Legislature(2017 - 2018)BUTROVICH 205
01/31/2018 03:30 PM Senate RESOURCES
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| Oil and Gas 102 to the Alaska Legislature | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
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ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 31, 2018
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Natasha von Imhof
Senator Bert Stedman
Senator Kevin Meyer
Senator Bill Wielechowski
Senator Click Bishop
MEMBERS ABSENT
Senator John Coghill, Vice Chair
OTHER LEGISLATORS PRESENT
Senator Berta Gardner
COMMITTEE CALENDAR
OIL AND GAS 102 TO THE ALASKA LEGISLATURE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
RICH RUGGIERO
In3nergy
Juneau, Alaska
POSITION STATEMENT: Presented "Oil and Gas 102."
CHRISTINA RUGGIERO
In3nergy
Juneau, Alaska
POSITION STATEMENT: Helped present "Oil and Gas 102."
ACTION NARRATIVE
3:30:15 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Stedman, Wielechowski, Bishop, Von Imhof,
Meyer, and Chair Giessel. Senator Coghill was excused.
^Oil and Gas 102 to the Alaska Legislature
Oil and Gas 102 to the Alaska Legislature
3:30:49 PM
CHAIR GIESSEL announced the only order of business today, the
presentation: Oil and Gas 102 to the Alaska Legislature. On
October 18, 2017, she and co-chair of the House Resources
Committee coordinated with Senator Stedman to hold an (all-day)
introductory course entitled "Oil and Gas 101." It is on line
for the public to see and it lays the foundation for today's
presentation, which is called "Oil and Gas 102."
3:32:18 PM
RICH RUGGIERO, In3nergy, introduced himself and said he would
present "Oil and Gas 102."
CHRISTINA RUGGIERO, In3nergy, introduced herself and said she
would help present "Oil and Gas 102."
SENATOR STEDMAN said they are trying to lay down a base level of
knowledge about oil and gas for elected officials and their
staff, as well as other interests in the public.
3:33:16 PM
MR. RUGGIERO said when they were asked to put "Oil and Gas 102"
together, he went back and looked at "Oil and Gas 101" and then
got together with members of the Legislative Budget and Audit
(LB&A) staff and all the other consultants and got an
appreciation for the level of understanding of certain concepts
within the legislature. He formulated what they thought would be
helpful to them as they think through petroleum fiscal policy.
The presentation will repeat some of the concepts from the 101
course and cover some future unexpected scenarios.
CHAIR GIESSEL commented, so he understands who his audience is,
that with the exception of Senator Von Imhof, every person
sitting here has been in the legislature for at least eight
years.
3:35:16 PM
MS. RUGGIERO started on slide 13 saying a mentor once told Mr.
Ruggiero: "Torture numbers and they will tell you whatever story
you want to hear." She advised that lawmakers should always be
thinking and asking: "What is it that they are not telling me?
What data or information do they hope I will not find?" She said
they are experts and can explain the past, but they don't
predict the future nor can anyone else. So, how does one plan
for a future that is uncertain and can't be predicted?
3:37:41 PM
MS. RUGGIERO advised not taking a number, conclusion, or
assumption at face value. She encouraged asking questions,
digging deeper, and understanding where they came from. For
instance, at what price per barrel does a net tax cross over to
a gross tax? What one should ask is where does that $72/barrel
come from. The answer is that it comes from a dataset of
specific costs from a snapshot in time when that data existed.
But, the difference is that the same circumstance might not be
in place today nor will it be in the future. They know that
$72/barrel is going to move. So, the question is: is the fiscal
system in Alaska prepared for that change whether the price of
oil goes to $90/barrel or to $60/barrel?
3:38:57 PM
MR. RUGGIERO added that the Tax Division recently testified that
the current crossover is in the mid-$60/barrel range. In
reality, that is based off average data. All the fields in
Alaska that are impacted by the net versus gross decision may
range from $50-$80-plus/barrel, depending on the field and its
cost structure. That crossover point is the oil price including
costs and that has changed every day, historically.
3:39:54 PM
MS. RUGGIERO said there is no a global standard or an ideal
structure, but there are parameters and pillars for success.
