Legislature(2017 - 2018)CAPITOL 106

02/27/2017 07:00 PM RESOURCES

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Audio Topic
07:01:13 PM Start
07:01:36 PM HB111
08:39:45 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Location Change --
-- Please Note Time Change --
+= HB 111 OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
Work Session with Rich Ruggiero, Oil & Gas
Consultant, Legislative Budget & Audit Committee
**Streamed live on AKL.tv**
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                       February 27, 2017                                                                                        
                           7:01 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 Chris Tuck (alternate)                                                                                           
Representative Mike Chenault (alternate)                                                                                        
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
WORK SESSION WITH RICH RUGGIERO, OIL & GAS CONSULTANT,                                                                          
LEGISLATIVE BUDGET & AUDIT COMMITTEE                                                                                            
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
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                                                                              
02/20/17       (H)       Heard & Held                                                                                           
02/20/17       (H)       MINUTE(RES)                                                                                            
02/22/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/22/17       (H)       Heard & Held                                                                                           
02/22/17       (H)       MINUTE(RES)                                                                                            
02/22/17       (H)       RES AT 6:30 PM BARNES 124                                                                              
02/22/17       (H)       Heard & Held                                                                                           
02/22/17       (H)       MINUTE(RES)                                                                                            
02/24/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/24/17       (H)       Heard & Held                                                                                           
02/24/17       (H)       MINUTE(RES)                                                                                            
02/27/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
02/27/17       (H)       RES AT 7:00 PM CAPITOL 106                                                                             
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
RICHARD RUGGIERO, Consultant                                                                                                    
Legislative Audit and Budget Committee                                                                                          
Alaska State Legislature; Managing Partner                                                                                      
Castle Gap Advisors                                                                                                             
Castle Gap Energy Partners                                                                                                      
Houston, Texas                                                                                                                  
POSITION STATEMENT:  Discussed net operating loss and credits                                                                 
and presented a model showing a range of prices with Alaska's                                                                   
current tax bill applied to them.                                                                                               
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
7:01:13 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  GERAN   TARR  called   the  House   Resources  Standing                                                             
Committee  meeting  to  order  at   7:01  p.m.    Representatives                                                               
Rauscher, Drummond, Talerico, Westlake,  Josephson, and Tarr were                                                               
present at  the call to  order.  Representatives  Johnson, Parish                                                               
and Birch arrived as the meeting was in progress.                                                                               
                                                                                                                                
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
                                                                                                                                
7:01:36 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR announced that the  only order of business would be                                                               
a Work  Session with Rich Ruggiero,  Oil & Gas Consultant  to the                                                               
Legislative Budget and Audit Committee,  pertaining to 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."                                                                                                                
                                                                                                                                
7:02:31 PM                                                                                                                    
                                                                                                                                
RICHARD RUGGIERO,  Managing Partner, Castle Gap  Advisors, Castle                                                               
Gap Energy  Partners, said he  would discuss the  relationship of                                                               
credits - net operating losses  (NOLs) taken as credits and carry                                                               
forwards - and the consequence of  giving credits at one rate and                                                               
taxing the  income at a  different rate.   He said he  would also                                                               
show a  model of a  range of  prices applied to  Alaska's current                                                               
tax bill versus  the "bracketed net" he said  he discussed during                                                               
the 1:00 p.m. House Resources Standing Committee meeting.                                                                       
                                                                                                                                
MR. RUGGIERO,  from his  laptop computer,  projected an  image he                                                               
called  a  dashboard, which  he  explained  is  a simple  way  to                                                               
calculate  the effects  of doing  things in  different ways.   He                                                               
pointed to a graph showing  the current tax system, the "producer                                                               
take" percentage, the  effective tax rate, and  the bracketed net                                                               
system.   He  noted some  deviation  between a  total net  system                                                               
bracketed with  no gross  revenue reduction  (GVR) or  per barrel                                                               
credits versus  Alaska's current  system, which  has GVR  and per                                                               
barrel  credits based  on certain  prices.   He talked  about the                                                               
percent of producer  take, the percent of effective  tax, and the                                                               
Alaska North  Slope (ANS) West Coast  market price for oil.   Mr.                                                               
Ruggiero said this  model allows for testing certain  things.  He                                                               
highlighted  an  "uptick," which  occurs  where  the minimum  tax                                                               
takes over -  assuming a hard floor.   He said if he  were to set                                                               
the minimum tax at zero, then  at certain prices there would be a                                                               
loss.                                                                                                                           
                                                                                                                                
MR. RUGGIERO said  to determine the cost he put  in two different                                                               
multipliers.  He continued as follows:                                                                                          
                                                                                                                                
     In an  interesting circumstance,  your tariff  could go                                                                    
     down from  the plus  or minus $10  per barrel  it's at,                                                                    
     quite  conservatively, if  you had  a couple  major new                                                                    
     finds.   The  tariff is  ...  fixed cost  plus a  small                                                                    
     variable component,  and it's divided by  the number of                                                                    
     barrels going  through to recover  that.  So,  it's the                                                                    
     cost recovery, plus whatever the  return on the capital                                                                    
     employed  as  a component  of  the  tariff, divided  by                                                                    
     barrels.   So, if  you doubled  the number  of barrels,                                                                    
     you  might actually  see that  cost go  down.   But you                                                                    
     might see operating costs on  a per barrel basis go up,                                                                    
     as  you  have general  inflation  and  things get  more                                                                    
     difficult  and you  have fewer  barrels  per well  that                                                                    
     you're putting out.  So, I  just built this to where we                                                                    
     could  look at  multipliers going  separately on  those                                                                    
     two and actually going in opposite directions.                                                                             
                                                                                                                                
7:08:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH  asked   for  clarification  regarding  the                                                               
current effective rate.                                                                                                         
                                                                                                                                
MR. RUGGIERO said the rate is about 8 percent.                                                                                  
                                                                                                                                
REPRESENTATIVE  BIRCH  surmised  the  bracketed  and  [effective]                                                               
rates track closely.                                                                                                            
                                                                                                                                
MR. RUGGIERO confirmed  that is correct.  He pointed  to a second                                                               
bracket showing 20  percent and showed how if he  changed that to                                                               
15 percent, "it  can actually bring things down."   He said it is                                                               
possible to play with the size  of each bracket step and the rate                                                               
in each bracket and to "decide  how you want to match things up."                                                               
He talked about  a scenario in which inflation  doubles cost, the                                                               
effective tax goes to "100-plus  percent," and the minimum tax is                                                               
"eating  up everything  there is  to be  had."   He said  in this                                                               
scenario, the bracketed  system "stays in the same  shape, but it                                                               
keeps moving to the right as  the cost structure goes up, because                                                               
it's based on the [production  tax value] (PTV)."  Deviation then                                                               
occurs  between  the bracketed  system  and  the current  system,                                                               
because  the current  system  bases the  credits  on an  absolute                                                               
price in  the market.   He demonstrated  how he could  change the                                                               
numbers to "inch  one curve closer to the other  one and match it                                                               
up."   He said there  would never be an  exact match over  a wide                                                               
range of scenarios, but the two could come close.  He continued:                                                                
                                                                                                                                
