  million.  Mr.  Ruggiero suggested  changing  the  gross                                                                    
minimum tax  back to the  previous change along with  a hard                                                                    
floor;  a company  would still  only pay  the minimum  up to                                                                    
$115/bbl.                                                                                                                       
                                                                                                                                
2:58:18 PM                                                                                                                    
                                                                                                                                
Mr.  Ruggiero increased  a new  field's  cost structure  and                                                                    
related that  as the  costs increased  the top  plot's curve                                                                    
moved up and to the right  since the 35 percent was fixed at                                                                    
$150/bbl. The  right-hand side of  the curve  remained fixed                                                                    
and the left side of the  curve moved towards the right with                                                                    
a  fixed price  instead of  the entire  curve changing.  The                                                                    
non-GVR field was at $105/bbl.  and below was subject to the                                                                    
minimum tax  with the same  parameters. The  overall revenue                                                                    
to the state was negative  because the higher cost structure                                                                    
meant less profit to share.                                                                                                     
                                                                                                                                
Mr. Ruggiero  referred to the  bottom graph that  showed the                                                                    
GVR  field  with  a  hard  floor  and  the  previous  points                                                                    
increased for the minimum tax  percentages, then a GVR field                                                                    
would be subject to a minimum  tax at $145/bbl. or below. He                                                                    
clarified that  the chart  only reflected  1 year  which was                                                                    
the reason the GVR remained  in place above the $70 cut-off;                                                                    
the model  hypothesized that the  price jumped  to $140/bbl.                                                                    
within one  year. The  GVR would be  eliminated if  the high                                                                    
price remained  over several years  and the top  graph would                                                                    
indicate the results of the changes.                                                                                            
                                                                                                                                
3:00:49 PM                                                                                                                    
                                                                                                                                
Mr. Ruggiero  pointed out  that the  net effective  tax (the                                                                    
tax   that  was   paid   relative   to  profit),   increased                                                                    
considerably as the parameters changed.                                                                                         
                                                                                                                                
Co-Chair  Seaton  requested  that Mr.  Ruggiero  return  the                                                                    
model to  the status  quo and insert  the per  barrel credit                                                                    
provision  in the  CS. Mr.  Ruggiero noted  that the  change                                                                    
went into effect at $60/bbl.   at $8 per barrel and at every                                                                    
$10 increment the amount was  reduced by $1 until the credit                                                                    
was at $3 and subsequently  jumped to zero. The results were                                                                    
shown in the upper right-hand plot.                                                                                             
                                                                                                                                
Ms.  Ruggiero  reported that  the  change  impacts began  at                                                                    
$80/bbl. where  the state revenue increased  by $270 million                                                                    
and that  remained relatively flat  until the  price reached                                                                    
$120/bbl.  and   increased  the  state's  revenue   by  $540                                                                    
million.                                                                                                                        
                                                                                                                                
Co-Chair Seaton wondered why the  per barrel credit had such                                                                    
an effect.  Mr. Ruggiero  replied that the  change initiated                                                                    
the point  where the  35 percent  tax was  payable decreased                                                                    
from  $150/bbl.  to $120/bbl.  portrayed  by  the flat  blue                                                                    
line. He  added that for prices  at $80 or higher  a $2/bbl.                                                                    
increment was added. He stated  that the flat plateau on the                                                                    
chart depicted the standard $2/bbl.  difference but after it                                                                    
made the jump from $3 to  zero a larger gap was created, and                                                                    
the line  began to  rise. He indicated  that "with  each $10                                                                    
increment it  was coming back  down until the two  tax rates                                                                    
were equal and the revenue to the state was equal."                                                                             
                                                                                                                                