Each country has different goals, different drivers, and
different needs. Their populations are different; their resource
is different. A successful system is durable but changes. It
marries the goals, the drivers and the needs of the government.
A country that is short on reserves is one that has a low
reserve base - they know what resource they have, but likely the
oil is being produced faster than new oil is being found. That
could be a time they want to incentivize exploring and drilling
through the fiscal system. If a country is long on reserves,
maybe it has spent more investment dollars in finding oil than
in developing it. If that's the case, then the fiscal system
would want to incentivize the development and production
behavior.
3:41:52 PM
She repeated that change is the constant in this industry and a
good fiscal design anticipates that. Good petroleum fiscal
design is one that learns from, but doesn't replicate or repeat
the past, and uses "self-correcting mechanisms" to succeed in
the inevitable changing future.
MR. RUGGIERO said an example of setting policy on a specific
number that didn't really work was when the gross tax came into
being. The tax was zero up to $15/barrel and 4 percent above
$25/barrel. In summary, the total all-in cost was about
$15/barrel back then. So, the zero was set at a point where
whatever revenue the oil companies made was eaten up by their
costs (their breakeven point). The idea was to not tax them to a
point where they had to dig into their pocket to pay for it. The
$25/barrel represented a significant value above $15. So, there
was value and thus the 4 percent tax. Fast forward to 2018 and
the breakeven cost for the legacy fields is $37/barrel. Now the
zero percent tax at $15 set many years ago, because it happened
to be coincident with the breakeven point, today would tax 4
percent at prices below their breakeven point all the way down
to $15/barrel. This is where the need to continually change or
update a system comes from.
3:46:46 PM
MS. RUGGIERO continued that one of the concepts they want to
expand upon is competitiveness and that Alaska is competing on
the global stage. But what does "competitiveness" really mean?
We are competing for finite resources, a finite amount of
investment capital, and a finite amount of industry personnel
with expertise. Add to that, rigs and technology availability.
So, Alaska is competing for allocation of the resources in a
boardroom when a company has a limited amount of money. Alaska
has always faced that, but this year, the LNG project adds
another layer to that definition in that it is now also
competing for market.
CHAIR GIESSEL noting that Mr. Ruggiero had been in the
boardrooms when investment decisions were made, asked what was
discussed in making those decisions to move capital to one
location versus another.
MR. RUGGIERO replied that they would get into that a little
later in the slides, but the short answer is that every group
that works an area - for instance Company X in Alaska - will put
together a list of their projects and will champion them within
their global environment. The people in the boardroom look at
the longevity, the overall economics, and risk. After a great
discussion, a line will get drawn and the project that is above
the line is picked. Then the person who is championing the
project that came in just below the line tries to figure out
what it needs to get it above the line and secure that capital.
If some of that is a government issue, he would go back and
start working with the government in the country he was assigned
to see if he could get his projects above the line.
3:50:10 PM
MS. RUGGIERO said global change is constant and Alaska is no
different. Its discussions have changed from a year ago. Alaska
is asking if the fiscal system is prepared for these changes. Is
it ready for the opening of ANWR or the federal tax change? Will
the AKLNG project affect our fiscal system. Is that successful
for the state or not?
3:51:15 PM
She said there is a lot of discussion about the headline tax
rate globally (slide 25). It's the report card that people talk
about, but much like an iceberg the headline tax rate is what
sticks out of the top of the water and the mass of a fiscal
structure is what lies beneath the water. The components that
under water are the ones discussed in boardrooms, for instance:
lease costs/bonuses, cost recovery, ring fencing, risk offset,
etc. She said slide 26 focused on the timing of cost recovery
and how those affect the economics of a project both from a
state perspective and a producer perspective.
MR. RUGGIERO said slide 27 graphed different countries' fiscal
regimes using the same project at one point in time. The red
color coding is the amount of the tax that was collected by the
government before the producers recovered their costs (the
breakeven point). The blue color coding is called post pay and
is after they got their costs back, but they haven't achieved
their internal rate of return (cost of capital) for doing that
project. That target is usually based on what return their
investments can achieve. The green color coding is the profit
component, and this is after the producer has received all its
costs back and met its corporate investment hurdle rate and is
what the government taxes. Another way to think about the color
coding is that it is proportional to the amount of risk
contained in the investment.
