Legislature(2011 - 2012)BARNES 124

02/11/2011 01:00 PM RESOURCES


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01:03:17 PM Start
01:03:34 PM Presentation(s): Oil & Gas Production Tax Status Report
03:02:35 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: TELECONFERENCED
"Oil & Gas Production Tax Status Report," by
Dept. of Revenue
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                       February 11, 2011                                                                                        
                           1:03 p.m.                                                                                            
                                                                                                                              
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Eric Feige, Co-Chair                                                                                             
Representative Paul Seaton, Co-Chair                                                                                            
Representative Peggy Wilson, Vice Chair                                                                                         
Representative Alan Dick                                                                                                        
Representative Neal Foster                                                                                                      
Representative Bob Herron                                                                                                       
Representative Cathy Engstrom Munoz                                                                                             
Representative Berta Gardner                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Mike Hawker                                                                                                      
Representative Mark Neuman                                                                                                      
Senator Cathy Giessel                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION(S):  OIL & GAS PRODUCTION TAX STATUS REPORT                                                                        
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRYAN BUTCHER, Acting Commissioner                                                                                              
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Provided the portion of the Department of                                                                
Revenue's presentation on the Oil and Gas Production Tax Status                                                                 
Report to the Legislature dated January 18, 2011.                                                                               
                                                                                                                                
FRANK MOLLI, Petroleum Engineer and President                                                                                   
Molli Computer Services, Inc.                                                                                                   
Consultant to the Department of Revenue (DOR)                                                                                   
Colorado Springs, Colorado                                                                                                      
POSITION STATEMENT:   Provided  the portion  of the Department  of                                                            
Revenue's presentation on the Fall 2010 Oil Production Forecast.                                                                
                                                                                                                                
RICH RUGGIERO, Vice President                                                                                                   
Field Development & I/O Support                                                                                                 
Gaffney, Cline, & Associates Division                                                                                           
Baker Hughes                                                                                                                    
Consultant to the Department of Revenue (DOR)                                                                                   
Houston, Texas                                                                                                                  
POSITION STATEMENT:   Provided  the portion  of the Department  of                                                            
Revenue's presentation on Petroleum Fiscal System Design.                                                                       
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:03:17 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   ERIC  FEIGE   called  the   House  Resources   Standing                                                            
Committee meeting  to order at  1:03 p.m.  Representatives  Feige,                                                              
Seaton,  Dick, Herron,  Munoz,  and Gardner  were  present at  the                                                              
call to  order.  Representatives  Foster and P. Wilson  arrived as                                                              
the meeting  was in progress.   Representatives Hawker  and Neuman                                                              
and Senator Giessel were also present.                                                                                          
                                                                                                                                
^PRESENTATION(S):  Oil & Gas Production Tax Status Report                                                                       
    PRESENTATION(S):  Oil & Gas Production Tax Status Report                                                                
                [Contains discussion of HB 110]                                                                                 
                                                                                                                                
1:03:34 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  announced that  the only order  of business  is an                                                              
oil and  gas production  tax status  report by  the Department  of                                                              
Revenue (DOR).   He  noted that  the presentation  is part  of the                                                              
committee's education process for HB 110.                                                                                       
                                                                                                                                
1:04:15 PM                                                                                                                    
                                                                                                                                
BRYAN BUTCHER,  Acting Commissioner, Department of  Revenue (DOR),                                                              
related that the  Oil and Gas Production Tax Status  Report to the                                                            
Legislature [dated  January 18,  2011,] has seven  sections (slide                                                            
3).  The first  section has to do with revenue  generation and the                                                              
tax  rate.   State revenues  under the  2006 petroleum  production                                                              
profits  tax  (PPT) and  the  2007  Alaska's Clear  and  Equitable                                                              
Share (ACES)  have exceeded the  amounts they would have  been had                                                              
the  state remained  under the  economic  limit factor  (ELF).   A                                                              
provision of  the PPT  required that DOR  provide a  status report                                                              
to the  legislature  in five years.   Eighteen  months after  PPT,                                                              
ACES was passed  and the decision was made to leave  the report in                                                              
statute.   The  passage  of ACES  probably  affected  some of  the                                                              
information  that DOR  might have  had had  there not  been a  tax                                                              
change one-third of the way into the five-year period.                                                                          
                                                                                                                                
1:06:28 PM                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER  BUTCHER noted that  even though the  tax rate                                                              
under ACES can  be as high as  75 percent, it has not  been nearly                                                              
that high over  the last four years.   Since Fiscal Year  2008 the                                                              
average  tax rate  has  been just  over 40  percent.   The  second                                                              
section of the report  is a look at industry  investment.  Capital                                                              
expenditures  began  increasing  upon  passage  of  PPT  and  have                                                              
continued   to  increase   after  passage   of  ACES.     However,                                                              
[regarding the third  section of the report], the  department does                                                              
not  have  a  breakdown  of  how   the  capital  expenditures  are                                                              
separated between  what is being  done in existing  facilities and                                                              
what  is  being  done  for new  exploration.    Although  DOR  has                                                              
considerably more information  than it did five years  ago under a                                                              
gross-based tax,  it still does not  have the kind of  detail that                                                              
allows  for  separation  that  would  provide  a  better  idea  of                                                              
exactly  where that  spending  is going.    [Regarding the  fourth                                                              
section of  the report],  industry employment  continued  to creep                                                              
slightly  up  in  2007,  2008,  and  2009,  but  dipped  in  2010.                                                              
[Regarding  the  fifth  section  of the  report],  the  amount  of                                                              
credits  used  continued in  an  upward  trend.   However,  it  is                                                              
difficult  to  draw  a  hard  conclusion  on  the  credit  results                                                              
because  they were  only recently  put  into law.   Regarding  the                                                              
sixth section  of the report,  tax administration  and compliance,                                                              
the  department continues  to write  regulations for  the new  tax                                                              
system.    The first  audits  under  the  first  year of  the  net                                                              
profits tax,  PPT, have just been  completed and the  auditors are                                                              
now getting  into the  first year  of the ACES  tax.   The seventh                                                              
section of  the report, conclusions  and recommendations,  will be                                                              
presented at the end of the presentation.                                                                                       
                                                                                                                                
1:08:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON recalled that  DOR has been  hampered in                                                              
its  tax  reporting  and  compliance  efforts  due to  lack  of  a                                                              
centralized  database to  house and  manage the  large volumes  of                                                              
oil and gas data.  She asked about the status of that problem.                                                                  
                                                                                                                                
ACTING COMMISSIONER  BUTCHER confirmed  that the DOR  tax division                                                              
has  had a  difficult  time in  putting together  all  of the  tax                                                              
information and  data that comes in.   While data is  contained in                                                              
various  systems of  Excel  software,  DOR does  not  have a  good                                                              
overall  database  that  allows   input  of  the  information  and                                                              
breakdowns  of the  information.   Given that  the cost range  for                                                              
such  a  system  is  $25-$35  million,   the  department  received                                                              
$300,000  in the  current  fiscal year  to  look into  determining                                                              
what  would   be  the  best   system.    Additionally,   with  the                                                              
Department of Administration,  DOR is looking at  a statewide view                                                              
of all  of the  information technology  (IT)  projects, so  DOR is                                                              
optimistic  that by  the fiscal  year's end  it will  have a  good                                                              
number and good recommendation on what is needed going forward.                                                                 
                                                                                                                                
1:10:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE GARDNER  inquired whether the new  database will be                                                              
able to  provide information  on how much  of the claimed  credits                                                              
is  for drilling  or  wells and  how much  is  for maintenance  or                                                              
facilities.                                                                                                                     
                                                                                                                                
ACTING COMMISSIONER  BUTCHER responded no, the statute  is written                                                              
such  that DOR  only receives  what the  capital expenditures  are                                                              
from  the companies  and the  department can  then determine  what                                                              
they  are to make  sure they  are legitimate.   The  law does  not                                                              
require a breakdown  that specifies exactly whether  it is capital                                                              
work  on   an  existing  facility   or  exploratory  work.     The                                                              
department  is very  much  limited by  the  amount of  information                                                              
that it gets.   The companies themselves might be  able to provide                                                              
more insight in this regard.                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  asked  whether  that  is  something  that                                                              
could be  done by  regulation even  though it  is not required  by                                                              
law.   She said this  is important because  other bills  are being                                                              
considered  that would provide  incentives for  new wells,  but if                                                              
it  is unknown  what is  a new  well  and what  is maintenance  or                                                              
facility related, then a meaningful fiscal note cannot be done.                                                                 
                                                                                                                                
ACTING COMMISSIONER  BUTCHER  answered that  he suspects  it would                                                              
have to  be statutory, but  he does not know  that for a  fact and                                                              
will have to get back to the committee on that.                                                                                 
                                                                                                                                
1:12:28 PM                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER,   returning  to  his  presentation,                                                              
compared  the estimated production  tax revenue  for fiscal  years                                                              
2007-2010 under  the current  ACES tax system  with what  it would                                                              
have been  under the previous  two systems  of PPT and  ELF (slide                                                              
4).  Under ACES  in Fiscal Year 2008 the state  received nearly $7                                                              
billion  in production  tax revenue,  but  had ELF  still been  in                                                              
effect the  revenue would have been  less than $2 billion.   Under                                                              
ACES  in  Fiscal  Year  2010 the  state  received  just  under  $3                                                              
billion,  compared  to under  $1  billion had  ELF  still been  in                                                              
effect.  Thus, it  can definitely be said that the  new tax system                                                              
has been very good for state revenue over the short term.                                                                       
                                                                                                                                
ACTING COMMISSIONER  BUTCHER reported  that another known  is that                                                              
companies are  spending more, although  the state does not  have a                                                              
breakdown on  where that is  going (slide  5).  Spending  began to                                                              
increase in the  2004 calendar year, moved up when  PPT was passed                                                              
in 2006,  and has continued  moving up  since the 2007  passage of                                                              
ACES.   He noted that  during those years  the Alaska  North Slope                                                              
(ANS) West  Coast price  spiked up  and down  but the increase  in                                                              
spending  remained steady,  which is  not the  usual case  because                                                              
generally spending  really moves  up when the  price of  oil comes                                                              
up and dips when the price of oil drops.                                                                                        
                                                                                                                                
