Legislature(2017 - 2018)BARNES 124

02/20/2017 01:00 PM RESOURCES

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Audio Topic
01:07:09 PM Start
01:07:41 PM HB111
03:07:21 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Rich Ruggiero, Oil & Gas Consultant, Budget &
Audit Committee
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                       February 20, 2017                                                                                        
                           1:07 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Andy Josephson, Co-Chair                                                                                         
Representative Geran Tarr, Co-Chair                                                                                             
Representative Dean Westlake, Vice Chair                                                                                        
Representative Harriet Drummond                                                                                                 
Representative Justin Parish                                                                                                    
Representative Chris Birch                                                                                                      
Representative DeLena Johnson                                                                                                   
Representative George Rauscher                                                                                                  
Representative David Talerico                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mike Chenault (alternate)                                                                                        
Representative Chris Tuck (alternate)                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 111                                                                                                              
"An  Act  relating  to  the  oil  and  gas  production  tax,  tax                                                               
payments,  and  credits;  relating   to  interest  applicable  to                                                               
delinquent  oil and  gas  production tax;  and  providing for  an                                                               
effective date."                                                                                                                
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 111                                                                                                                  
SHORT TITLE: OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                          
SPONSOR(s): RESOURCES                                                                                                           
                                                                                                                                
02/08/17       (H)       READ THE FIRST TIME - REFERRALS                                                                        
02/08/17       (H)       RES, FIN                                                                                               
02/08/17       (H)       TALERICO OBJECTED TO INTRODUCTION                                                                      
02/08/17       (H)       INTRODUCTION RULED IN ORDER                                                                            
02/08/17       (H)       SUSTAINED RULING OF CHAIR Y23 N15 E2                                                                   
02/08/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/08/17       (H)       Heard & Held                                                                                           
02/08/17       (H)       MINUTE(RES)                                                                                            
02/13/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/13/17       (H)       Heard & Held                                                                                           
02/13/17       (H)       MINUTE(RES)                                                                                            
02/17/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/17/17       (H)       Heard & Held                                                                                           
02/17/17       (H)       MINUTE(RES)                                                                                            
02/20/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
RICH RUGGIERO, Consultant                                                                                                       
Legislative Budget and Audit Committee                                                                                          
Alaska State Legislature; Managing Partner                                                                                      
Castle Gap Advisors                                                                                                             
Houston, Texas                                                                                                                  
POSITION   STATEMENT:     Provided   a  PowerPoint   presentation                                                             
entitled,  "Developing   Petroleum  Fiscal  Policy,"   and  dated                                                               
2/20/17.                                                                                                                        
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:07:09 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GERAN   TARR  called   the  House   Resources  Standing                                                             
Committee meeting  to order at  1:07 p.m.   Representatives Tarr,                                                               
Parish,  Talerico, Drummond,  and Josephson  were present  at the                                                               
call  to order.   Representatives  Birch, Westlake,  Rauscher and                                                               
Johnson arrived as the meeting was in progress.                                                                                 
                                                                                                                                
                                                                                                                                
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
                                                                                                                                
1:07:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR announced that the  only order of business would be                                                               
HOUSE  BILL  NO.  111,  "An  Act relating  to  the  oil  and  gas                                                               
production tax,  tax payments, and credits;  relating to interest                                                               
applicable  to  delinquent  oil   and  gas  production  tax;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
1:08:36 PM                                                                                                                    
                                                                                                                                
RICH  RUGGIERO, consultant  to the  Legislative Budget  and Audit                                                               
Committee,  Alaska  State   Legislature,  and  managing  partner,                                                               
Castle  Gap Advisors,  LLC., provided  a PowerPoint  presentation                                                               
entitled,  "Developing   Petroleum  Fiscal  Policy,"   and  dated                                                               
2/20/17.   Mr.  Ruggiero gave  a brief  background of  his energy                                                               
industry  experience,  including  work   for  the  Department  of                                                               
Revenue (DOR) from 2007 to 2010 [slide 2].                                                                                      
                                                                                                                                
MR. RUGGIERO introduced his presentation  [slide 3].  He informed                                                               
the  committee he  would provide  graphics  representing the  oil                                                               
industry worldwide and  emphasized the issue is  to determine how                                                               
to  prepare the  state for  future events,  while working  from a                                                               
common understanding [slide 5].                                                                                                 
                                                                                                                                
1:13:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  asked Mr. Ruggiero whether  he was involved                                                               
during  the administration's  development of  Alaska's Clear  and                                                               
Equitable  Share   (ACES)  [passed  in  the   25th  Alaska  State                                                               
Legislature].                                                                                                                   
                                                                                                                                
MR. RUGGIERO said yes.  He added  he spent 31 days working on the                                                               
legislation.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH  further  inquired  as  to  Mr.  Ruggiero's                                                               
involvement in the  change to the initial iteration  of ACES that                                                               
doubled Alaska's share.                                                                                                         
                                                                                                                                