     The beauty of something like this  is this is it.  It's                                                                    
     just like  doing your income  tax at home:   You've got                                                                    
     your  liable  deductions;  you  figure  out  what  your                                                                    
     adjusted  ... net  income is  ...;  and you  go to  the                                                                    
     tables and you figure out your  tax.  You don't have to                                                                    
     count barrels;  you don't have to  worry about monthly;                                                                    
     you don't have worry about  a whole lot of things; this                                                                    
     would just be done -- you  know, trued up at the end of                                                                    
     the year  based off  of the  averages and  your average                                                                    
     PTV and the rest.                                                                                                          
                                                                                                                                
7:11:58 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR  summarized Mr. Ruggiero was  showing the committee                                                               
that through the  manipulation of the numbers,  the bracketed and                                                               
current systems can mirror each other more or less closely.                                                                     
                                                                                                                                
MR. RUGGIERO responded that is correct.   He indicated that it is                                                               
a  matter  of  playing  with nuances  and  deciding  whether  the                                                               
objective is to  have all the credits "and  everything else built                                                               
in" to  the current system to  be at the  low end or high  end of                                                               
the profit  range and  how to  "pull these  two together  to make                                                               
them  work."    He  shared   that  when  he  was  developing  the                                                               
[dashboard], he  was surprised  at how  closely through  the six-                                                               
bracket system he developed he  could match [Alaska's various oil                                                               
tax  credit systems],  such  as  Senate Bill  21  [passed in  the                                                               
Twenty-Eighth  Alaska  State  Legislature]  and  House  Bill  247                                                               
[passed in  the Twenty-Ninth Alaska State  Legislature], with the                                                               
step net system.                                                                                                                
                                                                                                                                
7:14:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PARISH  said he  is  leery  of "bracket  systems"                                                               
because, at a  certain point, "spending one  additional dollar on                                                               
... widgets on  the Slope would result in a  shift in potentially                                                               
millions  of dollars  of liability  or debt  to the  state."   He                                                               
asked Mr. Ruggiero if he could allay his concern.                                                                               
                                                                                                                                
MR. RUGGIERO  said under continuous  progressivity, such  as with                                                               
Alaska's Clear and Equitable Share  (ACES) [passed in the Twenty-                                                               
Fifth  Alaska  State Legislature],  although  the  change in  the                                                               
absolute tax  may have  been, for example,  from 72  [percent] to                                                               
71.6 [percent], the  marginal change might have  been 95 percent.                                                               
He  said that  was the  nature of  continuous progressivity.   He                                                               
continued as follows:                                                                                                           
                                                                                                                                
     Under the  bracketed system, if  I'm in the  35 percent                                                                    
     bracket, I'm  in a range of  PTV, let's say from  50 to                                                                    
     60  dollars a  barrel; if  I change  that PTV  by $1  a                                                                    
     barrel, it  stays at that  same percentage  rate that's                                                                    
     in that bracket;  it doesn't impact all  the tax that's                                                                    
     paid on  working up  to that  bracket that  they're in.                                                                    
     So, ... an  example that I had this  afternoon, you pay                                                                    
     that  maximum of  $2 on  the  first bracket.   And  so,                                                                    
     whether you're up here adding  or subtracting a dollar,                                                                    
     you're still  paying $2 on  that first  bracket; paying                                                                    
     $4 on the  second bracket; you're paying  et cetera for                                                                    
     PTV.   So, you  don't get that  type of  drastic change                                                                    
     that  you're  talking  about  with  the  ...  bracketed                                                                    
     system.                                                                                                                    
                                                                                                                                
7:16:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH questioned  why, if  the bracketed  net tax                                                               
closely approximates  what Alaska has currently,  the state would                                                               
want to change.                                                                                                                 
                                                                                                                                
MR. RUGGIERO  said he is  offering an alternative  system wherein                                                               
the state  does not have  to track  the per barrel  credits, does                                                               
not  to have  the  GVR, and  does not  have  "special Cook  Inlet                                                               
versus  North Slope  versus Middle  Earth."   All  that could  be                                                               
dealt with under one system, he explained.                                                                                      
                                                                                                                                
REPRESENTATIVE BIRCH said the state  is currently operating under                                                               
Senate  Bill 21.    He asked  Mr. Ruggiero  to  confirm that  his                                                               
proposal  closely  approximates  Alaska's present  structure,  in                                                               
terms of the current effective rate and producer share.                                                                         
                                                                                                                                
MR.  RUGGIERO responded  that what  he is  showing the  committee                                                               
represents "how  it would  apply to, let's  say, the  North Slope                                                               
where you  have ample  production, ample  revenues, and  the cost                                                               
structure."  He continued as follows:                                                                                           
                                                                                                                                
     I have not delved into...   But if there was a decision                                                                    
     to go this way, you would  then need to test it against                                                                    
     specific   Cook  Inlet   fields.      I  believe   ...,                                                                    
     intuitively, that it  will work for the  low dollar PTV                                                                    
     Cook Inlet  fields, if  you have  a very  low base-rate                                                                    
     tax to  start.   So, instead  of starting  at 35,  as I                                                                    
     said, you  could start at a  5, you could start  at 10,                                                                    
     and then  that would still  leave the tax rate  on Cook                                                                    
     Inlet things  very low,  and only  tax ...  higher when                                                                    
     you   got   into   higher  profitability   fields   and                                                                    
     operations.                                                                                                                
                                                                                                                                
REPRESENTATIVE BIRCH  explained that Senate  Bill 21 is  doing as                                                               
intended, so  he questioned  why the state  would "throw  it out"                                                               
and "start  over again."   Notwithstanding  that, he  indicated a                                                               
willingness to listen.                                                                                                          
                                                                                                                                
MR.  RUGGIERO  said he  finds  it  interesting  to see  what  has                                                               
transpired ten  years since ACES.   He said one of  the goals was                                                               
durability.  He noted that  the cost structure had almost tripled                                                               
in those  ten years, and if  it doubles or triples  further, then                                                               
"all of a sudden  your credits that are based on  oil price - the                                                               
$8 becomes  meaningless, because  costs will have  overtaken it."                                                               
The impact  will not be  as intended when  it was low  profit per                                                               
barrel to the operators.  He said  the net system that sets a tax                                                               
for the first $10 per barrel  profit remains the same tax whether                                                               
that $10  occurs at $100, $150,  or $200 a barrel.   He explained                                                               
that  was  his   reasoning  for  putting  his  idea   out  as  an                                                               
alternative  going  forward that  could  take  away many  of  the                                                               
moving parts and create a  simple system that mirrors personal or                                                               
corporate income tax.                                                                                                           
                                                                                                                                