He explained that generally alongside running basic economics, a
company will also do a risk analysis. Over-simplistically
speaking, a country that has a lot of red is a high-risk
country; that is because the government is taking a lot of the
revenue well before costs are recovered. Blue is a little bit
less and green is the least risky.
SENATOR BISHOP said as a layman one would think that an oil
company boardroom would weigh a decision in more of the
countries with the green bar where costs and rents are recovered
before government take.
MR. RUGGIERO said, "Absolutely." In this example he would
recommend the two in the center with a majority of green and
avoiding the ones with a lot of red.
SENATOR BISHOP asked if these numbers are hypothetical or did he
pull them off actual countries leaving the names off.
MR. RUGGIERO replied that these are actual fiscal systems from
actual countries in his database. All the countries are very
different; so if one compares fiscal systems item by item the
answer will not be anywhere near accurate. The totality of the
system needs to be looked at. Probably dozens of items make
minor differences on their own, but a package of things make
major differences and he would focus on those differences today.
3:57:22 PM
SENATOR VON IMHOF asked where Alaska might fall in that graph
(slide 27).
MR. RUGGIERO replied that he chose to not include Alaska,
because this presentation was for training purposes and to
explain the concepts first. Alaska was not one of the bars on
the graph.
He said in all his years of fiscal modeling he has found that
time has more of an impact than the tax rate, and that goes back
to the fact that most capital is spent in countries that have a
higher tax rate than Alaska. Slide 28 takes the same project
with the same revenues, with the same costs, with the same split
between the government and the producer. The only difference is
that he artificially changed when the monies are received by the
government and when they are received by the producer.
The upper left-hand quadrant of slide 28 has a distribution of
revenues such that it creates a 27 percent rate of return
project - usually well above most corporate hurdle rates. He
varied the timing of when the same dollars are distributed. So,
referencing slide 27, he said the project in the bottom right
has more tax taken during the red period and the one in the
upper left has more tax taken in the green period. The one on
the lower right has a 6 percent rate of return and a negative
NPV (meaning that project would actually decrease the corporate
value). Most companies would not do that project.
The concept of time value of money is not well understood, Mr.
Ruggiero said, but it needs to be understood. He can take all
the same numbers and go from something that absolutely almost
every company would likely do (subject to the risk analysis) to
a project that none of them would do. He couldn't emphasize
enough how when things happen is a very important key to the
investment decision-making that is likely being done by Alaska
producers.
SENATOR BISHOP asked how much of that methodology would hold
true if one believes in peak demand coming X number of years
down the road.
MR. RUGGIERO replied if you believe that peak demand - meaning
the world will be in supply quite a way out, he would set the
system such that it would incentivize the activity they want to
see. If you think there won't be a market for gas in 20 years,
then you should be incentivizing everything onstream now. He
stated that one should do five or ten things regardless of
whether the future is supply long or supply short. Incentivize
those things and then remain a bit nimble to adjust to
circumstances as they unfold.
MR. RUGGIERO said the timing of "first significant dollars
spent" to first dollars into the revenue coffers is important.
In the Lower 48, it takes on average 60 days for most wells to
get oil into a pipeline from first drill. For Alaska, it's five
years-plus.
He really wanted to emphasize that for institutional investors,
private equity, and others, it's not just about the time. For
example, he compared two $500 million projects: one is drilling
50 shale wells in West Texas and the other is putting in a small
field in Alaska. In his shale example, each well costs about
$100 million and he can drill one every month. By the time he
drills the 10th well they have started generating enough cash
flow, in excess of operating expenses that he can funds the
remaining $400 million investment program from cash flow. The
investor is looking at $100 million out of pocket, maybe $110
million if a few things don't go quite right.
In Alaska and other places that have long lead times - Gulf of
Mexico, North Sea, etc. - the whole $500 million has to be spent
before first oil and maybe $600 million if things do go quite
right. The risk to the investor in the first project is $100
million and the in the other it is $500 million. Those two
projects will be looked at very differently by the investment
community. He can't say for sure about folks in the corporate
oil company boardrooms, but he can say that working a lot in the
last three years with private equity, that is exactly how they
look at it. In a different twist, they always ask: "What's my
maximum cash out? How many turns do I get if I reinvest the cash
flow from the early wells and the operations that come into it?"