1:14:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  inquired whether the governor  wants to, or                                                              
the legislature  needs to, put something  in statute to  require a                                                              
breakout of the information that DOR receives from companies.                                                                   
                                                                                                                                
ACTING COMMISSIONER  BUTCHER replied  that the department  has not                                                              
discussed  this  with the  governor,  but  will if  the  committee                                                              
would like it to.                                                                                                               
                                                                                                                                
1:15:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON  surmised  that the  increase  in  spending                                                              
regardless of  any decreases in  oil price is because  credits are                                                              
dependent on expenditures  and are independent of  price, and thus                                                              
the graph [on slide 5] indicates that the credits are working.                                                                  
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  responded  that  DOR  believes  the                                                              
credits are  having a positive  effect, particularly with  some of                                                              
the smaller producers.   However, the number of  exploratory wells                                                              
has continued  to drop  and production  continues to decline,  and                                                              
at  this point  this gives  a picture  that the  credits have  not                                                              
been working in terms of getting more exploratory wells.                                                                        
                                                                                                                                
1:16:21 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked  whether the acting commissioner  agrees then                                                              
that  there  is  not  necessarily  a  connection  between  capital                                                              
credits and production going into the pipe.                                                                                     
                                                                                                                                
ACTING COMMISSIONER  BUTCHER answered that he does  not think that                                                              
DOR has  the data to  say one way  or the  other at this  point in                                                              
time because it is too early in the process.                                                                                    
                                                                                                                                
1:16:47 PM                                                                                                                    
                                                                                                                                
ACTING COMMISSIONER  BUTCHER, continuing  his presentation,  noted                                                              
that production  continues  to decline (slide  6).   Additionally,                                                              
over the  last five years the  number of exploration wells  on the                                                              
North Slope has continued to drop (slide 7).                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  inquired whether  the exploration wells  [depicted                                                              
on  slide  7] include  wells  that  are  drilled both  within  and                                                              
outside of the unitized areas.                                                                                                  
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  replied  that  the graph  represents                                                              
the entire North Slope area.                                                                                                    
                                                                                                                                
1:17:48 PM                                                                                                                    
                                                                                                                                
ACTING  COMMISSIONER BUTCHER,  turning back  to his  presentation,                                                              
said that DOR  cannot conclusively identify the  ACES impact other                                                              
than  state  revenue   has  increased  in  the   short  term,  oil                                                              
production  continues to  decline,  and it  does  not appear  that                                                              
much exploration  is taking place  (slide 8).   Part of why  it is                                                              
so difficult is  because of the timeline for  investment decisions                                                              
that producers  generally use from  the beginning of  evaluating a                                                              
field to  actually begin producing.   For example,  the investment                                                              
decisions for  fields that  are currently  coming online,  such as                                                              
Nikaitchuq and  Oooguruk, were  made prior to  the passage  of PPT                                                              
five  years  ago  and  ACES  three  and a  half  years  ago.    He                                                              
suggested  having the producers  address  this timeline when  they                                                              
come before the committee next week.                                                                                            
                                                                                                                                
1:19:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE asked  whether the acting commissioner  is aware of                                                              
any decisions  that have  been made by  companies to  proceed with                                                              
new development since PPT and ACES were implemented.                                                                            
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  responded he  is not,  but that  Mr.                                                              
Frank Molli  might be  able to  address that.   Liberty  Field was                                                              
initially  expected to  begin production  in  calendar year  2012,                                                              
but that is now potentially 2013 or 2014.                                                                                       
                                                                                                                                
CO-CHAIR  SEATON  inquired  whether  the  acting  commissioner  is                                                              
saying that Liberty Field is related to the tax regime.                                                                         
                                                                                                                                
ACTING COMMISSIONER BUTCHER answered that he is not.                                                                            
                                                                                                                                
CO-CHAIR SEATON  added that since  Liberty Field is  under federal                                                              
control,  not  ACES, if  oil  companies  are not  proceeding  with                                                              
developments then  it may be  that decisions are  being influenced                                                              
by factors other than the tax regime.                                                                                           
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER  agreed  and  said  he  pointed  out                                                              
Liberty Field only as something that is seen in the future.                                                                     
                                                                                                                                
1:20:48 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P. WILSON said  there is a  rumor that one  of the                                                              
reasons the  oil companies are  not investing in  more exploration                                                              
and more  drilling is that the  companies are concerned  about the                                                              
age  and condition  of the  Trans-Alaska  Pipeline System  (TAPS).                                                              
She asked whether this has been in anyone else's mind.                                                                          
                                                                                                                                
ACTING  COMMISSIONER   BUTCHER  deferred  to  the   Department  of                                                              
Natural Resources  (DNR) to provide any specifics  in this regard.                                                              
He said DOR believes  that as long as there is  oil to be produced                                                              
and  profits to  be  made, the  producers  and  owners of  Alyeska                                                              
Pipeline  Service   Company  have  the  motivation   to  keep  the                                                              
pipeline active and in good working condition for decades.                                                                      
                                                                                                                                
1:22:39 PM                                                                                                                    
                                                                                                                                
FRANK  MOLLI, Petroleum  Engineer  and President,  Molli  Computer                                                              
Services,  Inc., Consultant  to the Department  of Revenue  (DOR),                                                              
first  provided a  history about  himself, noting  that he  worked                                                              
for "Phillips"  for 12 years in  various places such as  the North                                                              
Sea and  Texas.   He then  started his  own company and  developed                                                              
software  to do oil  and gas  reserve analysis,  which he  uses to                                                              
generate the forecasts  for Alaska's North Slope.   He pointed out                                                              
that North  Slope production peaked  in 1988 at 2  million barrels                                                              
[per day] but by  2010 that production had declined  by 68 percent                                                              
to  644,000 [barrels  per day]  (slide  10), which  is an  average                                                              
production decline  rate of  about 5 percent  per year.   Over the                                                              
last 10  years, the decline mediated  somewhat to an  average rate                                                              
of about 4.2 percent  per year.  Looking into  the future [through                                                              
2030] this  decline rate is expected  to flatten out a  little bit                                                              
further at about 3.2 percent [per year on average].                                                                             
                                                                                                                                
1:24:01 PM                                                                                                                    
                                                                                                                                
MR. MOLLI explained  that the left  side of the graph  on slide 11                                                              
depicts the  history of annual ANS  production and the  right side                                                              
depicts the  forecast.  The  68 percent  decline can be  seen from                                                              
the [1988]  peak  to the current  date  [2010].   The drop is  not                                                              
quite as large over  the last 10 years, and in  the forecast it is                                                              
less steep.   The  major producer  by far  is Prudhoe Bay,  second                                                              
largest is Kuparuk,  and third largest is Alpine which  came on in                                                              
the year 2000  or so.  Not included  in the forecast  is the outer                                                              
continental shelf (OCS),  the Ugnu heavy oil that  is sizeable but                                                              
for which there  is not yet a way to develop  efficiently, and the                                                              
Arctic National Wildlife Refuge (ANWR).                                                                                         
                                                                                                                                
MR.  MOLLI, in  response to  Representative  P. Wilson,  confirmed                                                              
that  the  offshore  production  sources  depicted  in  the  graph                                                              
include North Star and Liberty.                                                                                                 
                                                                                                                                
MR. MOLLI,  in response to Co-Chair  Feige, said that  Oooguruk is                                                              
in state waters and is not considered OCS.                                                                                      
                                                                                                                                
1:26:07 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON,  regarding the  production  history,  understood                                                              
that the  rate of decline  is determined  by the steepness  of the                                                              
slope.                                                                                                                          
                                                                                                                                
MR. MOLLI replied  that he used  data from the Alaska  Oil and Gas                                                              
Conservation  Commission   (AOGCC),  which  maintains   production                                                              
history data for  every well in the state of Alaska.   He imported                                                              
that data into  the software, looked at each  well individually to                                                              
find a  best-fit line  through the  trend of  that well,  and then                                                              
aggregated that  data to come up  with a field production.   Thus,                                                              
the trend  from each individual well  was used to forecast.   This                                                              
is  called decline  curve analysis  and  is fairly  common in  the                                                              
industry for projecting oil and gas.                                                                                            
                                                                                                                                
1:27:00 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON observed  that the  slope on  slide 11 is  pretty                                                              
steep between the  years 1994 and 2000, which was  during the time                                                              
of ELF  when there  was a  zero percent  tax rate  on fields  like                                                              
Kuparuk.    From 2004  through  2007,  during  which there  was  a                                                              
lesser tax  rate, the  decline is  steeper.   After ACES  in 2007,                                                              
the decline  slope is much flatter  and showing less decline.   He                                                              
said it is being  heard that if the tax rate  was less there would                                                              
be less  decline, yet the  history does not  show this.   He asked                                                              
whether he is analyzing this curve correctly.                                                                                   
                                                                                                                                
MR. MOLLI  responded that  he does  not know  the answer  to that,                                                              
but he  does know that  the mitigation  in decline was  the result                                                              
of several  new fields coming  on line around  the year 2000.   He                                                              
does not  know, however,  whether that relates  to the  tax regime                                                              
at the time.                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  said that  was a specific  point and  he exempted                                                              
that by  looking at 2004  through 2007  which has a  steeper curve                                                              
than after  2007 when ACES  came into play.   He said he  will get                                                              
back with DOR in this regard.                                                                                                   
                                                                                                                                
1:29:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE  inquired how  much of an  effect the price  of oil                                                              
has had  on that decline.   He further  inquired whether  it would                                                              
be possible  to  come up with  a graph  that shows  the amount  of                                                              
investment in fields versus the price of oil.                                                                                   
                                                                                                                                
MR. MOLLI answered  that he will  have to think about  that; he is                                                              
sure the price of oil entered into the decisions here.                                                                          
                                                                                                                                
CO-CHAIR FEIGE  commented that  the price of  oil obviously  has a                                                              
fairly significant  effect on whether a company  decides to invest                                                              
in any field,  whether that field  is in Alaska or elsewhere.   It                                                              
would  therefore  be  interesting  to  see  statistics  that  also                                                              
reflect the price of oil as a factor.                                                                                           
                                                                                                                                