7:19:56 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR offered  her understanding  that Mr.  Ruggiero had                                                               
said  that Alaska's  current system,  attached  to fixed  prices,                                                               
could deteriorate  in value  over time  because of  inflation and                                                               
capital and  operating cost  increases "versus  doing it  off the                                                               
profit,"   which  she   alluded   would   mean  recognizing   the                                                               
circumstances under which the companies  under a net system would                                                               
have a  profit and "being more  sensitive to that than  the fixed                                                               
price that may not have the same impact."                                                                                       
                                                                                                                                
MR. RUGGIERO responded, "Exactly."                                                                                              
                                                                                                                                
7:21:54 PM                                                                                                                    
                                                                                                                                
CO-CHAIR   TARR  noted   that  the   committee  had   been  shown                                                               
calculations based  on the cost  multiplier of 100 percent.   She                                                               
said, "One  particular new find  is very  far away and  ... would                                                               
likely have pretty  high development costs."   She suggested that                                                               
200 percent  may not even be  high enough, and she  would like to                                                               
see the multiplier set at double that.                                                                                          
                                                                                                                                
MR. RUGGIERO  illustrated the  curve at  double the  current cost                                                               
structure.   He  indicated that  a  facility far  from the  North                                                               
Slope that required a separate  facility and pipelines could have                                                               
a considerably higher  cost structure.  As the  zero profit point                                                               
moves further  to the  right in  the curve,  he said,  the impact                                                               
starts to  show wherever  the effective  tax is  swinging upward,                                                               
which in this example  start at about $95.  He  said that is when                                                               
the 4  percent minimum tax, as  a hard floor, "starts  kicking in                                                               
and  moving up."   In  response  to Co-Chair  Tarr regarding  the                                                               
tariff multiplier, he stated that  if there is [an oil discovery]                                                               
big  enough to  warrant development  and production,  and if  the                                                               
tariff  is taken  down to  75  percent of  what it  is, then  "it                                                               
didn't change the  shape too much; it scooted some  things to the                                                               
left."   He said the  point at which  there would be  zero profit                                                               
would occur  at a lower  price.  He added,  "But you could  get a                                                               
lowering  of the  tariff for  most of  the players  in the  state                                                               
overall if we  got a lot more production coming  through."  In an                                                               
example  where  the  tariff  is   calculated  up  50  percent  to                                                               
accommodate two pipelines,  he said that "it is  keeping the same                                                               
general  shape."   He  said  [the bracketed  net  system] can  be                                                               
changed  by  manipulating  the   brackets  and  the  percent  tax                                                               
applicable in each  bracket.  He added, "So, I  can take it down,                                                               
I can  bring it  up, relative  to where your  current set  of tax                                                               
structures has their effective rate in the producer share."                                                                     
                                                                                                                                
7:25:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PARISH  remarked  that  last year  "we  saw  what                                                               
happened when we were unprepared  or exposed at exceptionally low                                                               
... prices."   He  asked Mr.  Ruggiero to  see what  things would                                                               
look like at $40 per barrel.                                                                                                    
                                                                                                                                
MR. RUGGIERO  offered a  conceptual response that  if he  were to                                                               
reset everything  to 100 percent  on the  cost and then  added in                                                               
"45/40, 35/30," then  the gross minimum would take  over to where                                                               
there would eventually  be a loss and "100  percent of everything                                                               
they're making  goes to the state."   He said it  would look like                                                               
what the  committee was  seeing in the  visual example,  but with                                                               
the "X" axis shifted with different numbers on it.                                                                              
                                                                                                                                
MR.  RUGGIERO,   in  response  to   a  follow-up   question  from                                                               
Representative Parish,  indicated that  the example he  had shown                                                               
was simulating  a set of costs  against a market price,  and that                                                               
may be  for one player  or two.   He said  the beauty of  the net                                                               
system is that  each entity with a  different profitability would                                                               
move along the curve with a different effective tax rate.                                                                       
                                                                                                                                
REPRESENTATIVE  PARISH expressed  his excitement  in anticipating                                                               
modifications to federal corporate income tax.                                                                                  
                                                                                                                                
MR. RUGGIERO responded  that he did build in  the possibility for                                                               
modeling  a  significant change,  and  he  asked  if there  is  a                                                               
particular number Representative Parish  would like him to "throw                                                               
in and look at."                                                                                                                
                                                                                                                                
REPRESENTATIVE  PARISH queried,  "If a  corporation were  able to                                                               
pay the  same rate  as ...  the President  of the  United States,                                                               
what would that do to ... the overall picture?"                                                                                 
                                                                                                                                
MR. RUGGIERO offered to pick  a number for Representative Parish.                                                               
He plugged in 20 percent to  his calculations and noted that that                                                               
changed the curve such that if  there is no further increase from                                                               
the  state, the  state curve  stayed the  same, but  the producer                                                               
share moved up because of  the reduction in the federal corporate                                                               
income tax.                                                                                                                     
                                                                                                                                
7:28:46 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  JOSEPHSON said  the  crossover point  is  at about  $82                                                               
right now.   He  stated his assumption  that the  crossover point                                                               
moves to the left if "the GVR and per barrel are left."                                                                         
                                                                                                                                
MR.   RUGGIERO  answered   that  the   crossover  point   is  not                                                               
representative of anything; "it's  actually two separate thoughts                                                               
just plotted on  the same plot."  He said  those two thoughts are                                                               
the producer  take and the  non-producer - or government  - take.                                                               
He said, "When  their take goes to absolute  zero because they're                                                               
at a loss,  but they're still paying some tax,  yours goes to 100                                                               
percent of whatever there is being  paid."  He added that that is                                                               
just a feature of a hard floor minimum tax.                                                                                     
                                                                                                                                
7:30:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  BIRCH offered  his  understanding that  bracketed                                                               
tax is not  mentioned in HB 111, and he  asked how Mr. Ruggiero's                                                               
dashboard calculations relate to the proposed legislation.                                                                      
                                                                                                                                