3:03:40 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  asked Mr. Ruggiero to  repeat the                                                                    
scenario again.                                                                                                                 
Co-Chair  Seaton  asked Mr.  Ruggiero  to  identify at  what                                                                    
points  and price  the per  barrel credit  changed from  the                                                                    
status quo. Mr. Ruggiero stated  that relative to the status                                                                    
quo one change was made, which  was to the sliding scale per                                                                    
barrel credit.  He changed the starting  price from $80/bbl.                                                                    
where  the decrement  began to  $60/bbl.  He explained  that                                                                    
from $0/bbl.  to $60/bbl. the  highest credit of  $8 applied                                                                    
and every  time there was  a price  step increase of  $10, a                                                                    
credit  was decremented  by  $1 through  $3  as the  minimum                                                                    
credit; after $3 the credit fell  to zero. He pointed to the                                                                    
table located on the lower  left that set and calculated all                                                                    
the parameters  fed into the  model. He detailed  that there                                                                    
was  a difference  between the  credits available  under the                                                                    
status  quo versus  the CS  at the  point where  the revenue                                                                    
line  initially jumped  up.  The  difference became  $2/bbl.                                                                    
because he started at $60 and  a $6 credit applied versus an                                                                    
$8 credit  at $80/bbl. The  $2 difference remained  in place                                                                    
for roughly  150 million barrels  per year  totaling roughly                                                                    
$300 million to $270 million.  The $2/bbl. remained in place                                                                    
through the price points of  $90, $100, and $110 per barrel.                                                                    
He furthered that  once the price reached  $120/bbl. the new                                                                    
oil  dropped off  to  zero and  the rest  was  subject to  a                                                                    
$4/bbl.  credit.  He  added that  at  every  subsequent  $10                                                                    
increment,  the  credit  dropped  until the  two  tax  rates                                                                    
equated to the point the per  barrel credit was zero on both                                                                    
cases.                                                                                                                          
                                                                                                                                
3:07:15 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton  asked Mr. Ruggiero  to return to  the model                                                                    
of $5 per barrel credit  flat across the board. Mr. Ruggiero                                                                    
replied  that  the result  made  the  $5 per  barrel  credit                                                                    
remain  flat  up  to  $200/bbl.   Co-Chair  Seaton  was  not                                                                    
understanding  the  steps  in relationship  to  the  $5  per                                                                    
barrel credit.  Mr. Ruggiero responded  that the  status quo                                                                    
changed the per  barrel credit every $10. He  noted that the                                                                    
$5  flat  credit  input  reacted   to  the  status  quo.  He                                                                    
summarized  that   the  stair  step  that   Co-Chair  Seaton                                                                    
observed was  the "delta  impact of the  current $8  down to                                                                    
zero  in $1  increments for  every $10  in price."  Co-Chair                                                                    
Seaton asked whether the flat  line indicated the status quo                                                                    
and  the model  portrayed changes  from the  status quo.  He                                                                    
asked  for clarification.  Mr. Ruggiero  responded that  the                                                                    
revenue  that rose  and stepped  down represented  the point                                                                    
when the flat $5 credit was  less, equated, or more than the                                                                    
credit under  the status quo.  Co-Chair Seaton  offered that                                                                    
the status quo was portrayed  as a straight line across from                                                                    
zero and the graphs depicted  the changes in relation to the                                                                    
status quo  shown as the  flat line. Mr.  Ruggiero responded                                                                    
in the affirmative and added  that the parameters set at the                                                                    
status  quo  resulted  in  a   flat  green  line  from  zero                                                                    
representing  state take.  Mr. Ruggiero  clarified that  the                                                                    
zero  take  was  merely  a starting  baseline  and  did  not                                                                    
indicate that the  state had zero take.  He recommended that                                                                    
the members  utilized the  model to gain  the sense  "of the                                                                    
relative importance or magnitude"  of changing one parameter                                                                    
versus another.  Co-Chair Seaton  emphasized that  the model                                                                    
was  set at  the status  quo  and any  changes affected  the                                                                    
current system. Mr. Ruggiero reminded  the committee of what                                                                    
changes could be made by the model.                                                                                             
                                                                                                                                
Co-Chair Seaton  requested that the  GVR models were  run at                                                                    
20 percent  versus 30  percent and  wondered what  price the                                                                    
GVR  intersected  the  state   revenue  line.  Ms.  Ruggiero                                                                    
reported that  the impact was  negative and at  the $80/bbl.                                                                    
the state take was minus  $16 million, which stepped down at                                                                    
the $110/bbl. to minus $52  million. Ms. Ruggiero added that                                                                    
at below $80/bb. no change was affected.                                                                                        
                                                                                                                                