MR. RUGGIERO said he was  there to give the administration advice                                                               
on the effects  of House and Senate committee  substitutes to the                                                               
initial bill  proposed by  the governor.   He deferred  a further                                                               
question from Representative Birch to after the presentation.                                                                   
                                                                                                                                
MR. RUGGIERO observed  from his 40 years of  experience, the only                                                               
constant in  the oil industry  is change, not stability,  and the                                                               
need  for companies  and  other  parties to  be  nimble and  open                                                               
minded  to  changes in  price,  policy,  people, technology,  and                                                               
fiscal systems [slide 7].                                                                                                       
                                                                                                                                
REPRESENTATIVE  RAUSCHER noted  the presentation  was related  to                                                               
developing petroleum  fiscal policy  and opined  the state  has a                                                               
policy in place.                                                                                                                
                                                                                                                                
MR. RUGGIERO  stated his intent  if that the  committee recognize                                                               
there  never is  a period  of true  stability, thus  state policy                                                               
must be prepared to address a constantly changing environment.                                                                  
                                                                                                                                
REPRESENTATIVE RAUSCHER expressed his  concern about too frequent                                                               
changes.                                                                                                                        
                                                                                                                                
1:19:01 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR  pointed out  of past  changes, one-half  have been                                                               
requested by industry.                                                                                                          
                                                                                                                                
MR.  RUGGIERO acknowledged  these  are trying  times  in the  oil                                                               
industry,  but not  more  so than  in  the past  [slide  8].   He                                                               
recalled  in 2005,  studies indicated  the U.S.  was expected  to                                                               
import eight billion cubic feet  per day of liquefied natural gas                                                               
(LNG) between 2012 and 2015; however,  in 2015, the U.S. was in a                                                               
position to  liquefy and export  an equal amount of  natural gas.                                                               
He said, "That's  a sixteen bcf a day flip,  and the implications                                                               
of that ... actually impacted the  size, the timing, and the cost                                                               
of projects  on five different  continents" [slide 9].   Whenever                                                               
increasing  government   take  is  discussed,  there   are  three                                                               
responses   from  the   operators:      more  instability;   less                                                               
competitive; jobs  jeopardized.  Mr. Ruggiero  said oil companies                                                               
are  for-profit entities  whose shareholders  expect the  highest                                                               
return, thus the aforementioned  responses are a natural reaction                                                               
[slide 10].                                                                                                                     
                                                                                                                                
1:23:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON,  speaking as  a business owner,  said any                                                               
business wants to maximize its  profitability and reduce what the                                                               
government  earns.     Returning  attention  to   slide  10,  she                                                               
suggested "detractor  themes" are really business  concerns, such                                                               
as stability, competition,  and jobs.  She inquired as  to how an                                                               
oil company should react to increased government take.                                                                          
                                                                                                                                
MR.  RUGGIERO acknowledged  oil  companies  and other  businesses                                                               
want  to  make  a  profit.   He  said  there  will  be  extensive                                                               
[negative]  reaction  from  the  industry, and  stressed  in  his                                                               
experience in other  venues there is more open  dialogue from oil                                                               
companies about  their projects,  costs, volumes,  timelines, and                                                               
types of  fiscal systems.   Also, in  other regimes, he  has seen                                                               
more of  "a[n] oil company/government partnership,  instead of an                                                               
oil company versus the government type relationship."                                                                           
                                                                                                                                
REPRESENTATIVE  JOHNSON questioned  the  meaning of  partnership,                                                               
and restated business concerns are valid.                                                                                       
                                                                                                                                
MR. RUGGIERO  opined the state's  issues associated with  oil and                                                               
gas  taxation would  benefit from  the industry's  help with  the                                                               
policies that would  support development; there needs  to be more                                                               
dialogue  with the  operators related  to projects,  so that  the                                                               
state  can  negotiate  from  a   position  of  understanding  and                                                               
insight, rather than from speculation.                                                                                          
                                                                                                                                
REPRESENTATIVE  TALERICO  returned  attention  to  slide  10  and                                                               
expressed offense  at the tenor  of the presentation.   Given the                                                               
recent  availability of  shale  oil in  North  America, he  asked                                                               
whether the competition for Alaska's  oil industry has changed in                                                               
the last 10-15 years.                                                                                                           
                                                                                                                                
1:30:47 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO  advised with  every technological  advancement, the                                                               
field of  competition moves around  the globe.   If Alaska  is in                                                               
competition with the Lower 48,  he agreed there have been changes                                                               
in the last 10 years.                                                                                                           
                                                                                                                                
REPRESENTATIVE  TALERICO stated  that "jobs  are at  risk due  to                                                               
potential  lower activity"  is not  a theme  but a  reality.   He                                                               
pointed out when  activity declines, there is always  the risk of                                                               
losing jobs.                                                                                                                    
                                                                                                                                