1:30:46 PM                                                                                                                    
                                                                                                                                
MR.  MOLLI, returning  to  his  presentation, explained  that  the                                                              
graph on slide  12 [depicting forecasted ANS production]  uses the                                                              
same information  depicted on slide  11.  However,  the production                                                              
forecast in  this graph  [for fiscal  years 2010-2020]  is divided                                                              
into three  categories -  currently producing, under  development,                                                              
and under evaluation.   Currently producing includes  all existing                                                              
equipment,  existing   wells,  and  existing   surface  equipment.                                                              
Currently producing  requires a high level of  maintenance, so the                                                              
currently  producing category  is the  forecast at  the same  high                                                              
level of  maintenance without  any new development  and it  can be                                                              
seen  that  the   production  drops  quite  a  bit.     The  under                                                              
development category  includes any new projects or  new wells that                                                              
the operators  are planning to drill.   To generate  this forecast                                                              
he  looked   at  the  plans   of  development  submitted   to  the                                                              
Department of Natural  Resources by the operators  and talked with                                                              
the operators' engineers,  and then developed an  average well for                                                              
each field.  By  using the drilling plans and  applying an average                                                              
well  he  came  up  with the  development  and,  given  that  this                                                              
development is  usually already funded,  there is a  good probably                                                              
that this production will occur.                                                                                                
                                                                                                                                
1:32:17 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER  asked which  companies  are  in which  of                                                              
these three categories.                                                                                                         
                                                                                                                                
MR. MOLLI  replied that  they all  are.   In further response,  he                                                              
said all companies are in each category.                                                                                        
                                                                                                                                
REPRESENTATIVE  GARDNER understood there  are companies  that have                                                              
produced  wells in  Alaska  in the  last few  years  that are  not                                                              
necessarily under development.                                                                                                  
                                                                                                                                
MR. MOLLI responded  that he is thinking of the majors  and all of                                                              
them have some developments in the existing fields.                                                                             
                                                                                                                                
REPRESENTATIVE  GARDNER   said  she  is  trying  to   get  at  the                                                              
companies that are not the majors.                                                                                              
                                                                                                                                
MR.  MOLLI answered  that Great  Bear Petroleum  is planning  some                                                              
exploration soon and  is not in any of the forecasts.   He said he                                                              
will research this information and get back to the committee.                                                                   
                                                                                                                                
REPRESENTATIVE  GARDNER said  she  would like  to  know the  under                                                              
development and the  under evaluation and others who  are known to                                                              
be working but not necessarily planning development right now.                                                                  
                                                                                                                                
MR. MOLLI agreed to provide that information.                                                                                   
                                                                                                                                
1:33:33 PM                                                                                                                    
                                                                                                                                
MR. MOLLI,  continuing with his  presentation, explained  that the                                                              
under evaluation  category is probably  the most speculative.   It                                                              
involves projects  that are under  study right now by  the various                                                              
companies, such  as Umiat and  Point Thomson.   He said  the three                                                              
categories  are   added  together  to  come  up   with  the  total                                                              
forecast.                                                                                                                       
                                                                                                                                
CO-CHAIR  FEIGE inquired  whether  any percentage  or  probability                                                              
was assigned on that curve.                                                                                                     
                                                                                                                                
MR. MOLLI  replied that  he does  not do  that; the decline  curve                                                              
analysis is  a deterministic process,  so there is not  a range of                                                              
probabilities.                                                                                                                  
                                                                                                                                
CO-CHAIR   SEATON   surmised   that  this   forecast   gets   more                                                              
speculative  the further  out in  time it goes;  for example,  the                                                              
2013 date would be more confident.                                                                                              
                                                                                                                                
MR. MOLLI  responded  correct, the  further out  in time the  more                                                              
variance or error  that could be introduced into  the forecast, so                                                              
the  near term  forecast, meaning  the  next one  to three  years,                                                              
should be fairly confident.                                                                                                     
                                                                                                                                
1:35:29 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE observed  that  just after  2012  or 2013,  Alaska                                                              
will cross  the line  down to 500,000  barrels per  day if  no new                                                              
production is put into the system.                                                                                              
                                                                                                                                
MR. MOLLI concurred.                                                                                                            
                                                                                                                                
ACTING COMMISSIONER  BUTCHER added that there has  been discussion                                                              
over  the years  about forecasts  being more  optimistic than  the                                                              
historical  numbers show.   He pointed  out that  Mr. Molli  began                                                              
doing  this for  DOR in 2009  and that  Mr. Molli  factors in  the                                                              
scheduled  shutdowns  of  TAPS.   However,  unscheduled  shutdowns                                                              
such as what  happened last month  with Pump Station 1,  will be a                                                              
reduction in  production that is  unforeseen.  Another  thing that                                                              
can  happen is  that  forecasted production  comes  on later  than                                                              
expected, such  as the  Liberty field which  was expected  to come                                                              
on in 2012 but  is now delayed to 2013 or 2014.   Delays in coming                                                              
on are  much more frequent than  coming on earlier  than expected.                                                              
Therefore, the forecasts are what is being looked at or lower.                                                                  
                                                                                                                                
1:37:23 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE noted  that every year there is a  new forecast for                                                              
the next  10-20  years.  He  asked whether  DOR would  be able  to                                                              
take forecasts  from  1990 and onward  and plot  each forecast  at                                                              
the  time against  what the  production  actually was.   It  would                                                              
give a  better sense as  to how much  importance can be  placed on                                                              
this particular forecast and which way it can be expected to go.                                                                
                                                                                                                                
ACTING COMMISSIONER  BUTCHER answered  that he  thinks DOR  can do                                                              
this  and can  go back  as  far as  it has  the  information.   He                                                              
pointed out  that once this information  is given to  members, Mr.                                                              
Molli  will be unable  to answer  any questions  previous  to 2009                                                              
because he  did not work  on it before then.   He added  that this                                                              
would apply to himself as well.                                                                                                 
                                                                                                                                
1:38:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  inquired whether  there is an  error factor                                                              
that could  be incorporated into  the forecast model to  allow for                                                              
variations.                                                                                                                     
                                                                                                                                
MR. MOLLI  replied that  if an error  factor was incorporated,  he                                                              
thinks the forecast  would grow bigger and bigger as  time went on                                                              
and the variance  between the optimistic side and  the pessimistic                                                              
side would  be greater  and greater and  would be almost  unusable                                                              
once 10-20  years ahead was reached.   It would be doable  but not                                                              
meaningful.                                                                                                                     
                                                                                                                                
1:40:57 PM                                                                                                                    
                                                                                                                                
RICH RUGGIERO,  Vice President,  Field Development &  I/O Support,                                                              
Gaffney, Cline,  & Associates  Division, Baker Hughes,  Consultant                                                              
to the Department  of Revenue (DOR), noted that his  firm has been                                                              
working with and  for the Department of Revenue  since just before                                                              
the  ACES  special  session  and since  then  has  been  providing                                                              
testimony in  both the  special and general  sessions on  areas of                                                              
fiscal policy and  in helping with a comparison  around the world.                                                              
In response  to Representative  P. Wilson, he  said the  year this                                                              
started was 2007.   He added that he has over  20 years experience                                                              
working for  one of the  major oil companies  and that  about half                                                              
of his time  in this job was  spent developing large  projects and                                                              
negotiating  with bodies  like the  State of  Alaska on trying  to                                                              
put together  the right  commercial package in  order to  do those                                                              
deals.  He has  now been in the consulting business  with Gaffney,                                                              
Cline, &  Associates for nearly 10  years and the majority  of his                                                              
clients  during this  time period  have  been sovereign.   He  has                                                              
worked  for  a number  of  governments  around the  world  putting                                                              
together different  aspects of their  fiscal policy on  energy and                                                              
development of their petroleum resources.                                                                                       
                                                                                                                                
1:42:36 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO  said   that  after  having  been   through  several                                                              
sessions,  there are  many people  who are experts  and have  been                                                              
before this  and several other  bodies, so  he would like  to give                                                              
some background  on what  members are really  running into.   Many                                                              
of the questions  today and in the past have been  about what does                                                              
a particular  number  show.   Fiscal design  - what  is the  right                                                              
royalty,  or right  tax, or  right  rate -  is two  parts art  for                                                              
every one part science  (slide 2).  A lot of  science and analysis                                                              
can be  done; however, there  is also a  lot of subjectivity  that                                                              
goes into the design  of fiscal systems as well as  how the energy                                                              
patch  responds  to that.    A  wide  range  of response  will  be                                                              
received because  every company  is driven  by something  a little                                                              
bit  differently.   It will  be  found that  everybody can  always                                                              
quote  an  excellent fiscal  system  and  look  at the  amount  of                                                              
investment that  occurred there, but  even if a system  worked for                                                              
that  state  or  country  for  awhile,  over  time  it  starts  to                                                              
deteriorate  and  changes  have   to  be  made  for  a  number  of                                                              
different reasons going forward.                                                                                                
                                                                                                                                
1:44:21 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  explained that when  making comparisons a  number of                                                              
things  can  impact  the  situation   of  a  jurisdiction.    This                                                              
includes  the gross  domestic product  (GDP) of  a country  or the                                                              
GDP  per  capita  and  what percentage  of  the  GDP  that  energy                                                              
represents.    In those  countries  where  energy  is not  a  high                                                              
percentage  the   jurisdiction  can  choose  to   do  some  things                                                              
differently.  However,  in Alaska and countries where  energy is a                                                              
very large  portion of gross income  the jurisdiction has  to take                                                              
a little  different look  at how  it is going  to manage  that and                                                              
steward  that  resource.    Other factors  include,  but  are  not                                                              
limited  to,   infrastructure  availability   and,  if   there  is                                                              
infrastructure,  whether capacity  is available.   Building  whole                                                              
new facilities  to bring on another  100,000 barrels a  day is one                                                              
set of economics,  but it is a totally different  economic picture                                                              
if  there is  100,000  barrels of  excess  capacity.   The  fiscal                                                              
system  will   impact  those   two  decisions  very   differently.                                                              
Another factor is  the availability of labor force  and another is                                                              
institutional capacity.   For example, a country may  not have the                                                              
skill  to do  anything that  is complex  or sophisticated  because                                                              
that  takes an  army of  auditors, so  that country  will come  up                                                              
with something  that is very  simple.  Another factor  influencing                                                              
how  sovereigns put  together their  fiscal system  is where  they                                                              
want  to stand  within  that  competitive environment.    Somebody                                                              
will  be the  most  competitive  and somebody  will  be the  least                                                              
competitive and  somewhere someone  will put together  an analysis                                                              
or comparison and  declare where the middle or the  average is for                                                              
going forward.                                                                                                                  
                                                                                                                                