The timing means they are able to recover costs very quickly,
well before they are done with the last well drilled.
4:06:05 PM
CHAIR GIESSEL asked if timelines take precedent over tax policy
in the boardroom in terms of weighing a decision for or against
a project.
MR. RUGGIERO replied that they don't totally override other
considerations, but the timing to get money back and the time it
takes to do certain things really impacts the economics of a
project. It's the economics and the risk analysis that goes
alongside it that will generate the company's decisions.
However, Mr. Ruggiero said his experience in working in places
like the North Sea and bringing major projects forward that have
long lead times and high capex up front, is that those fields
tend to last a whole lot longer. How long has Prudhoe Bay been
producing, for instance, as compared to a shale well? North
Dakota has had 10,000-15,000 shale wells drilled to get into the
number-two producing position, and for the most part in
somewhere between one and a half and three years, 90 percent of
the ultimate production will have been produced, plus companies
have to keep drilling wells to keep production up.
4:08:10 PM
MR. RUGGIERO said last year he testified to something called
"the wasted NOL," the perceived inability for a producer to
recover its costs. He heard comments like allowing recovery was
a subsidy, but he said now what he said back then, "It is really
the norm around the globe that you get to recover your costs and
when you recover those costs, they aren't taxed." If a regime
does not allow those costs to be recovered, and in a timely
fashion, that would be more indicative of being non-competitive
than a high tax rate.
Also, in cost recovery something is not always well understood.
Regimes differ on what they allow and don't allow as a
deductible cost. Standard deductions on overhead and financing
costs, but if the exploration costs and abandonment (traditional
oil field operations) protocols aren't added in, the producer's
real costs and return can't be accounted for deciding on a
fiscal system tax rate. He was trying to point out that as
lawmakers look at doing anything with the fiscal system that the
tax rate is a big piece, but equally big, if not bigger in a lot
of the fiscal systems, is the timing on when and how much of the
costs get recovered.
4:11:11 PM
MR. RUGGIERO said slides 31 and 32 were example of countries
that have more than one type of tax regime in play at a time.
Although some have only one. The chart on slide 32 shows some of
the hidden things that don't become real evident when looking at
the totality of a fiscal system, like the limits that can be
placed on how fast costs can be recovered.
He explained that Production Sharing Contracts (PSC) have cost
oil and profit oil. Angola puts a cap on how much each year one
can call cost oil. The remainder of that is profit oil under the
definition of the contract and gets taxed even while other costs
need to be recovered. Other PSCs allow all the revenue to go to
costs until they are recovered and then the profit oil is
created. his example regimes design their systems in a lot of
different ways to impact the costs that are recovered and the
timing of their recovery. He advised them in the future to
concentrate not only on the tax rate (royalty, severance, gross,
and net) but on costs and timing aspects when someone comes in
with a comparison.
MS. RUGGIERO clarified that these are just examples of oil
producing companies and they are in no way advocating for any
one structure.
4:13:50 PM
She cautioned that the more levers the system has, the more it
costs to administer and in a complex system the risk of dispute
goes higher as the complexity increases (slide 33). Then there
are unintended consequences. By creating, revising, or
eliminating one aspect of a complicated tax system, there is
very likely a risk that other areas of the tax system will be
affected to the detriment of one or more parties. These
unintended consequences can undermine the intent of original
efforts and are often difficult to see or anticipate. Before
making changes, a thorough analysis should be performed to make
sure the level and degree of interdependency of certain taxation
terms are understood and addressed.
4:15:31 PM
SENATOR STEDMAN asked how complex Alaska's fiscal system is
compared to other basins he has seen and worked on.
MR. RUGGIERO answered that it's one of the more complex systems
that he has dealt with.