MR. RUGGIERO  responded that  he understood  there to  be concern                                                               
regarding HB  111 in the  following areas:  cashable  credits and                                                               
what the state's fair share would be  at a low or no profits rate                                                               
for the operators.  He  said the consequence of operating credits                                                               
at one rate  and being taxed at an effective  rate far below that                                                               
creates "a bit  of a very positive bump for  the operator," which                                                               
he indicated may  not have been intended.  He  said he is looking                                                               
at the whole package and  looking for the justification in taking                                                               
the  NOL  credit  percentage from  35  to  15.    He said  he  is                                                               
considering whether the 35 percent  is [the problem] or something                                                               
else.  He  said he studied the overall structure  and the changes                                                               
proposed under  HB 111  and recommended  looking "a  bit broader"                                                               
and  holistically.   He said  the  co-chairs gave  him the  green                                                               
light to figure  out what he would do and  why he would recommend                                                               
it, which  is what he is  talking about now.   He summarized that                                                               
although his work does not go  directly to HB 111, as written, he                                                               
believes that  it goes  to the  intent of  what the  committee is                                                               
trying to do with HB 111, which  is to make structural fixes.  He                                                               
opined that "you can't make  simple structural fixes; you have to                                                               
look at it a bit more holistically."                                                                                            
                                                                                                                                
REPRESENTATIVE  BIRCH explained  that he  is trying  to determine                                                               
whether the committee is building on  what it has or starting off                                                               
with something new.                                                                                                             
                                                                                                                                
MR.  RUGGIERO suggested  that he  is offering  information as  an                                                               
additional  tool  of  which  the  committee  may  not  have  been                                                               
previously aware.                                                                                                               
                                                                                                                                
7:34:08 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR said  that the issue of setting a  fixed price came                                                               
up when considering changes to  credits, and the idea there could                                                               
be unintended consequences  led to the decision  that "this would                                                               
be worthy of comparison."  She  said ACES did not anticipate high                                                               
prices and  Senate Bill 21  did not  anticipate low prices.   She                                                               
confirmed  for Representative  Birch that  the information  being                                                               
provided by Mr. Ruggiero  is not in HB 111 but  is in response to                                                               
the  legislature's  quest  for a  system  that  incentivizes  oil                                                               
producers to continue doing business in Alaska.                                                                                 
                                                                                                                                
7:35:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAUSCHER asked  for confirmation  that HB  111 is                                                               
"our starting point."                                                                                                           
                                                                                                                                
CO-CHAIR  TARR answered,  "Yes."   She remarked  on the  numerous                                                               
amendments that  had been made  to Senate  Bill 21 as  an example                                                               
that  [HB 111]  is  a  framework from  which  the committee  will                                                               
determine the final outcome.                                                                                                    
                                                                                                                                
REPRESENTATIVE RAUSCHER asked what the goal of HB 111 is.                                                                       
                                                                                                                                
CO-CHAIR  TARR directed  attention to  page 7  of Mr.  Ruggiero's                                                               
presentation  during the  1 p.m.  meeting on  the same  day.   As                                                               
shown  on page  7, she  read that  the goals  are to:   keep  oil                                                               
flowing through  the Trans-Alaska Pipeline System  (TAPS) as long                                                               
as  possible;  encourage  exploration   and  development  of  new                                                               
fields; encourage  new operators;  understand and  capture upside                                                               
value  from  existing  fields; and  create  a  durable  petroleum                                                               
taxation system.   She said she imagines that there  will be more                                                               
points for consideration going forward.                                                                                         
                                                                                                                                
REPRESENTATIVE RAUSCHER said it sounds  like with all the changes                                                               
being discussed the result will be  House Bill 247 once more.  In                                                               
response  to Co-Chair  Tarr, he  restated  that following  Senate                                                               
Bill 21  and House Bill  247, "we're just  going to end  up there                                                               
again, it seems like."                                                                                                          
                                                                                                                                
CO-CHAIR JOSEPHSON  said House Bill 247  is Alaska law.   He said                                                               
there was  a version that passed  the House, but not  the Senate,                                                               
in early  June [2016];  it largely reformed  tax credits  in Cook                                                               
Inlet.   He added, "And largely  did not do anything,  although a                                                               
couple things on the North  Slope."  He offered his understanding                                                               
that House Bill  247 left up to a $70  million annual tax credit,                                                               
"depending  on whether  there was  a haircut."   He  continued as                                                               
follows:                                                                                                                        
                                                                                                                                
     ...  That  was  the  cashable  part  that  was  at  our                                                                    
     discretion,  but a  company  could  accrue hundreds  of                                                                    
     millions of dollars, and they  could have partners also                                                                    
     accruing  hundreds of  millions of  dollars, and  we're                                                                    
     participating in that at a  35 percent share, and these                                                                    
     totaled,  in FY  17, $775  million.   That's more  than                                                                    
     half  of  what  we  paid  to educate  K-12.    So,  the                                                                    
     committee chairs want  to look at that  sort of outlay,                                                                    
     ... with a  new body, and really consider,  is that the                                                                    
     policy -- Even though it  was rejected by the Senate in                                                                    
     part, we  want to ask them  again:  Do you  continue to                                                                    
     want  to have  an outlay  of $500-$600  million a  year                                                                    
     with  a $3  billion  deficit?   I want  to  see if  the                                                                    
     answer's still yes.                                                                                                        
                                                                                                                                
CO-CHAIR JOSEPHSON concluded  that is part of [the  reason for HB                                                               
111], but there are other elements to the bill.                                                                                 
                                                                                                                                
REPRESENTATIVE  RAUSCHER reiterated  that  he  thinks the  result                                                               
will end up  being something that already exists, but  he said he                                                               
may be wrong.                                                                                                                   
                                                                                                                                
7:40:10 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR related the idea  of durability and said it remains                                                               
a goal  of hers to determine  a system that works  with all price                                                               
fluctuations.   She  recalled  that Mr.  Ruggiero  had said  that                                                               
linking  a  per  barrel  credit  to  a  certain  price  does  not                                                               
necessarily reflect  the cost to the  company; therefore, linking                                                               
[credits]  to companies'  profits  may  be a  better  way to  go,                                                               
because the system  would not be [affected by]  the volatility of                                                               
price.   She  indicated this  is in  alignment with  the comments                                                               
that  have been  heard by  the companies  regarding profitability                                                               
and what  keeps them competitive.   She concluded, "And  that was                                                               
why this particular idea ... was  of interest to me personally to                                                               
explore and  sort of  ... put  some numbers  in there  that would                                                               
help illustrate  it."  She  asked Representative Rauscher  if her                                                               
explanation had helped.                                                                                                         
                                                                                                                                
REPRESENTATIVE RAUSCHER answered yes.                                                                                           
                                                                                                                                
7:42:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE PARISH  asked if  the system being  illustrated by                                                               
Mr. Ruggiero would cause any problems in terms of transparency.                                                                 
                                                                                                                                
MR. RUGGIERO responded  that in a net system, it  is necessary to                                                               
have access  to costs  and to  that on which  the money  is being                                                               
spent.   He said  he is  not sure to  what degree  information is                                                               
being shared currently,  but information would need  to be shared                                                               
to the  extent that  the state could  be comfortable  that "good,                                                               
prudent  operators  spent at  the  level  that  it needed  to  be                                                               
spent."                                                                                                                         
                                                                                                                                