1:46:45 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  pointed  out that  there is always  the pressure  to                                                              
change, so  Alaska is not  alone (slide  3).  Even  a well-working                                                              
fiscal system  must eventually be  looked at because there  may be                                                              
a need  to do something  differently.   This change can  be broken                                                              
down  into  two different  drivers:    A) governments  want  their                                                              
perceived  fair  share  or  B)  governments  think  they  are  not                                                              
getting  enough investment  so they  do something  to attract  the                                                              
industry and  the investment.  The  newspapers are full  of Item A                                                              
- the  Venezuela's,  the Bolivia's,  the Peru's,  the Iraq's,  and                                                              
the Russia's;  and there are the  others that have gone  the other                                                              
way to  seek a  share of  those limited  investment dollars.   The                                                              
requests  for  change  can  always  be  justified  -  torture  the                                                              
numbers and they  will tell the story that is wanted.   Any change                                                              
being asked  for will  be justified  by "objective"  calculations,                                                              
but  understand that  behind  every "objective"  calculation  into                                                              
the  future is  probably  20 or  30  assumptions  that were  made.                                                              
Changes will  also be justified  by "subjective"  calculations; an                                                              
example  being whether  there is  a correlation  between how  many                                                              
wells  will be drilled  if  the state  does X, such  as the  state                                                              
providing credits.                                                                                                              
                                                                                                                                
1:49:52 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO shared  that one thing he has learned  as a producer,                                                              
as well  as working for governments  and sitting across  the table                                                              
from  producers, is  that  producers  have never  met  a tax  they                                                              
liked (slide  4).  Oil companies  are no different than  any other                                                              
for-profit organization;  they are in  it to make as much  as they                                                              
can  for their  shareholders  and  tax just  takes  away from  the                                                              
profit they are setting out to make.                                                                                            
                                                                                                                                
CO-CHAIR FEIGE  commented that  this is the  same thing  the state                                                              
is attempting to do for its shareholders.                                                                                       
                                                                                                                                
1:50:37 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO said  the messages  that legislators  will hear  are                                                              
that less  tax means  more investment dollars  and more  tax means                                                              
less investment  dollars.  However,  Illinois has one of  the best                                                              
fiscal  systems  for oil  and  gas  development,  yet big  oil  is                                                              
investing  nearly   nothing  in  exploration  and   production  in                                                              
Illinois.   In Iraq, government  take starts  and ends in  the mid                                                              
to  high 90  percent,  yet oil  companies  around  the world  have                                                              
committed in excess of $100 billion to begin developments there.                                                                
                                                                                                                                
MR.  RUGGIERO noted  that throughout  his  time in  Alaska he  has                                                              
heard  that if Alaska  does not  do something  the producers  will                                                              
take  their  money  to  the  Gulf  of  Mexico  or  the  Lower  48.                                                              
Recently the [Obama]  Administration talked about  raising federal                                                              
taxes  on exploration  and production  and the  response was  that                                                              
more federal  taxes would  push investment abroad.   If  the Lower                                                              
48 and  the Gulf of  Mexico is collectively  the best place  to do                                                              
business  as an  exploration  and production  company  - and  that                                                              
could be  evidenced by the number  of foreign companies  that have                                                              
purchased  assets in  that area  -  it is  interesting that  money                                                              
would go elsewhere  if taxes were raised given  that elsewhere has                                                              
a  higher tax  base than  the Lower  48  and the  Gulf of  Mexico.                                                              
Alaska  is going  to  hear that  high  tax is  driving  investment                                                              
elsewhere.   There  are grains  of truth  to that,  but there  are                                                              
also grains of that being something that a company has to say.                                                                  
                                                                                                                                
1:52:55 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  addressed how fiscal  systems are ranked  (slide 5),                                                              
while reiterating  that tortured numbers  can tell any story.   He                                                              
provided   a  ranking  comparison   between   place  "A"   with  a                                                              
production  sharing contract  (PSC)  environment,  place "B"  that                                                              
also has  a PSC environment, and  place "C" that has  a concession                                                              
agreement environment.   The average  government take for  each of                                                              
the  three places  is  30 percent,  50  percent,  and 60  percent,                                                              
respectively,  making place  "A" appear  to be  the best place  in                                                              
this  regard.    The  highest  marginal   government  take  is  45                                                              
percent, 65  percent, and 90  percent, respectively,  again making                                                              
place "A"  appear to  be the  best place  for materiality  and net                                                              
present value  rate of return.   However, a number of  type fields                                                              
can be run through  the various ranking categories  and because of                                                              
some of the other  provisions it might be found that  place "A" is                                                              
not necessarily  the  best because  some of the  small things  can                                                              
have a  huge impact  on the economics  and it  depends on  what is                                                              
driving certain  companies.  For some companies,  especially those                                                              
with a lot  of private investment  funding, the rate of  return or                                                              
the  immediate return  of  capital  is most  important.   In  this                                                              
case, place "C",  which has a minimum capital  expenditure (capex)                                                              
recovery period of  1 year [compared to 7 years for  place "A" and                                                              
5 years for place  "B"], becomes very important  to an independent                                                              
investor; however,  for someone long in the business  that may not                                                              
be as important  as the materiality, which is where  the money may                                                              
not come back as fast, but more money comes back.                                                                               
                                                                                                                                
1:55:19 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO,  continuing his example  of ranking  fiscal systems,                                                              
pointed  out that many  locales  do not have  credits [places  "A"                                                              
and "B"  do not have credits;  "C" has a  20 percent credit].   He                                                              
next  explained  that cost  oil  is how  much  of  a given  year's                                                              
revenue  is available  to recover  costs already  expended.   Some                                                              
locales put  a limit [cost  oil cap] on  how fast the  capital and                                                              
operating costs  can be returned.   For  example, place "A"  has a                                                              
cost oil cap  of 60 percent, while  places B and C have  no limit.                                                              
If the return has  to be pushed forward because  all the available                                                              
revenue for  that year has been  used, the time value  of money is                                                              
lost  on  that   unrecovered  capital  going  forward.     Another                                                              
category  is unrecovered  cost uplift.    In some  locales it  can                                                              
take  as  long   as  11  years  on  average  from   the  point  of                                                              
exploration to  the first  barrel flowing of  dollar.   That means                                                              
that $100  million spent today  to discover  a field would  not be                                                              
recovered for  11 years and [in  locales with no uplift]  it would                                                              
only  be the  $100 million  that is  recovered.   In locales  that                                                              
have  cost uplift  the cost  is uplifted  each year  by a  certain                                                              
percentage, and in  some of these regimes as much  as $300 million                                                              
can be recovered  as recoverable cost because credit  is given for                                                              
having  invested  and  carried   that  money  on  behalf  of  that                                                              
development.  [In  the example, places "A" and "C"  have no uplift                                                              
and "B" has an annum uplift of 5 percent.]                                                                                      
                                                                                                                                
1:57:14 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  said ring  fencing is another  category used  in the                                                              
ranking of fiscal  systems.  Ring fencing denotes  the taxing unit                                                              
and in  many locales the taxing  unit is around  particular leases                                                              
or particular fields.   [In the example, places A  and B have ring                                                              
fencing by  field, "C" does not.]   In locales where  ring fencing                                                              
is  by field,  any  money spent  on  exploration  in a  particular                                                              
field  cannot  be  recovered  until there  is  revenue  from  that                                                              
particular  field, or ring  fence, to  recover it.   Alaska  has a                                                              
statewide  ring fence,  although  there are  some nuances  between                                                              
Cook Inlet and "north  of 68," so any money on  exploration can be                                                              
deducted  right away  against  current revenues.    There is  huge                                                              
cost  and  huge  economic  impact  to oil  companies  as  they  go                                                              
forward  and  what is  seen  in  a lot  of  these surveys  is  the                                                              
"emotive  factors."   These  are  the factors  that  get the  most                                                              
optics and  that become the  15 second  sound bites in  chamber of                                                              
commerce speeches  before committees,  one example being  Alaska's                                                              
marginal  tax rate  of 87  percent that  is said  to be  terrible.                                                              
However, this ignores  all the other aspects of  the Alaska system                                                              
that actually provide  benefit in going forward.   The emotion may                                                              
be  enough  to   cause  a  negative  decision  in   a  board  room                                                              
somewhere,  but that  is  only one  piece.    When people  present                                                              
surveys and  focus just on these  emotive points, the  whole story                                                              
is not being  seen because under  most type oil fields,  place "C"                                                              
comes out ahead  on much more on  the net present value  (NPV) and                                                              
rate  of return  than  "A" and  "B," although  "A"  will come  out                                                              
ahead on materiality.                                                                                                           
                                                                                                                                
1:58:57 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  related that his company  was asked for its  view on                                                              
where Alaska  is today and what is  it that Alaska is  facing.  He                                                              
said it  is undisputed that  Alaska's production is  declining and                                                              
continuing to  decline [despite  unprecedented prices  (slide 6)].                                                              
There  is  the   looming  mortality  issue  of   the  Trans-Alaska                                                              
Pipeline System  (TAPS), which  could be  either a physical  limit                                                              
or an  economic limit.   Given that physical  limits can  be fixed                                                              
by money,  everything is  really an economic  limit, so  flow down                                                              
the pipeline  will  be cut  off at the  point where  it is  deemed                                                              
uneconomic.   A number  of Alaska's  new resources  are viewed  as                                                              
stranded,  so the TAPS  uncertainty  will give  new players  a big                                                              
cause  for  concern.    The  uncertainty   of  TAPS  includes  the                                                              
material integrity  of the pipeline,  the economic  viability, the                                                              
longevity,  and the  cost for  a company  to get  into it  because                                                              
there is a  bit of a stranglehold  on the pipeline by  its owners.                                                              
Thus,  even if the  economics are  there with  the fiscal  system,                                                              
some  risk premiums  will start  to be  introduced, and  assessing                                                              
the risks is  an art rather than  a science.  Many  companies will                                                              
run a  straight economics model  and subtract a risk  premium from                                                              
that  model.   So, when  a  company compares  Project  A in  Texas                                                              
against Project B  in Alaska, Alaska may have a  risk premium that                                                              
takes it from  being better to being  worse.  Lastly,  Alaska is a                                                              
location that has long lead times.                                                                                              
                                                                                                                                