MR. RUGGIERO said yes, that is a statement of fact.                                                                             
                                                                                                                                
REPRESENTATIVE  WESTLAKE   agreed  with  the   previous  comments                                                               
although instability in the state  has negatively affected public                                                               
education,  public  safety, and  essential  programs.   From  the                                                               
perspective  of  Alaska  businesses   and  its  social  programs,                                                               
Alaskans  are   being  negatively   impacted.    The   issues  of                                                               
competition and job losses are well known.                                                                                      
                                                                                                                                
REPRESENTATIVE   BIRCH  asked   Mr.  Ruggiero   whether  he   has                                                               
encountered a perfect taxing structure.                                                                                         
                                                                                                                                
MR. RUGGIERO said no, because  each regime differs with variables                                                               
such  as the  value of  gas versus  oil, offshore  versus onshore                                                               
resources,  and the  volume of  gas  versus oil.   However,  some                                                               
aspects  are being  used to  help governments  and oil  companies                                                               
achieve  stability; for  example, self-correcting  legislation or                                                               
fiscal policy that responds to  changing conditions in the market                                                               
and  in development.   Mr.  Ruggiero presented  slides 11  and 12                                                               
showing other regimes that have  increased or lessened government                                                               
take from  the years 2001  to 2011,  especially during 2009.   He                                                               
concluded Alaska is not unstable  when compared to other regimes.                                                               
He  referred  to an  oil  industry  annual survey  [document  not                                                               
provided]  that reported  the  United Kingdom  (UK)  is the  most                                                               
stable  regime in  which to  invest, and  noted UK  has had  four                                                               
changes  - as  indicated on  slide 4  - and  an additional  three                                                               
changes within  a period of 15  years.  Mr. Ruggiero  said the UK                                                               
is  considered stable  because when  oil prices  drop it  is more                                                               
generous, and when prices increase it taxes windfall profits.                                                                   
                                                                                                                                
1:38:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH  questioned  whether  governments  increase                                                               
their share during periods of low oil prices.                                                                                   
                                                                                                                                
MR. RUGGIERO responded most governments  lessen their take during                                                               
periods of low prices.                                                                                                          
                                                                                                                                
REPRESENTATIVE  BIRCH  pointed  out   Alaska  is  considering  an                                                               
increase in times of low prices.                                                                                                
                                                                                                                                
REPRESENTATIVE  TALERICO requested  information  through 2016  on                                                               
this issue.                                                                                                                     
                                                                                                                                
MR.  RUGGIERO said  the  point of  slides 11  and  12 is  regimes                                                               
around the  world change their  fiscal systems as often,  or more                                                               
often, than Alaska.                                                                                                             
                                                                                                                                
CO-CHAIR  TARR  urged  the  presenter   to  provide  more  recent                                                               
information.                                                                                                                    
                                                                                                                                
MR. RUGGIERO presented pie charts  that illustrated the locations                                                               
of worldwide  capital expenditures  by the largest  oil companies                                                               
from 1994 through  2006.  In 1994, almost 70  percent of spending                                                               
was in Asia  and Latin America, and in 2006,  about 50 percent of                                                               
spending was  in North Africa.   In  2008, almost $40  billion in                                                               
capital spending  was committed to  Iraq.  He observed  the areas                                                               
of  major capital  spending changes,  and Alaska  needs a  policy                                                               
that can react to competition from new regimes.                                                                                 
                                                                                                                                
1:44:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH asked where  North America is represented on                                                               
slide 13.                                                                                                                       
                                                                                                                                
MR. RUGGIERO explained investment in  North America was too small                                                               
to be  represented on the  chart as  the major oil  companies had                                                               
acquisitions,  but no  major capital  investment programs  in the                                                               
development of assets in the U.S. Lower 48.                                                                                     
                                                                                                                                
REPRESENTATIVE  BIRCH  pointed  out oil  industry  investment  in                                                               
Alaska is over $6.5 billion per year.                                                                                           
                                                                                                                                
MR. RUGGIERO said overall the  industry spends $500-$600 billion,                                                               
an amount that "dwarfs" even an investment of $2-$3 billion.                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH clarified  the 2006 pie chart  [on slide 13]                                                               
reflects  a  total  investment of  $500-$600  billion,  thus  the                                                               
investment in  Alaska of  $6.5 billion does  not register  on the                                                               
chart.                                                                                                                          
                                                                                                                                
MR. RUGGIERO  said correct.   He referred  to an  ACES supporting                                                               
document  that indicated  the largest  three oil  companies spent                                                               
very little capital from 2004  through 2007 in the U.S. [document                                                               
not provided].                                                                                                                  
                                                                                                                                
REPRESENTATIVE  JOHNSON asked  whether  more current  information                                                               
would show North America investments.                                                                                           
                                                                                                                                