4:20:13 PM
MS. RUGGIERO said another one of the presentation's key themes
is about growing the legislature's knowledge base. Much good
information is available to them from a lot of public sources
like government agencies: the Energy Information Administration
(EIA), the International Energy Agency (IEA), and the Extractive
Industries Transparency Initiative (EITI), and that data can all
be exported into an excel spreadsheet where it can be
manipulated any way one wants. In addition, oil companies like
BP do annual statistical reviews and oil field services
companies like Schlumberger do oil field glossaries. She also
likes looking at annual reports and analyst presentations in the
United State Securities and Exchange Commission 10-K forms from
the oil companies. The analyst presentations can reveal what the
real intentions of a company are. Banks also put together a
number of useful presentations. Because so much changes so
quickly, she personally likes to go to these sources at least
monthly to see how the numbers have shifted. Their hope is that
Alaska agencies will work together to create a depository of
documents and websites for legislators and the public to go to
to be as informed as possible.
MS. RUGGEIRO showed examples from the EIA as part of their long-
term outlook report (slide 37). She pointed out that the chart
on the left shows that the U.S. will be an exporter of energy in
2024/25. This is significant when they discuss the LNG project.
She skipped to slide 40 that displayed the crude oil price curve
from the 1860s but in 2016 dollars and noted the preponderance
of volatility and said that Alaska should expect volatility in
the future. The only time oil prices were stable was when they
were under tight government controls.
4:22:02 PM
MR. RUGGIERO said the goal of sovereigns is the 'optimal'
development of its petroleum resources for the benefit of their
people (slide 42). "Optimal" is not the same for all governments
and Alaska needs to ensure its fiscal structure supports an
agreed set of goals. The goal of oil companies is to make a
profit and meet investor expectations. These vary somewhat from
company to company. When people come to Alaska, they have
different goals. If they are private equity-backed they have
very different expectations as to what they will do and how they
will do it than a company that is guided more by shareholder
returns. Thus, the attractiveness of Alaska is going to be
different. He advised to really understand the type of player
they are trying to attract - and they may choose to exclude some
- and the challenge is to find where the fiscal system and the
expectation of the investor community and the companies overlap.
He emphasized that the private equity-backed companies'
expectations are very different.
CHAIR GIESSEL asked if he would say that the private equity
investment organizations want faster return on their investment.
How would he summarize the difference?
MR. RUGGIERO replied that they are always driven to get their
money back as fast as possible. Time is really key for them, and
they always look for an exit ramp. They really don't care who
comes in, as long as the price is right, they'll get out and
move on. He has become very familiar with this approach in the
last few years.
4:25:34 PM
MR. RUGGIERO said the countries that seem to do really well and
have more "stable systems" are those that are built to achieve a
set of transparent goals, so everyone knows what the goals are
and will help you get there. Without transparent goals, the oil
companies and the investment community don't know what project
to choose. He said suggested Alaska petroleum tax design goals
were on slide 43.
4:26:51 PM
Slide 44 illustrated the tension in the fiscal design between
producers trying to get their costs back plus a bit of profit
and the government trying to maximize the sovereign's return.
Somewhere therein lies the right split for a given situation.
4:27:25 PM
MR. RUGGIERO explained that the orange part on slide 46
represents a few of the many tools that governments have for
extracting whatever they believe is their share of petroleum
production in their jurisdiction, but it all comes down to net
and gross take. It hasn't changed in the decades he has been
doing this. A gross tax is regressive; it gets worse the lower
the profit gets. It becomes very penal as prices come down and
the costs stay steady.
He explained that right now Alaska's system could have a
price/cost scenario where the company would have to reach into
their pocket to pay production tax. He used the following
analogy: in a 100-meter dash the amount of gross tax would be
something like 10 meters out and the question is what the size
of the hurdle is that each runner has to go over before he can
finish the remaining 90 meters of the race on a flat surface?
That is what a regressive tax is. Royalty is the hurdle that has
to be crossed before anything else happens because it gets paid
first. The beauty of that system is that it is really simple and
transparent and can be audited easily. But, it's not responsive
to the economics of a project.
A net tax system is either neutral or progressive, meaning as
profits go up then the tax follows along the profit line. The
issue with that is figuring out what net profits to tax from all
the moving pieces (cost, timing, what deductions are allowed nor
not). A net tax tends to even the playing field between a little
higher-cost project versus a much lower-cost project, because it
taxes the lower cost project a bit more and the higher cost less
profitable project less, so it evens the playing field. A gross
tax doesn't discriminate; it just hits everyone the same.
Those are the choices. A lot of systems are a hybrid. That way
they don't make the upfront hurdle rate too high and just in
case things get really, really, good they can catch it on the
back end.