MR. RUGGIERO  said the  aforementioned leads  to a crossroads  for                                                              
the state:   What path does Alaska  see itself on from  this point                                                              
forward?   This goes  back to the  two drivers  for why  the state                                                              
would want to look  at or think about changing  its fiscal system.                                                              
If the state  is entering a harvest  path, then it needs  to think                                                              
about how  to get its  fair share.   If, however, the  state wants                                                              
to be on a growth  path, then it must assess  what it really needs                                                              
to  do,  as opposed  to  what  others  want  it do,  to  encourage                                                              
investment and development of resources.                                                                                        
                                                                                                                                
2:02:49 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO  advised  that  two   entities  can  have  different                                                              
perceptions  about the same  item.   For example, governments  and                                                              
producers  have different  perceptions  on the  various levels  of                                                              
producer  profit (slide  7).   If the  profit level  is a loss  or                                                              
break even, the  government perception is that it  needs a minimum                                                              
amount of  cash to allow  development of  its resources.   A small                                                              
profit  will be  seen by  government  as about  right, a  moderate                                                              
profit will  be seen as  more than fair,  and a large  profit will                                                              
be seen as greedy  and outrageous.  The perspective  of producers,                                                              
however,  is that  government  is  focused on  a  narrow range  of                                                              
circumstance  that does not  look at the  big picture.   Producers                                                              
try to do things  that avoid a loss, breaking even  is nice but it                                                              
is not why  a producer is in  business, projects that  will make a                                                              
small profit  generally only work  when there is more  capital and                                                              
people than there  are projects, a moderate profit  is the target,                                                              
and there  is no such thing  as an outrageous profit  because that                                                              
is the quid  pro quo for all  the losses that governments  tend to                                                              
ignore when millions are spent on dry exploration wells.                                                                        
                                                                                                                                
2:05:20 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  stated that  it is  not the  numbers that  drive the                                                              
decisions.  While  the numbers are there and part  of the decision                                                              
making, there are  perceptions, which is where  the different risk                                                              
premiums  come in,  such as  geologic,  political, stability,  and                                                              
infrastructure  risk premiums.   Or,  they can  become matters  of                                                              
principles, such  as certain companies will not  do certain things                                                              
and will not  agree to certain terms  and will pull up  stakes and                                                              
go elsewhere.   Additionally, there  is the fear of  precedent and                                                              
that  doing something  in one  place  will result  in the  company                                                              
having to do same everywhere else that it does business.                                                                        
                                                                                                                                
MR.  RUGGIERO, regarding  future  scenarios for  Alaska, said  any                                                              
number  of consultants,  his company  included,  can make  several                                                              
thousand  runs  on  all  sorts  of  variations  off  certain  base                                                              
assumptions (slide  8).  However,  the more  runs that are  put up                                                              
the  more noise  that is  created.   Instead of  pinpointing to  a                                                              
narrow  range what  will happen,  he suggests  talking about  what                                                              
the goal  posts are.   He allowed that  it is his  subjective look                                                              
at the  goal posts  as far  as the  upside and  downside cases  of                                                              
doing something with HB 110.                                                                                                    
                                                                                                                                
MR.  RUGGIERO pointed  out that  relative to  many other  prolific                                                              
hydrocarbon-producing regimes  around the world Alaska  has a lack                                                              
of  data transparency  from  the  producing community,  which  was                                                              
heard  today in the  answers to  the committee's  questions.   The                                                              
amount of data that  the State of Alaska gets is  limited relative                                                              
to  what other  fiscal regimes  around the  world require  through                                                              
either legislation or regulation.                                                                                               
                                                                                                                                
2:07:48 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO said  he will  try to  give some  perspective as  to                                                              
what is really  before the legislature when talking  about whether                                                              
to change from  ACES to something else.   Since it is  HB 110 that                                                              
is before  members right now, he  has put together two  goal posts                                                              
- an upside  and a downside -  on that bill.  One  possible upside                                                              
growth  scenario is  that the  reduction  in taxes  soon leads  to                                                              
significant new  investment that keeps  oil and new oil  coming in                                                              
sufficient  quantities to  pay out  upgrades and  repairs to  keep                                                              
TAPS  available and  flowing through  2050.   He interjected  that                                                              
others might  come up with  other upside  cases, but this  is his.                                                              
A possible  downside scenario is  that taxes are reduced  but, for                                                              
whatever  reason, no  new fields  are developed  and TAPS  reaches                                                              
its economic or physical limit in the 2020s.                                                                                    
                                                                                                                                
2:09:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE P.  WILSON, regarding  his statement about  lack of                                                              
data  transparency,  surmised that  Mr.  Ruggiero  is saying  that                                                              
other  countries ask  the same  questions and  get better  answers                                                              
than does Alaska.                                                                                                               
                                                                                                                                
MR. RUGGIERO replied  that other countries actually  publish data,                                                              
so it  can be  found on  the web  and the question  does not  even                                                              
have to be  asked.  He recalled  that Gaffney, Cline  & Associates                                                              
presented a  paper in testimony to  either this body or  the other                                                              
that went  over these other regimes  and what is  normal reporting                                                              
and  what  is available,  whether  through  the  local  regulatory                                                              
agency or  the web, in  each of those  locations.  It  ranges from                                                              
how many wells  were drilled, to  how much of the capex  was spent                                                              
on  wells versus  infrastructure, to  what the  forward plans  are                                                              
for  each of  the individual  fields,  and  more.   In some  cases                                                              
infrastructure  is online and  every day it  can be seen  what the                                                              
capacity is and  what the amount of unused capacity  is.  There is                                                              
a  wide range  of  things across  the  globe.   He  said he  would                                                              
provide copies of the aforementioned paper to members.                                                                          
                                                                                                                                
2:10:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  P.  WILSON related  that  in  cases where  two  or                                                              
three companies  are involved in  the same unit, members  are told                                                              
by the  producers that  they do  not want  the other producers  to                                                              
know what is  going on.  She  asked whether this happens  in other                                                              
countries.                                                                                                                      
                                                                                                                                
MR. RUGGIERO  responded that  just as a  producer has never  met a                                                              
tax it liked,  whenever it comes  to data disclosure it  is always                                                              
that this is competitive  and if it gets out the  producer is at a                                                              
competitive disadvantage.   However, he noted, in  countries where                                                              
producers are  required to do this,  they still compete,  and they                                                              
compete quite well.                                                                                                             
                                                                                                                                
REPRESENTATIVE P.  WILSON inquired whether the state  could say it                                                              
wants this information  and the producers must provide  it, or are                                                              
there laws that say the producers do not have to provide it.                                                                    
                                                                                                                                
MR. RUGGIERO  answered he is unaware  of any law in  either Alaska                                                              
or  the  U.S. at  this  time  that would  prevent  companies  from                                                              
producing information.   There would have  to be a closer  look by                                                              
someone  more  familiar with  such  things  as antitrust,  but  in                                                              
other locations  and other regimes  the companies are  required to                                                              
present  more data  and  make more  data public  than  is done  in                                                              
Alaska today.                                                                                                                   
                                                                                                                                
2:12:33 PM                                                                                                                    
                                                                                                                                
CO-CHAIR FEIGE requested  that Mr. Ruggiero provide  the committee                                                              
with  a reasonable  sampling  of  the  types of  information  that                                                              
other countries  make available  that would increase  transparency                                                              
in  Alaska  and  why  that  information   is  available  in  those                                                              
countries  and reasons  why that  information,  based on  existing                                                              
U.S. laws, is not available in the U.S.                                                                                         
                                                                                                                                
MR. RUGGIERO  replied he can  look at what  is available  in other                                                              
countries and that  would be the report his firm  has already done                                                              
for the  state.   Legal issues,  however, are  outside his  firm's                                                              
range of expertise.                                                                                                             
                                                                                                                                
2:14:06 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO,   returning  to  his  presentation,   reviewed  his                                                              
downside and  upside goal posts,  but noted that  reality probably                                                              
exists somewhere  in between (slide  9).  The downside  case would                                                              
include only  the existing fields,  a fixed 6 percent  decline, no                                                              
new major  investments, and a TAPS  minimum of 200,000  or 250,000                                                              
barrels a day.   He clarified that he just picked  two numbers for                                                              
the  TAPS  minimum and  there  was  no  science in  picking  them.                                                              
Running these numbers  from 2011 through the mid-2020s,  the total                                                              
cash  flow  to  the  state through  the  production  tax  and  the                                                              
corporate  income  tax  [under  ACES]  is  somewhere  between  $95                                                              
billion and  $110 billion undiscounted.   He then reviewed  a case                                                              
using the terms  of HB 110, but  first clarified that  this is for                                                              
purposes of illustration  only and is in no way  a recommendation.                                                              
For this  case he assumed  that the  needed capital  investment is                                                              
actually developed,  existing fields continue to  produce at maybe                                                              
a  slower  decline  rate because  of  additional  investment,  new                                                              
fields  are discovered,  and regular  investment is  made to  keep                                                              
facilities  in order,  and thus  a vibrant  industry runs  through                                                              
2050.   In  this forecast,  the  state's  total undiscounted  cash                                                              
flow  or  take  would  be around  $210  billion.    So,  somewhere                                                              
between  his  downside  case  and  his upside  case,  there  is  a                                                              
difference to the State of Alaska of $100-$115 billion.                                                                         
                                                                                                                                