REPRESENTATIVE PARISH  asked if Mr. Ruggiero  had another graphic                                                               
showing final impact in dollars to the state.                                                                                   
                                                                                                                                
MR. RUGGIERO responded:                                                                                                         
                                                                                                                                
     I  altered   the  size  of   three  brackets   and  two                                                                    
     percentages, and  you'll see  that on  the plot,  I was                                                                    
     able to take the net  bracketed from about a 75 percent                                                                    
     correlation to almost a 98  percent correlation to your                                                                    
     current tax law.  So, if  you've got a fiscal note from                                                                    
     the DOR  that says  you should  be receiving  this much                                                                    
     tax at  this sort of price,  then if you'd set  up your                                                                    
     net system  as I've  got it  ... configured  right now,                                                                    
     your numbers  would be  the same;  there should  not be                                                                    
     any difference.                                                                                                            
                                                                                                                                
7:45:11 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOHNSON  asked Co-Chair  Josephson to  restate the                                                               
amount of cash credits the state is currently paying.                                                                           
                                                                                                                                
CO-CHAIR JOSEPHSON  offered his understanding that  the amount is                                                               
$40 million,  but "that's  because of  the veto."   He  said what                                                               
"the independents"  expected from  the state  and what  the state                                                               
expected to  deliver would have  been approximately  $775 million                                                               
in FY 17.   He said it  was about $575 million,  but $200 million                                                               
carried over because of an FY 16 veto.                                                                                          
                                                                                                                                
7:46:08 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH asked  if, with a current  effective rate of                                                               
100 percent, there  is any characterization of what  the State of                                                               
Alaska makes irrespective of the tax structure.                                                                                 
                                                                                                                                
MR.  RUGGIERO  answered  that  in  his  model,  the  100  percent                                                               
indicates that the minimum tax  is "consuming every dollar profit                                                               
that they've got."   He added, "And probably then  some on top of                                                               
it; I just capped it at 100."                                                                                                   
                                                                                                                                
REPRESENTATIVE BIRCH remarked that some  people want to set aside                                                               
royalty share, which he emphasized  is a significant component of                                                               
what the State  of Alaska derives as  an owner of the  asset.  He                                                               
said he wants to ensure that  "we roll that into whatever sort of                                                               
assessment we're making."   He emphasized that  production is the                                                               
key element  to consider for any  plans made.  The  tax, he said,                                                               
is "over  and above that."   He said  he was trying  to interpret                                                               
how Mr. Ruggiero reached the 100 percent amount.                                                                                
                                                                                                                                
MR. RUGGIERO, regarding the option  he had put forward, explained                                                               
that the royalty  is the same for the current  system as it would                                                               
be if the state were to adopt the net bracketed system.                                                                         
                                                                                                                                
REPRESENTATIVE BIRCH  suggested that may  not be the case  if the                                                               
tax  system is  such that  it discourages  investment and,  thus,                                                               
drives down production.                                                                                                         
                                                                                                                                
MR. RUGGIERO replied:                                                                                                           
                                                                                                                                
     If  you  believe,  as  I think  you  stated,  that  the                                                                    
     current   system  is   attracting  investment   and  is                                                                    
     bringing more barrels  into the pipe, since  what I put                                                                    
     up here  as an  alternative taxes  it exactly  the same                                                                    
     way,  then it  should  be just  as  effective at  doing                                                                    
     those things you would like to see happen.                                                                                 
                                                                                                                                
7:48:32 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR  talked about the distinction  between producer and                                                               
non-producer  and that  the royalty  of  [oil and  gas] found  on                                                               
private  land goes  to the  private landholder  - not  the state.                                                               
She indicated that  some of Mr. Ruggiero's figures  may have been                                                               
requested as  a way  to sort out  "apples to  apples" comparison.                                                               
She mentioned  that the State  of Alaska is competing  with other                                                               
states for investment dollars.                                                                                                  
                                                                                                                                
CO-CHAIR TARR noted  that HB 111, as  currently written, proposed                                                               
to raise the minimum  tax from 4 to 5 percent,  and she asked Mr.                                                               
Ruggiero if he would display that increase for the committee.                                                                   
                                                                                                                                
MR. RUGGIERO said going to 5  percent shows as a slight uptick at                                                               
the lower  end of the  price spectrum, because  a gross tax  is a                                                               
regressive tax  and is "very  penal when there isn't  much profit                                                               
in  the system  to share."   He  indicated that  the low  end, to                                                               
which  he referred,  is the  point  at which  companies would  be                                                               
struggling a little  bit, because the profitability  is not quite                                                               
what they would be expecting.                                                                                                   
                                                                                                                                
CO-CHAIR  TARR next  asked Mr.  Ruggiero  to show  an example  of                                                               
something more dramatic, such as a  change to 10 percent, and she                                                               
observed  that  that  would  change  the  producer  share.    She                                                               
reviewed  some  of  the  examples that  Mr.  Ruggiero  had  shown                                                               
earlier  and asked  him  to  repeat the  example  where the  cost                                                               
multiplier is set  at 200 percent, which reflects  100 percent of                                                               
the producer share  going to the State of Alaska.   She said this                                                               
clearly  reflects   how  the   different  costs   of  development                                                               
influence "how this all really works."                                                                                          
                                                                                                                                
MR.  RUGGIERO  pointed  out  that when  doubling  the  costs  and                                                               
looking several years into the  future, he adjusted the brackets,                                                               
which resulted  in "the two curves  lying on top of  each other."                                                               
Going back  to 100  percent results  in "more  separation between                                                               
the curves."  He said the calculation  can be set up to start off                                                               
with some deviation today and  increased deviation over time.  He                                                               
said it is  possible to determine where the  effective tax should                                                               
be the  same and  how much  deviation to have  on either  side of                                                               
that timeframe  in order to  have some durability -  "some length                                                               
of time where  this will work and be reasonable  compared to what                                                               
you have now."                                                                                                                  
                                                                                                                                
CO-CHAIR  TARR  said  she has  learned  that  although  different                                                               
systems have different incentives, when  the whole package is put                                                               
together, it  is desirable  to consider  the effective  tax rate.                                                               
She offered her understanding that  Mr. Ruggiero had shown a "low                                                               
bracket for low  prices" and that at  a 5 percent tax,  it is not                                                               
until profit increases that the percent tax increases.                                                                          
                                                                                                                                
MR. RUGGIERO confirmed that is correct.                                                                                         
                                                                                                                                
CO-CHAIR TARR invited Mr. Ruggiero to show the last scenario.                                                                   
                                                                                                                                