MR.  RUGGIERO  pointed out  slide  13  shows investment  for  the                                                               
largest international  oil companies  (IOCs) - the  supermajors -                                                               
and is  not inclusive of  all oil companies; the  message remains                                                               
that the  spending of capital  on the upstream side  moves around                                                               
the globe  due to  changes in  regime, location,  and technology,                                                               
for example, production from shale.                                                                                             
                                                                                                                                
REPRESENTATIVE  JOHNSON surmised  other regimes  can become  more                                                               
attractive fairly easily.                                                                                                       
                                                                                                                                
MR. RUGGIERO indicated  yes.  Alaska is  competing for investment                                                               
capital across the  globe, and needs to understand  why large and                                                               
small oil  companies will or  will not invest  in the state.   He                                                               
turned attention  to how oil companies  make investment decisions                                                               
and  from his  experience -  using  a rock,  paper, and  scissors                                                               
analogy  -  said  rock,  representing   a  great  reservoir,  can                                                               
overcome high  taxes.  Large oil  companies spend a lot  of money                                                               
in regimes  with higher  government take  than Alaska  because of                                                               
better and larger  reservoirs driven by economy of  scale.  Great                                                               
rock and prospects can overcome a  high tax regime.  On the other                                                               
hand, profits  not that large  will overcome bad rock  if profits                                                               
come quickly, as happens with shale oil production [slide 14].                                                                  
                                                                                                                                
1:51:23 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH observed Alaska  can exert a painfully large                                                               
tax  structure that  could drive  investment from  the state  and                                                               
questioned the logic of the analogy.                                                                                            
                                                                                                                                
1:52:33 PM                                                                                                                    
                                                                                                                                
[Due to  technical difficulties,  the committee  took a  brief at                                                               
ease.]                                                                                                                          
                                                                                                                                
MR.  RUGGIERO stated  his  point is  oil  companies are  spending                                                               
investment  capital  disproportionately  in countries  that  have                                                               
higher  taxes  than  Alaska;   however,  he  cautioned  companies                                                               
working  in Alaska  face  a difficult  environment  and a  remote                                                               
location, thus the right risk/reward balance is required.                                                                       
                                                                                                                                
REPRESENTATIVE PARISH  asked what regimes have  higher government                                                               
take yet attract higher investment.                                                                                             
                                                                                                                                
MR.  RUGGIERO  said  Angola,  Nigeria,  Iraq,  certain  areas  of                                                               
Indonesia, and  perhaps Kazakhstan  have higher  government take.                                                               
At one  time Angola had a  marginal 90-plus percent tax  rate and                                                               
$1  billion bids  for  licenses  because of  the  quality of  its                                                               
reservoirs.   Norway  has  a flat  70 percent  net  tax and  also                                                               
attracts investment from the large oil companies.                                                                               
                                                                                                                                
1:57:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON  pointed out Norway  is the full  owner of                                                               
its oil business.                                                                                                               
                                                                                                                                
MR.  RUGGIERO explained  Norway  has a  single  taxing entity  as                                                               
opposed to Alaska that has state,  local, and federal taxes.  Mr.                                                               
Ruggiero  informed the  committee  producers  like quick  returns                                                               
from high rates and then "sell  out" in order to maximize rate of                                                               
return and return on investment;  however, governments want costs                                                               
minimized  and  long term  jobs.    In  reality, there  is  quick                                                               
production and  decline, followed  by sales to  smaller companies                                                               
and more  production, which is  a combination of  both priorities                                                               
over time [slide 15].  Further,  as the fields change owners, new                                                               
owners come  in with the  latest technology and a  fresh outlook;                                                               
for example, Apache  Corporation got 80,000 barrels  per day from                                                               
the  Forties  Field in  the  North  Sea  [slide  16].   Slide  17                                                               
provided another  example of  a field in  Texas given  up thrice,                                                               
but that continued to grow  to 8.5 times its original projection.                                                               
It is important to bring new  companies into the basins to unlock                                                               
potential,  because  the  original  developers pull  out  at  the                                                               
beginning of  decline; subsequent developers have  different risk                                                               
profiles,  business  models,  and   new  technology  [slide  18].                                                               
Another  emerging  tool for  the  industry  is the  risk  service                                                               
contract which is a different  form of developing hydrocarbons on                                                               
behalf of governments.   He stressed large  service companies are                                                               
now  providing  capital,  downhole  technical  expertise,  tools,                                                               
field operations, and technology  on behalf of governments [slide                                                               
19].   In response  to Co-Chair  Tarr, he said  the blue  line on                                                               
slide  19 represents  Schlumberger  Limited (SLB),  the red  line                                                               
represents Halliburton (HAL), and  the light blue line represents                                                               
Baker Hughes (BHI).                                                                                                             
                                                                                                                                