3:14:36 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  struggled with the GVR.  He emphasized that                                                                    
he did not support the  original provision. He asked for Mr.                                                                    
Ruggiero's   opinion  regarding   the  GVR   provision.  Mr.                                                                    
Ruggiero  responded   that  statutes  were   implemented  to                                                                    
instigate desired results. He  related that a long-term goal                                                                    
of   the  legislature   was  to   increase  production.   He                                                                    
recommended   that  the   state  decide   what  the   proper                                                                    
incentives were  to spur  the development  of new  fields on                                                                    
the  North Slope  and increase  production. Vice-Chair  Gara                                                                    
stated that  his goal was  to increase production  and state                                                                    
revenue  and  not  fill  the  pipeline  while  losing  state                                                                    
revenue.   He  referenced   analysis  that   demonstrated  a                                                                    
negative  net present  value to  the state  for GVR  oil. He                                                                    
asked if  Mr. Ruggiero  was familiar  with the  analysis. He                                                                    
declared that  his "benchmark  was that he  did not  want to                                                                    
spend  money  on oil  that  was  not  making money  for  the                                                                    
state." Mr. Ruggiero referred to  his previous testimony and                                                                    
deduced that  the CS  eliminated the  practice of  the state                                                                    
paying  "up   front"  but  the  state   contributed  through                                                                    
foregoing tax via deductions. He  personally did not endorse                                                                    
cashable  credits  but  felt that  the  same  incentive  was                                                                    
accomplished through  deductions and  cost recovery  tied to                                                                    
actual  production. He  surmised that  the flat  $5/bbl. GVR                                                                    
was  an   example  of   providing  credit   when  production                                                                    
occurred.                                                                                                                       
                                                                                                                                
3:19:21 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  expressed reservation about using  the term                                                                    
"uplift" for an interest rate  that benefitted a company. He                                                                    
would have  a difficult time explaining  to his constituency                                                                    
why  the state  offered 8  percent interest  on top  of cash                                                                    
credits and  loss carry forwards. He  wondered whether there                                                                    
was  an "uplift"  percentage that  was more  reasonable. Mr.                                                                    
Ruggiero responded that 8 percent  was the average return on                                                                    
a 50-year long-term curve. He  explained that the use of the                                                                    
term "uplift" was  very common in the  industry. He reminded                                                                    
the committee  that the reason  large companies  invested in                                                                    
countries  with  higher tax  rates  because  costs were  not                                                                    
deducted they were recovered with  interest or uplift, which                                                                    
was  the "norm."  He  elaborated that  in  Alaska a  company                                                                    
deducted  against   its  investment  and  then   paid  taxes                                                                    
compared to another regime where  the company received total                                                                    
cost recovery  and then  began to pay  taxes. The  fact that                                                                    
the  company could  attain cost  recovery much  earlier than                                                                    
possible  in  Alaska  added a  "considerable  upside"  to  a                                                                    
company's  economics. He  remarked that  when measuring  how                                                                    
the state compared to other  regimes the comparison amounted                                                                    
to  "more  than  headline  tax  rates."  The  other  "moving                                                                    
pieces" in the  tax system mattered. He  maintained that "if                                                                    
Alaska  allowed  full  deductions with  uplift,"  the  state                                                                    
would  still not  compare to  other regimes  that offered  a                                                                    
"much more  lucrative recovery."  In response to  a question                                                                    
by, Vice-Chair Gara, Mr. Ruggiero  relayed that some regimes                                                                    
with a  lower effective  tax rate  than Alaska  offered full                                                                    
recovery of costs  and uplift. He knew of  many regimes with                                                                    
higher government  take that offered full  cost recovery and                                                                    
some form of uplift.                                                                                                            
                                                                                                                                