7:54:42 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO  displayed  a   representational  model  showing  a                                                               
hypothetical  [oil]  field  with the  following  characteristics:                                                               
four years of spending at a  cost of $600 million, followed by 20                                                               
years of  production.   He said  the purpose of  the model  is to                                                               
look  at three  options to  handle NOLs.   He  said every  regime                                                               
allows the producers that spend their  money to recover it.  When                                                               
producers are spending and don't  have the income to offset their                                                               
costs, the  question then is  what mechanism  to use so  that the                                                               
producer will recover  those costs.  He said the  State of Alaska                                                               
has established a mechanism wherein  the producers can take their                                                               
NOL and, at  a given percentage, turn it into  a cashable credit.                                                               
He said "the  majority" of systems carry forward the  loss or the                                                               
cost,  and the  money is  recovered from  future production.   He                                                               
said he is  aware of "just a  couple" that "will convert  it to a                                                               
credit,  then  carry that  credit  forward  to be  deducted  from                                                               
future tax liability."                                                                                                          
                                                                                                                                
MR.  RUGGIERO said  that because  HB 111  proposes to  change the                                                               
percentage at which  the NOLs would be converted  to tax credits,                                                               
he looked at  what the impact would be of  "these three different                                                               
ways of looking at  it."  He said his model  reflects the rate at                                                               
which NOLs are converted to  tax credits, what the effective rate                                                               
is at the  time those tax credits are used,  and what benefit one                                                               
system has over another.   Regarding losses carried over into the                                                               
future, he said  there is a time  value of money that  pays a key                                                               
role into the economics and decision  making as to whether or not                                                               
to invest in a project.                                                                                                         
                                                                                                                                
MR.  RUGGIERO showed  two bar  charts:   the top  one showed  the                                                               
producer  internal  rate  of  return   on  the  project  and  the                                                               
effective tax  rate.  With  an effective  tax rate of  35 percent                                                               
and  an NOL  that was  converted to  tax credits  at 35  percent,                                                               
there  is  no difference  between  carrying  forward credits  and                                                               
carrying forward an  NOL - it is the same  return on the project.                                                               
Conversely, with the ability to "cash  at 35 percent" there is "a                                                               
considerable uplift."   He said  that is because cash  allows the                                                               
recovery of the value of the loss  or credit in the year in which                                                               
it is  incurred, which lessens  the investment in the  first four                                                               
years.   He indicated that  getting the credit four  years sooner                                                               
than  it  would  have  been   obtained  by  subtracting  it  from                                                               
producing operations is indicative of the time value of money.                                                                  
                                                                                                                                
MR.  RUGGIERO then  showed  information on  the  chart and  said,                                                               
"Today you're  plus or minus,  based on your per  barrel credits,                                                               
the average cost that you have,  and the price of the oil; you're                                                               
in the range of the 10 percent  effective tax."  He said having a                                                               
credit created  and with an  NOL occurring and "converting  it at                                                               
35 percent  to a credit," then  applying that credit "in  a world                                                               
where  the effective  tax  that they're  paying  is 10  percent,"                                                               
results  in  "a   tremendous  bump  in  the   [internal  rate  of                                                               
return](IRR) of the project by doing  that."  He added, "And they                                                               
... actually get a commensurate bump  in the net present value of                                                               
the project  overall, as well."   He said that the  parameters of                                                               
the net present value improve depending  on the rate at which the                                                               
credits  are created  and what  the effective  tax rate  is.   He                                                               
offered an example.                                                                                                             
                                                                                                                                
8:01:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE BIRCH  asked if  the credits  had been  "rolled in                                                               
there."                                                                                                                         
                                                                                                                                
MR. RUGGIERO answered  yes.  In response to  a follow-up question                                                               
from  Representative  Birch,  he said  his  hypothetical  project                                                               
example was  created to  allow the committee  to choose  at which                                                               
rate losses  are converted to  credits and what effective  tax is                                                               
in place  when the  credits are  used.   He indicated  that doing                                                               
this shows  the value  for the  cost to the  operator and  to the                                                               
state of  "creating them in ...  one environment at one  rate and                                                               
using them in  a different environment at a different  rate."  He                                                               
specified three examples:  one  represents the project being able                                                               
to take  its investments during its  four-year development period                                                               
and converting it  to cash; the second represents  taking the NOL                                                               
and converting  it at  a given  rate to a  tax credit,  not being                                                               
able to  cash it, but using  that tax credit once  the field goes                                                               
into production  and "using  those credits  against the  tax bill                                                               
that they would otherwise have";  and the third represents taking                                                               
the NOL  and carrying  it forward to  be deducted  against future                                                               
taxable income  before the  tax is calculated  and assessed.   He                                                               
explained that  when a credit  is given at  35 percent of  a loss                                                               
but  is  then applied  against  a  10,  12,  or even  15  percent                                                               
effective tax,  that is a  considerable incentive that  the state                                                               
has given.                                                                                                                      
                                                                                                                                
8:04:12 PM                                                                                                                    
                                                                                                                                
The committee took an at ease from 8:04 p.m. to 8:08 p.m.                                                                       
                                                                                                                                
8:08:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR  reviewed  that   there  had  been  discussion  of                                                               
producer internal  rate of return,  and she mentioned  the Alaska                                                               
Liquefied Natural Gas Project (AKLNG)  and the possible desire of                                                               
partners to  get a  15 percent  rate of  return, while  the state                                                               
might consider  a lower internal rate  of return.  She  offered a                                                               
recap of the three examples Mr.  Ruggiero had just given prior to                                                               
the at-ease.                                                                                                                    
                                                                                                                                
MR. RUGGIERO  offered clarification regarding the  differences he                                                               
had previously stated related to an  NOL created and given the 35                                                               
percent cash  and a carry  forward credit  of 35 percent  that is                                                               
used at  "an effective 15  world" with a  gain from roughly  a 14                                                               
percent IRR  project to an 18  percent IRR project.   The latter,                                                               
he said, would  give a considerable increase, which  at a project                                                               
of  this [hypothetical]  size  would be  worth  a couple  hundred                                                               
million dollars of  net present value at  10 percent discounting.                                                               
He said  that is a benefit  he would assume all  operators, quite                                                               
sophisticated in their modelling, would  notice.  He said, "And I                                                               
believe  that's why  you may  get  some comments  that it's  very                                                               
important to keep  these credits at 35 percent.   And the credits                                                               
at 35 percent,  with your current tax regime,  means that there's                                                               
this little boost to each of  the projects that is out there that                                                               
could be achieved."                                                                                                             
                                                                                                                                
8:11:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR  asked  Mr.  Ruggiero   if  he  could  talk  about                                                               
"uplift."                                                                                                                       
                                                                                                                                