REPRESENTATIVE  BIRCH asked  whether  the  risk service  contract                                                               
companies have an equity position.                                                                                              
                                                                                                                                
2:07:17 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO  advised  the  primary  tenet  of  a  risk  service                                                               
contract  is  "no  equity."     Risk  service  contracts  are  "a                                                               
different form  of governments  getting the  capital spent  and a                                                               
different way of  paying that capital back to the  operator ... a                                                               
second major tenet  of these type of contracts is  that it's paid                                                               
back basically through production ...."   He summarized the first                                                               
section of  the presentation as  follows:  change  is continuous;                                                               
tax increases generate comments;  new players are very important;                                                               
the challenge is to determine  fair share that creates growth for                                                               
the operators and the government [slide 20].                                                                                    
                                                                                                                                
REPRESENTATIVE  TALERICO was  unsure whether  there is  a perfect                                                               
fair share for all parties.                                                                                                     
                                                                                                                                
REPRESENTATIVE  JOHNSON asked  what  oil companies  should do  in                                                               
response to tax increases.                                                                                                      
                                                                                                                                
MR.  RUGGIERO   urged  for  oil   companies  to   disclose  their                                                               
prospects, and propose  fiscal terms to advance  projects, so the                                                               
state  does  not  have  to   base  its  decisions  on  models  of                                                               
hypothetical  fields; in  fact, this  is the  procedure in  other                                                               
countries.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  JOHNSON surmised  companies are  not inclined  to                                                               
discuss their business plans with the government.                                                                               
                                                                                                                                
REPRESENTATIVE RAUSCHER  referred to  the importance  of bringing                                                               
in  new players  and noted  on slide  14, Mr.  Ruggiero said  the                                                               
first two years  in a field are the most  productive.  Therefore,                                                               
profits for new players and the  state from mature fields will be                                                               
lower.                                                                                                                          
                                                                                                                                
MR. RUGGIERO clarified he was speaking  of a shale well, of which                                                               
the majority of  production is recovered in the  first two years;                                                               
in contrast,  in some of  the Gulf  of Mexico and  Alaska fields,                                                               
recovery in  the first two  years may only  be 20 percent  of the                                                               
ultimate  production.     Total   recovery  is  related   to  the                                                               
production facilities and to the nature of the field.                                                                           
                                                                                                                                
2:15:25 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON expressed  her understanding the presenter                                                               
is  advocating  for a  different  [tax]  structure for  differing                                                               
fields and types of production.                                                                                                 
                                                                                                                                
MR.  RUGGIERO said  he is  not  advocating for  anything at  this                                                               
time, but is providing information  so "everyone comes from [the]                                                               
same general understanding  of the landscape into  which you must                                                               
create your  fiscal policy."   He  returned to  the presentation,                                                               
noting the importance  of past events is not  just what happened,                                                               
but  why certain  events  happened.   For  example, locations  in                                                               
which oil  companies are investing  today are not a  predictor of                                                               
the  future unless  one knows  why.   In response  to an  earlier                                                               
question as  to whether  there is an  ideal system,  he explained                                                               
countries   have   different   drivers,   thus   regime-to-regime                                                               
comparisons  of   tax  rates  are  problematic.     For  example,                                                               
comparisons  do  not  take   into  consideration  the  following:                                                               
domestic  market obligations  that  are not  required in  Alaska;                                                               
local content,  such as  local service  companies; infrastructure                                                               
development such  as schools and hospitals;  oil blends; refinery                                                               
and  power station  needs.   He stressed  the committee  needs to                                                               
foresee Alaska's  drivers in order  to develop its  fiscal policy                                                               
[slide 22].   Mr.  Ruggiero cautioned that  short term  needs and                                                               
crises can  cause governments  to focus  on short  term solutions                                                               
instead  of long  term  issues,  which are  more  lucrative.   He                                                               
listed several issues affecting Alaska [slide 24].                                                                              
                                                                                                                                
REPRESENTATIVE BIRCH  restated the merits  of Senate Bill  21 and                                                               
suggested the current tax structure  should be allowed to provide                                                               
stability for a year or more.                                                                                                   
                                                                                                                                
MR. RUGGIERO  reiterated two bills  related to oil and  gas taxes                                                               
have  been  introduced to  the  legislature,  thus the  committee                                                               
should have  a framework from  which to address  possible changes                                                               
during  this  legislative  session.     In  further  response  to                                                               
Representative Birch, he said he has read HB 111.                                                                               
                                                                                                                                
REPRESENTATIVE BIRCH  concluded the  presenter is  advocating for                                                               
changes  to the  current  tax structure  through the  legislation                                                               
advanced  by  the  co-chairs  of  the  House  Resources  Standing                                                               
Committee.                                                                                                                      
                                                                                                                                
MR. RUGGIERO restated  at this time he is not  advocating for any                                                               
legislation associated with oil tax.                                                                                            
                                                                                                                                