MR.  RUGGIERO  then  reviewed  a scenario  in  which  the  state's                                                              
fiscal system is  changed to HB 110 (slide 10).   In this scenario                                                              
he used  the same aforementioned  [downside] assumptions  in which                                                              
there is  no investment, and  also assumed  that over the  next 15                                                              
years  the state  did not  make  any changes  to this  investment-                                                              
friendly  regime (slide  10).    In such  a scenario  the  state's                                                              
[undiscounted cash  flow] would be  reduced by about  $20 billion.                                                              
He  advised that  if nothing  actually happened  under the  fiscal                                                              
changes  made by  HB 110, it  would be  because the  bill did  not                                                              
pull the  right levers  to actually get  the investment  coming to                                                              
the state.                                                                                                                      
                                                                                                                                
2:17:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER,  regarding  the  figure of  $20  billion,                                                              
observed that  the fiscal notes for  HB 110 show [a  reduction of]                                                              
$7.7 billion over five years.                                                                                                   
                                                                                                                                
MR. RUGGIERO  replied that  his scenarios  go out  to the  mid- to                                                              
late-2020s, so  they take what  is in the  fiscal note  and extend                                                              
it further  out in  time.   The difference  in production  between                                                              
investment that happens  and investment that does  not happen gets                                                              
wider  the further  out in  time, so  that number  will grow  more                                                              
rapidly in  the later years  than it does  in the first  and early                                                              
years.                                                                                                                          
                                                                                                                                
2:18:05 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO,  turning  back to  his  presentation,  discussed  a                                                              
decision making  process for  the state that  would be  similar to                                                              
how  producers  look at  the  probability  of success  versus  the                                                              
probability  of failure  (slide  11).   Using the  numbers he  had                                                              
before, and  using his  own view of  a conservative  approach, the                                                              
chance  of  the downside  occurring  would  be  75 percent.    The                                                              
aforementioned  $20  billion  loss   would  be  multiplied  by  75                                                              
percent,  arriving  at  a  probabilistic   outcome  of  minus  $15                                                              
billion.  The 25  percent chance of the upside  occurring would be                                                              
multiplied  by the difference  of roughly  $120 billion,  arriving                                                              
at $30 billion.   Thus, in  his conservative case the  decision he                                                              
is  making right  now has  a probable  outcome of  a positive  $15                                                              
billion to the  state.  Under an optimistic approach,  which means                                                              
that the right levers  were pulled by making the  change, he would                                                              
use  a 25  percent chance  of the  downside  occurring, and  under                                                              
this optimistic approach  the probable outcome to  the state grows                                                              
to  a positive  $85 billion.   He  pointed out  that when  getting                                                              
into decision  making theory,  what is really  being said  is that                                                              
if the belief  is that the  right outcome is somewhere  in between                                                              
the two, then it  is a risk worth taking because  the upside is so                                                              
much greater  than the  downside of  having taken  that risk.   He                                                              
further  reminded   members  that   in  the  downside   case,  the                                                              
assumption was that  the state did nothing with  its fiscal system                                                              
even after it was seen that there was no investment.                                                                            
                                                                                                                                
2:20:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER surmised  that using  probabilities of  75                                                              
percent  and 25  percent instead  of probabilities  of 10  percent                                                              
and 90 percent is the art that Mr. Ruggiero talked about.                                                                       
                                                                                                                                
MR. RUGGIERO  concurred.   He then  calculated  that a 90  percent                                                              
downside  would be  minus  $18 billion  and  a  10 percent  upside                                                              
would  $12 billion,  which would  be  a negative  outcome for  the                                                              
state.   If  it  was thought  that  there was  only  a 10  percent                                                              
chance of  success, the mathematics  would suggest that  the state                                                              
not  make  the  decision  because   it  is  a  negative  decision.                                                              
"However," he  continued, "you  get to a  point where, we  call it                                                              
the  crossover  point,  where  somewhere  between the  10  and  20                                                              
percent  chance of  success you  cross  over where  any chance  of                                                              
success  above that  yields a positive  outcome  for the state  in                                                              
that decision making  process.  So, it is just a  different way of                                                              
looking at and approaching the numbers."                                                                                        
                                                                                                                                
REPRESENTATIVE  GARDNER asked  whether the  discounted cash  flow,                                                              
today's dollars  versus dollars 20  years from now,  is calculated                                                              
in Mr. Ruggiero's example.                                                                                                      
                                                                                                                                
MR.  RUGGIERO responded  that if  discounting is  used the  answer                                                              
and the crossover  point would be  different.  That is  one of the                                                              
pieces of noise  that he did not  want to get into so  he took the                                                              
simple approach here [of undiscounted].                                                                                         
                                                                                                                                
2:21:53 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO,   returning  to   his  presentation,   provided  an                                                              
outsiders' view  of where Alaska  sits.   He said the  left column                                                              
of slide 12  describes several aspects of Alaska's  fiscal regime.                                                              
In  the center  column  labeled  rank, the  word  "top" means  the                                                              
aspect  is good  and  the word  "bottom"  means it  is  bad.   The                                                              
[right] column is  the economic impact of that  aspect.  Regarding                                                              
the aspect of  allowing immediate deduction of  capex, only Alaska                                                              
and two or three  countries allow immediate deduction  of capex as                                                              
though  it  is operating  expenditure  (opex;  all  other  regimes                                                              
require a  period of time to  recover that capex [giving  Alaska a                                                              
rank of  top 1-3  and economic  impact of  high for this  aspect].                                                              
Alaska's investment  credits give it a ranking  of top one-quarter                                                              
[economic  impact  of  moderate-high],   and  Alaska's  investment                                                              
credits  of up  to  40 percent  put  it in  the  top 10  [economic                                                              
impact  of high].    Alaska's unique  aspect  of  credits to  cash                                                              
ranks  in the  top 1  or  2, [economic  impact  of moderate,  big,                                                              
huge].   Alaska's  aspect of  no  ring fence,  which is  immediate                                                              
deductibility, puts the  state in the top 10, and  this aspect has                                                              
a huge  economic impact.   When  looking at full-cycle  economics,                                                              
the economics in  a regime as a whole, Mr. Ruggiero  said Alaska's                                                              
87 percent  marginal rate puts  it in the  bottom 5-10.   However,                                                              
he pointed  out, to get to that  87 percent, a company  would have                                                              
to be  operating  almost like  on the  head of a  pin because  the                                                              
parameters  would  have  to  be   such  that  the  company's  cost                                                              
structure, amount  of production,  capex/opex split,  credits, and                                                              
so forth, put  it right at the  $92.50 profit per barrel.   Once a                                                              
company   moves  away   from  that,   that   87  percent   changes                                                              
drastically  and is a  very steep  curve down  on both  the higher                                                              
and  lower sides  of  $92.50.   [The  economic  impact  of the  87                                                              
percent marginal rate  depicted on slide 12 is  moderate, but with                                                              
the  qualification that  optically  it is  huge.]   Regarding  the                                                              
cost per barrel  to find or develop, Alaska is in  the bottom one-                                                              
quarter [high  economic impact] due  to the high expense  of doing                                                              
business in  the state.   However,  Alaska's fiscal system  allows                                                              
full  deduction of  all  costs before  the  state taxes,  although                                                              
royalty  does come  off the top.   Mr.  Ruggiero reminded  members                                                              
that in some other  regimes, a company may not be  able to recover                                                              
all its costs  in a given year  before it is credited  with income                                                              
that it  must pay tax on.   Regarding environmental  costs, Alaska                                                              
is in the  bottom ten [high economic  impact].  So, in  some cases                                                              
Alaska  has some  things  that are  very,  very  favorable and  in                                                              
other  cases Alaska  has some things  that are  not so  favorable.                                                              
However, he  advised, when  looking for  places to invest,  always                                                              
look at the package.                                                                                                            
                                                                                                                                
2:26:03 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  noted that  one  provision  of  HB 110  is  ring                                                              
fencing - all new  development would be taxed at  a different rate                                                              
and  presumably these  fields would  be reported  separately.   He                                                              
inquired how  instituting ring  fencing in  the North  Slope would                                                              
work in the balance of the aforementioned.                                                                                      
                                                                                                                                
MR.  RUGGIERO answered  that  for  a brand  new  player, what  the                                                              
state  is  really  doing  is  ring  fencing  all  production  that                                                              
develops  after a  certain  date;  it is  still  a statewide  ring                                                              
fence.   A  company  would be  starting  from  scratch and  moving                                                              
forward.   Initial  exploration  will take  some  time before  the                                                              
company can recover  the costs associated with it,  but once there                                                              
is  production and  it  is all  new,  it all  is  within the  ring                                                              
fence.   For existing players,  he said he  does not know  if they                                                              
have the  election, but something  that can  be looked at  is that                                                              
they  can elect  to  either  pull it  in  and have  the  immediate                                                              
deductibility but  the higher rate  moving forward, or  the option                                                              
to choose if it  is something that hits a certain  set of criteria                                                              
to be different  and separately ring fenced.  The  ring fence will                                                              
be looked at as  either a positive or negative  thing depending on                                                              
individual company positions.                                                                                                   
                                                                                                                                
2:27:43 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON  asked what  the  effect  is  of the  87  percent                                                              
marginal rate on  investment and described a  possible development                                                              
scenario as an example.                                                                                                         
                                                                                                                                
MR. RUGGIERO  replied  that he thinks  the issue  that comes  with                                                              
the 87  percent marginal rate  is that  the affected rate  at that                                                              
point  in time  is  in  the greater-than-70-percent  range.    For                                                              
example, in  a project  in Alaska that  requires an  investment of                                                              
$100 million, the  state is an investor up to  $70 million through                                                              
the deductions and  credits, and the company invests  $30 million.                                                              
When the revenue  comes in - say it is $200 million  - the company                                                              
only gets  30 percent, $60 million,  so the company's net  in that                                                              
project is only  $30 million.  However, in a 50  percent regime in                                                              
the Lower  48, that exact same  project with the exact  same capex                                                              
and  opex numbers  makes  the company  a  profit  of $100  million                                                              
above its cost.   So, in materiality  it is the same  project with                                                              
the same  risks with  the same revenues  and cash flowing  around,                                                              
but materially  that  would look  a lot larger  in another  regime                                                              
than it looks in  Alaska and, to him, that is  where the optics of                                                              
this really comes  in.  This is why he put up the  slide about the                                                              
two  different perceptions:    from  a government  standpoint  the                                                              
company still  made a profit of  $30 million; however,  while this                                                              
is  a  substantial profit,  the  company  can  do the  same  thing                                                              
elsewhere and make two to three times the money.                                                                                
                                                                                                                                