MR. RUGGIERO recommended  not to turn anything  into tax credits,                                                               
but rather  to carry  forward NOLs  and only  use the  NOLs where                                                               
there is production to use them against.   He said, "I do not see                                                               
why the state needs to pay for  things up front ... and get their                                                               
money  back later."   He  said nearly  all regimes  in the  world                                                               
carry  forward  their  costs until  those  costs  are  recovered.                                                               
However, he  said if an NOL  is carried forward for  six or seven                                                               
years, it loses value as compared  to a project where the NOL can                                                               
be recovered  in one  or two  years.  He  stated his  belief that                                                               
Alaska is  in "the plus  zone," because  it allows capital  to be                                                               
deducted as  fast as it can  be recovered.  He  said many regimes                                                               
limit capital recovery through depreciation  schedules or caps on                                                               
the amount of  costs that can be recovered in  a given year, much                                                               
like  corporate taxes.    He  said given  the  size  and cost  of                                                               
projects in  Alaska and the  number of years  it may take  to get                                                               
from development to  production, there can be a loss  in value in                                                               
a project if it  takes too long.  One way  to compensate for that                                                               
lost time  value is to  offer some form  of uplift, which  can be                                                               
annual, such  as NOLs carried until  they can be used,  or a lump                                                               
sum uplift on all capital.                                                                                                      
                                                                                                                                
MR.  RUGGIERO  showed  a  model  that  allows  an  uplift  to  be                                                               
calculated.  He  entered a figure of 10 percent  and continued as                                                               
follows:                                                                                                                        
                                                                                                                                
     What you'll notice is we  start bringing the NOL at the                                                                    
     different  conditions of  what  it's created  at -  the                                                                    
     effective tax  - bring them  closer to the line  of the                                                                    
     cashable option that you have.                                                                                             
                                                                                                                                
MR. RUGGIERO said just like  with the aforementioned brackets and                                                               
tax, it  is possible to play  with the amount of  uplift that the                                                               
state may want to  give going forward.  He showed  a table with a                                                               
certain number  of years and  different annual uplift rates.   He                                                               
indicated  numbers that  show "the  multiplier from  the original                                                               
loss if  it's carried that long  in time at that  interest rate."                                                               
For example,  he said, "If I  was to carry something  seven years                                                               
at 12 percent, it would have a  multiplier of 2.2.  So, for every                                                               
$100 of  loss, seven  years in  the future  I could  be deducting                                                               
$221."   He explained that  the reason  he chose that  example is                                                               
that there  are a number  of production-sharing contracts  in the                                                               
world   where  the   government   gave  a   one-time  uplift   of                                                               
approximately 120 percent.  He  said he questioned that the first                                                               
few times he  saw it, but was given the  explanation that "if you                                                               
take  a 12  percent  uplift  for about  seven  years, that's  the                                                               
uplift that  you get."   He  said the  reason the  government did                                                               
that  is  to give  2.2  times  whatever  was spent  on  allowable                                                               
capital expenditures, with  an incentive if the  producer can get                                                               
the field [in  production] faster than seven  years.  Conversely,                                                               
if the  producer takes longer than  seven years to get  the field                                                               
in  production  and is  responsible  for  that timing,  then  the                                                               
government only gave "the uplift  for the seven years after that;                                                               
any time value loss you suffer."                                                                                                
                                                                                                                                
8:17:52 PM                                                                                                                    
                                                                                                                                
MR.  RUGGIERO,  in  response  to  Co-Chair  Tarr,  crunched  some                                                               
numbers  to  illustrate  the differences  between  taking  a  tax                                                               
credit  versus carrying  forward  an NOL.    He emphasized  there                                                               
would be a  significant impact when creating credits  at one rate                                                               
that  is drastically  higher than  the effective  tax rate,  when                                                               
[tax credits] are carried forward.                                                                                              
                                                                                                                                
8:22:48 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON, regarding  the uplift schedule and  a rate of                                                               
10  percent,  expressed concern  about  the  nonspecific time  it                                                               
would take  to work through  an NOL and about  "leaving something                                                               
unanswered."                                                                                                                    
                                                                                                                                
MR. RUGGIERO responded as follows:                                                                                              
                                                                                                                                
     I'm  looking at  option A  or B.   A  is:   I've turned                                                                    
     these NOLs  into credits  and I  pay somebody  for them                                                                    
     now, so I'm cash out of pocket.   If I had that cash, I                                                                    
     would look to  something like my PFD  return, the state                                                                    
     could be making  -- I'm just going to be  using a round                                                                    
     [number]  plus  or  minus 8  percent;  that's  long-run                                                                    
     equity market 8 percent.   So, that's your alternative.                                                                    
     So, if you're  paying a 10 percent  uplift, what you're                                                                    
     basically  paying is  a couple  points above  what your                                                                    
     long-run  return should  be on  your investments.   So,                                                                    
     you're paying  slightly more  than what  you're getting                                                                    
     by keeping that money in your fund and investing it.                                                                       
                                                                                                                                
     As far as the companies go  - and this depends on which                                                                    
     company  you're talking  about; some  have much  higher                                                                    
     expectations than  others - but  if you look  long run,                                                                    
     over the  same long-run period of  the equities market,                                                                    
     you might  see that  there's an  average gain  of 12-14                                                                    
     percent by  the companies.  That's  the alternative for                                                                    
     their money.   So, if they're only  getting 10 percent,                                                                    
     they're giving up 2-4 points.                                                                                              
                                                                                                                                
     So, you  just have to  pick something like  10 percent,                                                                    
     which  is  somewhere  in the  middle  between  long-run                                                                    
     their  [emphasis on  "their"] return  for ...  upstream                                                                    
     oil companies  and long-run  your [emphasis  on "your"]                                                                    
     return for  your equity investments  in your  fund, and                                                                    
     so,  you're  both  giving  a  little  bit,  but  you're                                                                    
     meeting in  the middle ground.   And so,  you're really                                                                    
     not giving up  that much, even though  the number looks                                                                    
     big  when it  gets into  the future,  you've kept  your                                                                    
     cash in other investments and allowed it to grow.                                                                          
                                                                                                                                
8:26:19 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR  remarked  that Alaska  has  its  mining  taxation                                                               
system set  up in this  manner, wherein companies are  given time                                                               
in  the   first  few  years   to  recapture  their   losses  from                                                               
exploration  and development  costs.   She said  cashable credits                                                               
have  been  a challenge  that  has  resulted  in a  $900  million                                                               
obligation  the  state has  to  figure  out  how  to pay.    Some                                                               
independent  and  new  entrant  companies have  given  the  state                                                               
feedback that they will not be  able to continue in Alaska if the                                                               
state does  away with cashable  credits.   She said the  state is                                                               
looking for options that are  competitive with other regimes, and                                                               
offering the uplift  would resolve the problem of  the time value                                                               
of money.                                                                                                                       
                                                                                                                                