CO-CHAIR  TARR recalled  during  the debate  on  Senate Bill  21,                                                               
legislators never considered oil prices under $60 [per barrel].                                                                 
                                                                                                                                
MR. RUGGIERO  turned attention to  the discussion of  the drivers                                                               
that  became factors  in the  design of  the ACES  legislation in                                                               
2007, and  advised different fiscal  systems are  appropriate for                                                               
different  sets of  drivers.    At that  time,  the Alaska  State                                                               
Legislature identified the drivers -  listed on slide 24 - around                                                               
which to design ACES.                                                                                                           
                                                                                                                                
2:25:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH  questioned why  the  ACES  tax policy  was                                                               
amended by  the legislature  to double the  tax rate  proposed by                                                               
the [administration of former  Governor Sarah Palin, 12/06-7/09];                                                               
he  recalled the  Palin Administration  proposal  was a  reasoned                                                               
progressive increase in  the tax rate, and  the legislature added                                                               
an egregious  progression to an unknown  tax rate.  He  asked for                                                               
the origin of the legislative amendment.                                                                                        
                                                                                                                                
MR.  RUGGIERO advised  the administration  proposed  in ACES  tax                                                               
policy progressivity of 0.2 percent,  and the legislature changed                                                               
the rate to  0.4 percent and after 50 percent  was reached, added                                                               
0.1 progressivity.                                                                                                              
                                                                                                                                
REPRESENTATIVE  BIRCH opined  the amendment  prevented investment                                                               
and was a horrible mistake.                                                                                                     
                                                                                                                                
MR. RUGGIERO pointed  out after ACES was  enacted investment went                                                               
up, as  did the number  of jobs, and the  rate of decline  on the                                                               
North Slope  was less;  all of  the improvements  did occur  to a                                                               
certain degree.   He then presented his perspective  of the goals                                                               
for  Alaska fiscal  design as  follows:   keep TAPS  running with                                                               
additional investment in existing  fields; encourage new players;                                                               
develop  Cook Inlet  gas; incent  unconventional  fields such  as                                                               
heavy oil and shale; create  a self-correcting fiscal policy that                                                               
is not  tied to a specific  price or production rate  [slide 25].                                                               
He  turned  to finding  the  right  balance  of fair  share,  and                                                               
cautioned against reaching the "tipping  point" for operators and                                                               
the government.   He  restated the importance  of looking  to the                                                               
future,  recognizing the  past may  not be  relevant [slide  27].                                                               
From Mr.  Ruggiero's experience,  finding the  fair share  is one                                                               
part science and  three parts art, using creativity  to factor in                                                               
the basins, the location, and  the needs of the government [slide                                                               
28].   Slide  29 illustrated  revenues that  generally go  to the                                                               
operator such  as finding, development, and  operating costs, and                                                               
the  cost  of capital,  which  causes  debate.   In  theory,  the                                                               
government collects  money above the operator's  return; however,                                                               
if government taxes  are high, operators believe  there should be                                                               
a higher cost  of capital.  A government that  holds operators to                                                               
a certain rate  will find that operators  need additional capital                                                               
costs  for successful  fields to  cover  the cost  of dry  holes.                                                               
Further, many regimes  can keep capital costs  down and determine                                                               
a fair  return [slide  29].  He  noted the  aforementioned theory                                                               
and practice  illustrated on slide 29  will change if there  is a                                                               
major reduction to federal corporate income taxes [slide 30].                                                                   
                                                                                                                                
REPRESENTATIVE BIRCH  inquired as to whether  Alaska includes the                                                               
owner's  royalty share  as  a component  of  the government  take                                                               
[shown on slides 29 and 30].                                                                                                    
                                                                                                                                
2:35:33 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO said  yes,  royalty  is included  in  rents to  the                                                               
government.   He  continued, advising  that a  comparison of  the                                                               
percentage of government  take does not tell the  whole story; in                                                               
fact, in developing  fields, the timing of when the  tax is taken                                                               
is  critically important.   Slide  31 was  a graph  of government                                                               
take  for  a hypothetical  field  calculated  through the  fiscal                                                               
regimes  of  several  countries.     The  blue  bars  represented                                                               
government  take  prior to  the  operator  recovering costs,  the                                                               
yellow  bars  represented  government  take after  a  15  percent                                                               
return  on capital,  and the  green  bars represented  government                                                               
take after  all costs,  plus a 15  percent return  on investment.                                                               
The timing  of government  take greatly affects  the risk  to the                                                               
operator:   slide 32 illustrated  the unfavorable,  moderate, and                                                               
favorable risk  levels for  the same  countries as  determined by                                                               
the timing of their government take.                                                                                            
                                                                                                                                
REPRESENTATIVE RAUSCHER  asked whether Alaska is  included within                                                               
the U.S. state take on slide 31, and risk level on slide 32.                                                                    
                                                                                                                                