2:30:44 PM                                                                                                                    
                                                                                                                                
CO-CHAIR SEATON  said he is trying  to get back to  the separation                                                              
that capital  credits and the  investment are totally  independent                                                              
of  the price  and a  project  is not  going  to have  a price  or                                                              
revenue component until  after it starts producing.   If a company                                                              
was at that point  of $92.50 and an 87 percent  marginal tax rate,                                                              
the  company  could instead  invest  $87  million in  the  project                                                              
rather  than paying  it  to the  state in  taxes.   Now  it is  an                                                              
investment and the  company will get the full 20  percent capex on                                                              
top for the  entire project.  That  is $107 million of  money that                                                              
would  have been  in  the  state's pocket  that  is  now giving  a                                                              
company an  entire project  plus $7 million  in excess.   This was                                                              
the gold  plating that was  talked about before  regarding whether                                                              
people would  make investments  that did  not make economic  sense                                                              
because they  actually make money  on the investment.   The return                                                              
on  that  is  totally  separate  because  that  is  price  control                                                              
depending on  what the  oil price is  when the production  starts,                                                              
not when  the investment is.   The investment  tax credit  and the                                                              
moving from  paying tax to putting  it into the project  occurs at                                                              
that time,  not when production  starts.   He asked whether  he is                                                              
missing something or whether he is correct.                                                                                     
                                                                                                                                
2:32:50 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO   agreed  that  Co-Chair  Seaton's   description  is                                                              
correct,  although  he  thinks  that finding  such  a  project  is                                                              
getting a bit  outside the realm  of reality.  The payback  to the                                                              
state is  when the revenue  and the barrels  would flow  from that                                                              
project, which  could be at a higher  average tax rate  or a lower                                                              
rate  or a  different marginal  tax rate,  so whether  or not  the                                                              
state was  ahead or behind  or whether  the producer was  ahead or                                                              
behind, is  a number of  what-ifs.  However,  the issue  in Alaska                                                              
is   that   developments   are    multiple-year,   multiple-period                                                              
developments  and   given  that  there  is  no   price  prediction                                                              
accuracy  anywhere in  the industry,  he thinks  it would  be real                                                              
tough for  the oil  companies to  actually manipulate  the process                                                              
and be just  ready to spend  that money when that  predicted right                                                              
number hits;  that would be too  hard, if not impossible,  for any                                                              
project  in Alaska.    Maybe with  a  quick,  land-based rig  that                                                              
could drill 20 wells  in a month, a company could  hit the bonanza                                                              
because it  optimized within what  this tax law allowed,  but that                                                              
could not be done in Alaska.                                                                                                    
                                                                                                                                
2:34:45 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO allowed  that members have a tough  decision ahead of                                                              
them.   A lot is  being said publically  and privately  about what                                                              
is  needed to  go forward  in  a positive  future  for the  state,                                                              
which is  the growth case  instead of the  harvest case.   He said                                                              
he has seen it  time and time again as he comes  to the state that                                                              
the  body is  handicapped  in trying  to  make informed  decisions                                                              
when it is  not informed about what  is going on (slide  13).  His                                                              
firm cannot  help in  this regard and  neither can the  Department                                                              
of Revenue.  The  producers are the only people who  can help with                                                              
the questions  of:   Where has the  money been  spent and  on what                                                              
has it  been spent?   What is the  upside potential  that actually                                                              
exists out there?   What are the fields that could  be brought on?                                                              
There is  noise about  possibilities and  projects that  have been                                                              
deferred  because ACES  was passed,  but what  is the real  reason                                                              
that is  going on?   Additionally, if HB  110 is passed,  will the                                                              
producers  invest?  He  said that  while he  is sure members  will                                                              
not  receive any  guarantees, the  question is  what will  members                                                              
get and in  what form will it  be received if a sacrifice  is made                                                              
by the state to do the right thing?                                                                                             
                                                                                                                                
2:36:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER inquired  who the  biggest investor  is on                                                              
the North Slope right now.                                                                                                      
                                                                                                                                
MR. RUGGIERO  said "investor" would  be something that is  down to                                                              
working interest  and total spend  per field and breaking  it down                                                              
by field and what  was spent where, so he cannot  say which of the                                                              
"big three"  is the largest.  But,  he added, they are  all nearly                                                              
in  the  same  boat.    In  response   to  another  question  from                                                              
Representative  Gardner, he clarified  that "H S  & E" on  slide 2                                                              
stands for health, safety, and environment.                                                                                     
                                                                                                                                
2:37:15 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   GARDNER,   regarding   Mr.   Ruggiero's   earlier                                                              
statement that  investment money  is limited  based on  the number                                                              
of   companies,  inquired   whether   more   companies  and   more                                                              
investment dollars could be expected when prices are high.                                                                      
                                                                                                                                
MR. RUGGIERO  answered  that over  time many  things come  down to                                                              
how many  countries are  open for business  and trying  to attract                                                              
capital.  Over the  last 30 or 40 years in the  energy patch there                                                              
have been  times when there were  hundreds of companies  with lots                                                              
of money  and very  few countries  that were  open, and  therefore                                                              
the  governments could  charge  a lot.   And  then  there are  the                                                              
periods of  time when almost every  country in the world  is open;                                                              
for example,  there have been  years where 72 different  countries                                                              
have held  license  rounds.  When  there are  more countries  than                                                              
there are companies  and capital chasing it, it  becomes a buyer's                                                              
game and  the companies  can dictate  the terms  and that  is when                                                              
governments usually  have to lower their expectations  to attract.                                                              
What he meant by  his statement is that at any  point in time what                                                              
must be looked  at is the balance between opportunity  and capital                                                              
availability.                                                                                                                   
                                                                                                                                
2:38:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER, regarding  the producers' viewpoint  that                                                              
a large  profit is quid  pro quo for  taking downside  risk, asked                                                              
how the state's  participation in the capital  cost of exploration                                                              
and development is  balanced into the fiscal ranking  system given                                                              
that the  State of Alaska  is buying down  the risk  and therefore                                                              
might expect to have more of the upside.                                                                                        
                                                                                                                                
MR.  RUGGIERO replied  that  in his  firm's  investigation of  the                                                              
many  companies that  publish these  rankings, the  aspect of  how                                                              
much a company can  get back for a failed exploration  well is not                                                              
something that is  taken into account in those  studies.  Usually,                                                              
the studies  take the  positive fiscal system  and a  typical type                                                              
field  and run  that  same type  field through  every  one of  the                                                              
regimes as though  money was spent, the discovery  was commercial,                                                              
and  it  was developed.    Thus,  the  question  is one  of  those                                                              
nuances that  do not  get captured  in these relative  comparisons                                                              
of regimes.                                                                                                                     
                                                                                                                                
REPRESENTATIVE GARDNER  inquired how the duty to  develop or other                                                              
elements of a lease are included in fiscal system rankings.                                                                     
                                                                                                                                
MR. RUGGIERO  said he cannot  comment on  how that is  done today,                                                              
but back  when he  was in  that situation  if the company  thought                                                              
there  was any chance  of a  commercial nature  being there,  that                                                              
expiring lease would take priority for investment going forward.                                                                
                                                                                                                                
2:40:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE  asked  how  feasible  would  it  be  to  tie  the                                                              
production tax to production and productivity.                                                                                  
                                                                                                                                
MR.  RUGGIERO responded  that  he  has seen  a  number of  systems                                                              
where being  able to  get a  certain set  of commercial  terms was                                                              
tied  to requirements  for certain  levels of  investment or  work                                                              
programs.   This is quite  common and it  could be  something like                                                              
the number of wells,  miles of seismic, or certain  training to be                                                              
done.   There are  also a number  of fiscal  systems that  tie the                                                              
government take,  be it in royalty, production  share, and/or tax,                                                              
to different levels  of production and that production  is used as                                                              
a  surrogate  for  profitability;  for  example,  government  take                                                              
might be 50 percent  up to 25,000 barrels a day,  60 percent up to                                                              
50,000 barrels  a day,  and 75 percent  of everything  over 70,000                                                              
barrels a day.                                                                                                                  
                                                                                                                                
2:42:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON, regarding  fiscal system design,  surmised                                                              
that oil  companies want  to make a  profit but accommodate  their                                                              
failures.                                                                                                                       
                                                                                                                                
MR. RUGGIERO  answered  that a company  looks  at the totality  of                                                              
its  business.   This  is not  an exact  science  business and  if                                                              
added  up there  are  more failures  than  successes when  talking                                                              
about wells  that find  commercial hydrocarbons.   So, to  stay in                                                              
business,  a company  must make  more off its  successes than  its                                                              
failures cost in getting to those successes.                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  understood   Mr.  Ruggiero  to  have  said                                                              
earlier in  his presentation  that the oil  companies do  not have                                                              
to invest even if HB 110 is passed.                                                                                             
                                                                                                                                
MR.  RUGGIERO qualified  that  he has  not  read HB  110 in  great                                                              
detail, but his  understanding is that there is  no requirement in                                                              
the bill that companies must invest after the bill passes.                                                                      
                                                                                                                                
2:43:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON, regarding  the  state's  investment in  failures                                                              
and that  this nuance is lost  in analyses done by  oil companies,                                                              
asked whether such  benefits are lost because the focus  is on the                                                              
negatives of the state's fiscal system.                                                                                         
                                                                                                                                
MR. RUGGIERO  answered that Co-Chair  Seaton has "hit the  nail on                                                              
the head"  in that  the 15-second  sound bite  seems to  have more                                                              
validity  and  gets  a  wider audience  than  does  a  proper  and                                                              
detailed  analysis of  what is actually  there  and what the  good                                                              
versus bad  points are.   So, yes, what  is seen in  publications,                                                              
speeches, and  conferences is that sound  bite of 87 percent.   He                                                              
said he  is not  sure that any  producer has  yet paid  a marginal                                                              
87-percent dollar, but it is out there.                                                                                         
                                                                                                                                