MR. RUGGIERO recollected that  an industry representative, within                                                               
the  last week,  had  talked about  how  an incumbent  [producer]                                                               
could  "write it  off  right  away, so  it's  worth  a lot  more"                                                               
whereas [the newer producer] has  to wait resulting in diminished                                                               
value  over time.    He said,  "This is  where  the uplift  helps                                                               
them."   There would  still be some  diminishing relative  to the                                                               
cost of  capital, but  not that  much; therefore,  [uplift] keeps                                                               
incumbents and  new players "somewhat  on the same  level playing                                                               
field."   He  said  true  balance will  never  exist,  but it  is                                                               
possible to get  to a place where  the state is "not  in any way,                                                               
choosing winners and choosing losers."                                                                                          
                                                                                                                                
8:28:41 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOSEPHSON surmised that  "an independent" faced with the                                                               
uplift idea  would be  more comfortable  with "the  annual chart"                                                               
Mr. Ruggiero  had shown  rather than "an  expectation of  a large                                                               
110 percent," as Mr. Ruggiero  mentioned had occurred, perhaps in                                                               
Europe.   He said he  did not know if  there could be  "a takings                                                               
issue," but  suggested "a future  legislature could look  at that                                                               
as  something to  avoid."   He  clarified he  wanted  to know  if                                                               
"politics  could get  in the  way of  one's security  about their                                                               
uplift."                                                                                                                        
                                                                                                                                
MR. RUGGIERO  responded that politics  always gets in the  way of                                                               
oil companies.  He recognized  that the legislature cannot bind a                                                               
future legislature,  which is why  many projects are  being built                                                               
contractually rather than through legislation.                                                                                  
                                                                                                                                
8:31:02 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  PARISH  asked if  "this  sort  of NOL"  would  be                                                               
transferable.                                                                                                                   
                                                                                                                                
MR.  RUGGIERO  answered that  all  the  rules  would have  to  be                                                               
considered to  avoid unintended consequences.   He noted  that in                                                               
the  United Kingdom  (UK), there  was something  he nicknamed  as                                                               
"the  no  thin slicing  rule."    He  explained that  there  were                                                               
operators who  had gone through exploration  and had considerable                                                               
losses.  It was during a time when  the UK had a plus or minus 70                                                               
percent windfall profits  tax.  He said the largest  field in the                                                               
UK  was paying  "a ton  of windfall  profits."   He continued  as                                                               
follows:                                                                                                                        
                                                                                                                                
     So, what  they found  is a sliver  of that  field might                                                                    
     have been  worth $300 to  them; ... to the  person that                                                                    
     had  losses, that  ...  same sliver  might  be worth  a                                                                    
     thousand dollars,  because he can immediately  take it,                                                                    
     and even  though it  was tax paying,  it would  be non-                                                                    
     taxpaying   for  him,   because   he   had  all   these                                                                    
     accumulated losses.  And so,  you started getting these                                                                    
     thin slices being  sold out of this field  for the sole                                                                    
     purpose  of  these  people  being  able  to  use  their                                                                    
     losses.   So, then it became  a bit of a  rule about no                                                                    
     thin slicing in these fields.                                                                                              
                                                                                                                                
     We did  discuss that in  '07 when we were  here helping                                                                    
     advise  on  ACES,   which  is  a  little   bit  of  the                                                                    
     background into  the cashable credits, in  that to both                                                                    
     prevent those with a strong  position from bidding down                                                                    
     the price  if they bought  them, but being able  to use                                                                    
     them at full  price and not getting in to  sort of this                                                                    
     thin slicing  of field  equity and the  rest.   ... So,                                                                    
     that way "gaming"  of the system didn't  occur.  Things                                                                    
     were put  in place to  make sure that people  get value                                                                    
     that they thought they were going to get.                                                                                  
                                                                                                                                
     Now, as you move forward  and there's NOLs, my position                                                                    
     would  be  ...,  depending on  what  incentives  you're                                                                    
     giving for new players to  come and visit, you can then                                                                    
     decide whether  or not  you wanted  to turn  those into                                                                    
     cash.   And I think  as my presentation today  said, if                                                                    
     they're totally done and they're  leaving the state and                                                                    
     they  paid all  their contractors,  you might  consider                                                                    
     that part  of your incentives  is to pay some  cash for                                                                    
     those  losses that  they had  at some  conversion rate.                                                                    
     But  otherwise  they  get held  and  they  get  carried                                                                    
     forward  until they  have got  production to  use those                                                                    
     NOLs against.                                                                                                              
                                                                                                                                
REPRESENTATIVE PARISH expressed interest in learning the best                                                                   
way for companies to achieve maximum benefits for their                                                                         
shareholders.                                                                                                                   
                                                                                                                                
8:34:57 PM                                                                                                                    
                                                                                                                                
MR. RUGGIERO,  in response to  Co-Chair Tarr, stated that  the 10                                                               
percent uplift equalizes  the NPV of the project  and brought the                                                               
IRRs  closer together  between  the options.    Changing the  NOL                                                               
conversion rate  or effective rate would  give different results.                                                               
He said  there are multiple moving  parts.  Depending on  how the                                                               
parts are set, there can be  the appearance of parity with an NOL                                                               
carry forward  system and  parity with  a cashing  credit system.                                                               
He added,  "And the beauty of  the second one is  the state isn't                                                               
out a  lot of money."   He said  hopefully if parameters  are set                                                               
up, then "the operator becomes a bit indifferent."                                                                              
                                                                                                                                
8:35:37 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  TARR reiterated  the desire  to  offer incentives  that                                                               
bring "the  new entrants" and  independents to come to  Alaska to                                                               
do exploration work.  She indicated  that a message has been that                                                               
if "the  cashables" go away, then  that would be a  problem.  She                                                               
concluded,  "So,  this  is  ...  [a] potential  way  to  sort  of                                                               
overcome  [a problem]  ...  not  doing cash  and  making it  more                                                               
attractive."                                                                                                                    
                                                                                                                                
MR. RUGGIERO  noted that he  had created a  model of an  S curve:                                                               
when the project rate of return  is at the bottom, it means there                                                               
is a  very low  tax and low  growth; at a  16-18 percent  rate of                                                               
return, the tax gets steep in  the example; it would level out at                                                               
whatever the  regime decided would be  the maximum tax rate.   He                                                               
explained the S curve  is a way of showing that  more is given at                                                               
the low  end but  taken back  at the high  end when  everyone has                                                               
lots of profit to share.                                                                                                        
                                                                                                                                
8:38:28 PM                                                                                                                    
                                                                                                                                
CO-CHAIR TARR announced that HB 111 was held over.                                                                              
                                                                                                                                
8:39:45 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 8:39 p.m.                                                                 

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