MR.  RUGGIERO said  the  U.S. representation  is  a generic  that                                                               
includes royalty, severance taxes, and  corporate income tax.  In                                                               
further  response to  Representative Rauscher,  he explained  the                                                               
intent of the graph is to  aid in understanding that all taxes at                                                               
a given  percentage are not  equal, when  the timing and  risk to                                                               
the project  are considered.   Mr. Ruggiero  summarized designing                                                               
fiscal systems  for countries relates  to the following:   no two                                                               
regimes  are alike;  take experiences  from the  past; look  at a                                                               
country's  needs; find  the best  design.   Furthermore, just  as                                                               
governments may  seek certain factors  from a fiscal  policy, the                                                               
operators  are  also  unique  in  size,  capital  structure,  and                                                               
purpose  [slide 33].    He directed  attention  to credits  under                                                               
Alaska's past fiscal systems, and  observed credits were designed                                                               
to help  Alaska remain  competitive.   From the  present activity                                                               
and   production,  it   appears  credit   incentives  have   been                                                               
successful.    The  current   production  is  predominately  from                                                               
existing fields;  although there  have been new  discoveries, the                                                               
large new  fields will be  in development  for six to  ten years,                                                               
and  Alaska's tax  regime must  be  sufficiently predictable  and                                                               
known  to  instill  confidence  in  investors  during  that  time                                                               
period, and  over the  first ten to  fifteen years  of production                                                               
[slide 35].                                                                                                                     
                                                                                                                                
2:43:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  reviewed the  credits that  were introduced                                                               
in 2013  with the intent to  incent smaller companies.   He noted                                                               
the  governor's veto  of the  payments due  for the  credits, and                                                               
asked for Mr. Ruggiero's global perspective on credits.                                                                         
                                                                                                                                
MR.  RUGGIERO   advised  Alaska  cannot  change   its  geography,                                                               
environmental issues, and  higher cost of operation;  in order to                                                               
attract capital and new operators  away from other regimes, there                                                               
must be  incentives to produce  and reinvest in Alaska's  oil and                                                               
gas fields.   He said, "I  do think that there  is something that                                                               
needs to  be done to  encourage people  to come and  to encourage                                                               
the investment,  but I've  not yet  got any  recommendations with                                                               
respect to  what form that  takes and  how that should  be done."                                                               
Slide 36 listed examples of how  to use various fiscal tools; for                                                               
example, royalty can be fixed,  step, variable tied to production                                                               
or profitability,  royalty relief,  and first  tranche petroleum,                                                               
in  which  royalty  is  split  between  the  government  and  the                                                               
operator.  One area of  consideration for Alaska is credit versus                                                               
deduction.  Slide 38 illustrated  comparison data, including full                                                               
cycle economics, marginal dollar splits,  and bonus payments.  He                                                               
cautioned   most   comparisons   are  of   marginal   take   with                                                               
assumptions.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOHNSON asked  for an  explanation of  full cycle                                                               
economics and marginal dollar splits.                                                                                           
                                                                                                                                
MR.  RUGGIERO said  full cycle  economics  are economic  analyses                                                               
over  the  life  of  a field  from  exploration  to  abandonment,                                                               
looking  at  the  split  between  the  operator  and  government.                                                               
Marginal dollar analyses are of  the impact of additional revenue                                                               
or less cost on government take and operator profit.                                                                            
                                                                                                                                
2:49:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR informed the committee  DOR will present life cycle                                                               
economics related to Alaska fields at an upcoming hearing.                                                                      
                                                                                                                                
REPRESENTATIVE BIRCH  returned attention to slide  38 and pointed                                                               
out in Alaska government take is near 60 percent and increasing.                                                                
                                                                                                                                
MR. RUGGIERO advised the slide  represents government take during                                                               
1998  through  2007,  when  overall   government  take  was  62.5                                                               
percent.                                                                                                                        
                                                                                                                                
REPRESENTAIVE BIRCH  said the percent  represented is close  to a                                                               
one-third, one-third, one-third target advocated by some.                                                                       
                                                                                                                                
MR. RUGGIERO restated the theory  that an operator recovers their                                                               
costs plus a fair return, and the rest goes to the government.                                                                  
                                                                                                                                
REPRESENTATIVE  PARISH  questioned  whether  the  governments  on                                                               
slide  38  collect a  corporate  portion,  or have  non-sovereign                                                               
holders of royalties.                                                                                                           
                                                                                                                                