2:45:53 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON noted  that the  main push  for HB  110 is  about                                                              
Alaska's  competitiveness.   In this regard,  he inquired  whether                                                              
the effective tax  rate is the right thing for members  to look at                                                              
when  comparing  Alaska's structure  to  the structures  of  other                                                              
countries or states.                                                                                                            
                                                                                                                                
MR. RUGGIERO  replied he  does not  think there  is any  one right                                                              
thing to be looking  at.  Going back to his  statement of "torture                                                              
numbers and  they will tell  you any story  you want to  tell," he                                                              
said that those  who want to tell the negative  story have latched                                                              
on to  the 87  percent and  have not let  go.   Those who  want to                                                              
tell a positive  story will latch  on to something else.   The key                                                              
is  convincing  the  decision makers  within  the  oil  companies,                                                              
particularly  the large  oil companies.    He pointed  out that  a                                                              
circle  drawn around  the  worst quartile  in  those surveys  will                                                              
include  the names  of  countries  where a  vast  majority of  the                                                              
investment dollars of  the large oil companies are  going.  So, if                                                              
it is location on  those curves, Alaska is in a  good spot and has                                                              
a lot of company in where investment dollars are going.                                                                         
                                                                                                                                
2:47:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   GARDNER,   regarding   Mr.   Ruggiero's   earlier                                                              
statement  that  a  system  which  is  complex  and  sophisticated                                                              
requires an  army of  auditors, asked whether  the ACES  system is                                                              
complex and/or sophisticated.                                                                                                   
                                                                                                                                
MR.  RUGGIERO responded  that he  thinks it  is sophisticated  but                                                              
not complex.   What becomes complex  is how the data  is presented                                                              
that then needs to  be audited.  What form does  the data come in?                                                              
Is it  in a  form that  is cooperative?   Or  is it  in a  form of                                                              
"here is  what you  asked for, here  is what  my system  just spit                                                              
out in a million lines of SAP code, you figure it out"?                                                                         
                                                                                                                                
2:48:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER related  that one  of the arguments  heard                                                              
for bracketing  taxes  at different  prices is  that it makes  the                                                              
return  simpler.    However, she  said  it  seems  to her  that  a                                                              
spreadsheet  that works  for 30  days could  work 30  times for  a                                                              
day, so it is  not that much more complex to  calculate one way or                                                              
the other.                                                                                                                      
                                                                                                                                
MR. RUGGIERO answered  that he thinks stepped taxation  versus the                                                              
continuous  progressivity taxation  of ACES is  not to  change the                                                              
complexity level  of the return  or the mathematics  to calculate.                                                              
It is to  change the absolute high  end of the tax being  paid; it                                                              
reduces  the amount  of tax  for  a given  set of  price and  cost                                                              
scenarios.                                                                                                                      
                                                                                                                                
2:49:42 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  SEATON recalled  that when  a step  or steps were  being                                                              
considered  under  ACES,  there  was great  consternation  in  the                                                              
industry  that each  time  there was  a step  there  was a  fairly                                                              
large jump  in tax at  $1 difference in  price.  He  asked whether                                                              
that same consideration would still be there [under HB 110].                                                                    
                                                                                                                                
MR.  RUGGIERO replied  that to  the  extent that  one step  causes                                                              
consternation,   three  steps  will   cause  more   consternation.                                                              
However, he would  suspect that if a system has  steps, operations                                                              
would be  such that they  do not operate  near the step  change to                                                              
where that  last dollar causes a  much different rate of  tax than                                                              
the previous dollar.   Either through cost  management, production                                                              
management, or something  else, the companies will  make sure that                                                              
they pay just the  fair share of what they believe  they should be                                                              
paying in  taxes.  Any  fiscal system has  its pluses  and minuses                                                              
for  both   government  and  producer;   there  needs  to   be  an                                                              
understanding of those  nuances so an operation can  be managed to                                                              
that from both perspectives of government and producer.                                                                         
                                                                                                                                
2:52:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  FEIGE related  that  on 2/9/11  Mr.  Roger Marks  stated                                                              
that one of the  best things that could be done  to encourage more                                                              
investment  and more  production on  the North  Slope would  be to                                                              
lower the  aggressiveness  of the progressivity  factor.   Another                                                              
idea floated  at the time was  to have a reverse  progressivity in                                                              
HB 110  where the progressivity  factor is  a stair step  going up                                                              
and then at  a cap of a certain  price the stair step  would start                                                              
going down.  He  asked what the effect would be  on an average oil                                                              
company's decision  making if a  reverse progressivity was  put on                                                              
production above a certain point.                                                                                               
                                                                                                                                
MR.  RUGGIERO  answered   that  he  has  a  couple   of  emotional                                                              
responses  to   this  hypothesis.     In  testimony   before  this                                                              
legislature  he  has  heard  about things  that  happen  when  the                                                              
profit  per barrel  is $150-$200.    However, if  that happens  it                                                              
will  not exist  very long.   For  example, during  the time  that                                                              
prices quickly  rose from  the range  of $40-$50  to the  range of                                                              
$100, which  was when ACES  was being discussed,  costs escalated.                                                              
A  look  back over  time  will  show a  fairly  clear  correlation                                                              
between cost  in the oil  patch and price  of oil.  So,  the point                                                              
at which  a decreasing  progressivity  would come  into play  at a                                                              
profit per  barrel of $150  or more would  soon disappear  and the                                                              
state would  be right back  into the steps  where it was  to begin                                                              
with.  He said  that while Dr. Wood presented a  separation of the                                                              
state versus  the producer  at $300 a barrel  profit, he  does not                                                              
think that is going to happen.                                                                                                  
                                                                                                                                
2:55:21 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GARDNER inquired  of  Acting Commissioner  Butcher                                                              
whether any  taxpayer has  reached the  87 percent marginal  rate.                                                              
Regarding  audits, she  noted that  the  2006 audits  for the  PPT                                                              
were just  completed and that no  audits have yet been  done under                                                              
the  ACES tax  structure.   Therefore,  without  any audits  under                                                              
ACES,  it  is  unknown  whether  the  proposed  changes  would  be                                                              
pulling the  right levers.   However,  what is  known thus  far is                                                              
that  for  rebates   the  state  cannot  break   out  the  capital                                                              
expenditures  which have been  approved or are  in the  process of                                                              
being approved; the  state cannot tell which are  drilling or well                                                              
related or  maintenance or  facilities related.   Page 6  of DOR's                                                              
January 18, 2011,  report to the legislature basically  says there                                                              
is  no breakdown  as  to the  spending that  is  occurring in  the                                                              
state and  where that is  going.  The state  has no data  by field                                                              
on capital spending.   The credit program for Cook  Inlet has been                                                              
expanded,  but it  is  unknown whether  that  program has  changed                                                              
anything.  On page  9 of the January report is  the statement, "It                                                              
is much  more difficult to  measure a tax  system's impact  on oil                                                              
development and  production from existing  fields."  She  said she                                                              
finds it cumulatively  alarming that when billions  of dollars are                                                              
being talked about,  the state does not have  baseline information                                                              
and is  potentially embarking  on taking  billions of  dollars out                                                              
of the treasury on a "flim" basis.                                                                                              
                                                                                                                                
ACTING COMMISSIONER  BUTCHER replied that the 87  percent marginal                                                              
rate is a scenario  that could happen, but he does  not know if it                                                              
has  happened at  $92.50 after  production  tax value.   While  he                                                              
knows it  has been  up over that,  he thinks  it was pre-ACES  and                                                              
will get back  to the committee in  this regard.  In  terms of the                                                              
audits, he  confirmed that DOR has  finished with PPT and  is just                                                              
starting  with ACES.   However,  the information  in these  audits                                                              
will  not provide  any  kind  of  enlightenment on  these  numbers                                                              
because they  are not broken  out in a  way that would  show where                                                              
the  breakout  is  between  what is  being  spent  on  exploratory                                                              
activities and what is being spent on current infrastructure.                                                                   
                                                                                                                                
2:59:44 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   GARDNER  asked   whether   DOR  needs   statutory                                                              
authority to get  that information or whether the  regulations can                                                              
be  changed  in a  way  that would  allow  the  state  to get  the                                                              
information  necessary  to  help   figure  out  what  impacts  its                                                              
actions are having on investments.                                                                                              
                                                                                                                                
ACTING  COMMISSIONER  BUTCHER responded  that  he  believes it  is                                                              
statutory and the  department will get back to  the committee with                                                              
a definite answer.                                                                                                              
                                                                                                                                
ACTING  COMMISSIONER BUTCHER,  regarding Representative  Gardner's                                                              
question  about Cook  Inlet, said  that the Cook  Inlet bill  just                                                              
passed  last session  and a  couple  of companies  are looking  at                                                              
developing.  More  should be known in the next six  months, but he                                                              
thinks  it is likely  to happen.   Regarding  the state's  limited                                                              
information, he related  that the governor has looked  at the lack                                                              
of   exploration  under   the  high   oil  prices   and  has   had                                                              
conversations   with  numerous  current   producers  as   well  as                                                              
companies that  are interested in  Alaska, and feels that  this is                                                              
something  that  must be  dealt  with  sooner rather  than  later.                                                              
When the  state was looking  at changing from  ELF to PPT,  it had                                                              
far  less information  than is  had today,  but it  was a  feeling                                                              
that something needed to be done and action was taken.                                                                          
                                                                                                                                
3:01:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON,  noting that  the  DOR commissioner  needs                                                              
skilled  auditors, inquired  whether the  state is  at a  complete                                                              
disadvantage  because the other  side is  willing to pay  anything                                                              
to keep the best from working for the department.                                                                               
                                                                                                                                
ACTING  COMMISSIONER BUTCHER  allowed that  that is  a very  valid                                                              
point.   The state cannot  pay to the  level of private  industry,                                                              
but while the  department has a much smaller  budget its employees                                                              
do a really  good job and are  very experienced.  It  is difficult                                                              
to  find people  that look  at public  service  as something  they                                                              
want to  take over a  large paycheck, he  said, but  the committee                                                              
would be impressed with the folks that the department has.                                                                      
                                                                                                                                
3:02:35 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being  no further business  before the committee,  the House                                                              
Resources Standing Committee meeting was adjourned at 3:03 p.m.