3:23:30 PM                                                                                                                    
                                                                                                                                
Representative   Wilson  asked   how  many   countries  took                                                                    
royalties in kind. Mr. Ruggiero  responded that he was aware                                                                    
of very few  countries that took royalty in  kind. He voiced                                                                    
that  explaining every  regimes  royalty system  was a  very                                                                    
complex answer  but indicated that  very few  countries took                                                                    
royalty  in  kind.  Representative Wilson  referred  to  Mr.                                                                    
Ruggiero's  previous comments  regarding  cost recovery  and                                                                    
uplift  in  other  regimes.   She  asked  for  clarification                                                                    
regarding the  producer's ability  to recover  costs earlier                                                                    
then  in Alaska.  Mr. Ruggiero  replied that  the DOR  model                                                                    
employed a  5-year investment period. He  elaborated that in                                                                    
most other regimes the companies  were investing during that                                                                    
time as well  but the ability for cost  recovery depended on                                                                    
whether production  occurred. In  addition, in  most regimes                                                                    
projects  were  ring fenced;  companies  had  to wait  until                                                                    
production   began  before   receiving  cost   recovery.  He                                                                    
restated that the  regime did not pay  anything upfront, the                                                                    
producer   had   to   produce    oil   to   recover   costs.                                                                    
Representative  Wilson  queried  whether uplift  began  once                                                                    
production began. Mr. Ruggiero  answered in the affirmative.                                                                    
He added that  regimes either allowed every  barrel that was                                                                    
not royalty oil  or limited the number of  barrels that were                                                                    
counted  for   cost  recovery  to  ensure   some  government                                                                    
revenue. Representative Wilson  stressed that the discussion                                                                    
should  include  the  "complete number"  including  all  the                                                                    
components  of government  take for  Alaska or  else it  was                                                                    
difficult  to   compare  "apples-to-apples."   Mr.  Ruggiero                                                                    
stated that  a full  project model  was necessary  to obtain                                                                    
the  goal  of  increased production.  Representative  Wilson                                                                    
reiterated that  she did not believe  the current discussion                                                                    
considered   the   negative    consequences   of   decreased                                                                    
production  to   the  point  of  placing   the  pipeline  in                                                                    
jeopardy.                                                                                                                       
                                                                                                                                
3:29:04 PM                                                                                                                    
                                                                                                                                
Representative   Guttenberg   appreciated  the   model.   He                                                                    
wondered whether  the majors were "sticking  around" in case                                                                    
more  production  came online  or  new  areas in  the  state                                                                    
opened  for development.  Mr. Ruggiero  speculated that  the                                                                    
major  oil companies  believed that  "there was  huge upside                                                                    
potential" in  the state and that  production would increase                                                                    
in its  own time  when each company  was ready.  He observed                                                                    
from personal experience that  most major producers anywhere                                                                    
in the world divested in big projects after 30-35 years.                                                                        
                                                                                                                                
3:32:16 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg wondered what  would happen if the                                                                    
major  producers just  walked  away from  the massive  North                                                                    
Slope infrastructure  and TAPS  and let  throughput decrease                                                                    
enough that the  pipeline was forced to shut  down. He asked                                                                    
what  the  risks  were  for   the  producers.  Mr.  Ruggiero                                                                    
believed that  the companies were profit  driven which would                                                                    
drive  its  decisions  and hoped  that  the  companies  kept                                                                    
bringing new development online.                                                                                                
Co-Chair Seaton saw no further questions.                                                                                       
                                                                                                                                
HB 111 was HEARD and HELD in committee for further                                                                              
consideration.                                                                                                                  
                                                                                                                                
Co-Chair Seaton reviewed the agenda for the following day.                                                                      
                                                                                                                                

Document Name Date/Time Subjects
HB111 - DOR Lifecycle Scenario Analysis Presentation 3.24.17.pdf HFIN 3/24/2017 1:30:00 PM
HB 111
20170324_Castle Gap Advisors_Models Session Intro.pdf HFIN 3/24/2017 1:30:00 PM
HB 111
20170327_Castle Gap Advisors_Model Explanation.pdf HFIN 3/24/2017 1:30:00 PM
HB 111
20170327_Castle Gap Advisors_Dashboard House Finance.xlsx HFIN 3/24/2017 1:30:00 PM
HB 111
HB 111 20170329_HFIN_Impact of CF NOLs_Castle Gap Advisors.pdf HFIN 3/24/2017 1:30:00 PM
HB 111