2:53:07 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO advised  the source of the data  is Daniel Johnston,                                                               
who generally  represents a  marginal dollar  split, thus  he was                                                               
unsure  what was  included in  the analysis.   Slide  39 reviewed                                                               
factors of the  marginal dollar versus the  overall project split                                                               
economics  based on  a  hypothetical North  Slope  project.   The                                                               
overall project  government take  was 55  percent to  60 percent,                                                               
and  for on  a marginal  dollar  basis, depending  on price,  the                                                               
split was nearer  70 percent government take.   Also in comparing                                                               
Alaska  with   other  regimes,  many  comparisons   fail  due  to                                                               
misunderstood  credits,  uplifts,  waterfall  priority,  caps  on                                                               
deductions  or credits,  sliding scales,  and other  factors.   A                                                               
comparison of  Alaska and  Texas revealed in  Texas, in  the rare                                                               
instance of  production from  legacy state  land, the  royalty is                                                               
12.5 percent;  on state land  the royalty is 20  percent; private                                                               
leases are near  30 percent.  In addition,  Texas state severance                                                               
and ad  valorem gross taxes range  from 4 percent to  10 percent,                                                               
and acreage is sold at prices  ranging from $2,500 to $30,000 per                                                               
acre.   He  concluded a  typical horizontal  shale well  in Texas                                                               
produces between  300,000 and 500,000  barrels on 160  acres, and                                                               
costs to the operator for  land, drilling, and operating expenses                                                               
would  total approximately  $20 to  $40 per  barrel.   Therefore,                                                               
using a  flat $60  oil price,  in Texas the  split of  the profit                                                               
would be 30 percent to the  operator and 70 percent to government                                                               
and the royalty holder [slide 40].                                                                                              
                                                                                                                                
2:59:23 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO provided information on  Norway for the committee to                                                               
review [slide  41].  He  observed Alaska's current tax  system is                                                               
complex  with  many  moving  parts   -  which  make  it  hard  to                                                               
administer  and   audit  -   such  as   geographical  separation,                                                               
allowances, credits,  and minimum  tax.   Also, the  system lacks                                                               
the  data  transparency  needed  to  inform  decisions,  and  the                                                               
industry needs to  partner closer with the state.   There are too                                                               
many factors tied  to fixed events, and he  suggested using self-                                                               
correcting mechanisms [slide  43].  He informed  the committee of                                                               
the Extractive  Industries Transparency Initiative  (EITI), which                                                               
was instigated  by World  Bank and is  active in  many countries.                                                               
The initiative is  a global movement to make  public all payments                                                               
from  companies  in  extractive industries  to  governments,  and                                                               
slide  46  illustrated  participating  countries.   In  fact,  in                                                               
Norway, all  payments to the  government are made public,  and in                                                               
the  United Kingdom  (UK),  all companies  listed  on the  London                                                               
Stock Exchange must  make tax payments public.   He provided 2015                                                               
tax  payments  made to  Alaska  by  BP.    In 2018,  the  Federal                                                               
Communication Commission will require  reporting for FY 17 [slide                                                               
47].     Lastly,   he   acknowledged   taxpayer  information   is                                                               
confidential;  however,  in  many   countries  detailed  data  is                                                               
available,  and where  governments  grant licenses,  they own  or                                                               
have  rights to  all  the data  and it  is  published.   Further,                                                               
historical data  is published,  as well  as forward  forecasts of                                                               
production, capital  costs, and major refurbishments  on existing                                                               
fields.   The aforementioned  information ensures  the government                                                               
its fiscal  system will  generate investment  and competitiveness                                                               
in the world market [slide 48].                                                                                                 
                                                                                                                                
REPRESENTATIVE BIRCH  stated the Department of  Natural Resources                                                               
is  cataloging seismic  data  on  the North  Slope  that will  be                                                               
available to the public.                                                                                                        
                                                                                                                                
REPRESENTATIVE  JOHNSON observed  the  current  tax structure  is                                                               
bringing  in more  revenue than  would the  ACES tax  system, and                                                               
asked whether the state should return to ACES.                                                                                  
                                                                                                                                
MR.  RUGGIERO stated  that  is  true for  the  current year  when                                                               
viewed in "narrow isolation," however,  ACES taxed heavily during                                                               
periods  of windfall  profits to  accumulate savings  for use  in                                                               
periods of low profits.  He  agreed ACES would take less now, but                                                               
would take more during the good times.                                                                                          
                                                                                                                                
[HB 111 was held over.]                                                                                                         
                                                                                                                                
3:07:21 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no further business before the committee, the House                                                                 
Resources Standing Committee meeting was adjourned at 3:07 p.m.                                                                 

Document Name Date/Time Subjects
HB111 Supporting Document-Castle Gap Advisors 2.19.17.pdf HRES 2/20/2017 1:00:00 PM
HB 111
HB111 Supporting Document - CY2016 Education Tax Credit Report from Revenue Commissioner Hoffbeck 2.15.17.pdf HRES 2/20/2017 1:00:00 PM
HB 111
HB111 ver O 2.8.17.PDF HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Sectional Analysis 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Sponsor Statement 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111
HB111 Fiscal Note DOR-TAX 2.12.17.pdf HRES 2/20/2017 1:00:00 PM
HB 111