CHAIR GIESSEL recognized Senator Gardner present in the
audience.
MR. RUGGIERO summarized their discussion saying that:
1. Change is inevitable
2. You're not going to be able to predict anything off that past
other than what is a good practice and a bad practice. Going
forward, more and more regimes are going toward self-correcting
mechanisms with a minimal amount of intervention. It works
across a much wider range of circumstances occurring.
4:32:05 PM
Someone always has the idea: if we fix this one item, the state
could make more money. However, in the overall scheme of things
those are small items that don't add up to savings because of
the resulting increased administrative costs and legal disputes,
as well as the time value loss of money to the state. He
concluded that the simpler systems usually prove to be more
viable and durable than theoretically ideal but complex systems.
Simpler systems are more stable and viable over time because of
the associated administration of them, fewer disputes, and the
time value of money.
4:32:38 PM
In general, they are not making recommendations, Mr. Ruggiero
said, but they want to make one strong one stemming from his 12
years of working with the State of Alaska. He asked himself what
he would do if he was sitting in one of their chairs as a
freshman in either body. The first thing he would assert is that
the state is dependent on oil and gas and he would want a "state
of the petroleum union" speech in the first week of every
legislative session. People who don't have to worry about
taxpayer confidentiality and have a wealth of information should
do the presenting on what is producing, what permits are out
there, and a whole list of other issues, so that everyone knows
as much as possible about the petroleum industry at the start of
each session. Some of the most transparent regimes that he is
aware of don't lose competitiveness or their edge in doing this.
It's just the opposite: the more transparent they are the more
investment they have. A well-informed legislature working with a
well-informed producing community is going to come up with a
better solution overall.
4:35:08 PM
MR. RUGGIERO said the data exists in the system now, but it
isn't user friendly. He included a slide with North Dakota to
show how one can go to their ministry and find out everything
about their operation. The data is available on line 15 days
after the reporting month. North Dakota has one of the most
transparent sites you can go to. He can track back the ownership
of a lease, how many times it got sold, if that sale price was
public, what wells were drilled and when; and the whole gamut.
Even though Norway has a higher tax rate than Alaska, it's very
transparent with its information and it gets more investment
than Alaska. He also showed a slide of North Dakota that is
becoming much more dependent on its oil and gas.
SENATOR BISHOP commented that, "It's all offshore."
MR. RUGGIERO said that was right, which means it's just like the
North Slope that has a very long lead time, is environmentally
sensitive and Arctic conditions.
CHAIR GIESSEL said the Division of Oil and Gas (DOG) website has
monthly reports on production and royalty and where it goes. She
hoped legislators used it to see how much the state is gaining
in royalty.
MR. RUGGIERO added that the website also has some data, but it
is hard-wired and hard to use, and encouraged them to make it
more user friendly.
4:38:10 PM
MR. RUGGIERO said their summary is first, that a lot more
probing questions need to be asked. So, when people compare
Alaska to jurisdictions X,Y,Z, legislators need to ask them on
what basis are they making that observation and drill down to
understand more than the headline tax rate.
Second, there isn't an ideal structure for sharing the benefits
of oil and gas development; it's a matter of understanding what
you are trying to achieve, what the geology is below the surface
and understanding the challenges upon the surface, and defining
goals, and putting that all together in what is best for Alaska.
Third, never have someone say "Wow, when we did bill X,Y,Z, we
didn't think about this." Moving forward, make sure that the
scenarios you ask your consultants and others to consider are
broad and wide-ranging. Any conclusion about competitiveness can
only be drawn on systems as a whole.
4:39:58 PM
Slides 56 & 57 were generated by the following phone
conversation he had: Texas has a 20 percent royalty compared to
Alaska's one-eighth or one-sixth, and under certain
circumstances Texas might have a 7 percent severance tax
compared to Alaska's 4 percent gross tax. So, the question is:
why is all the money going to Texas and not coming to Alaska,
and can Alaska raise its royalty and tax rates to those levels
and still have companies come here?
MR. RUGGIERO said to answer that, he sat down and went through
the order of operations in figuring tax, a "single-barrel
analysis," for the Alaska North Slope (AKNS), West Texas (WT)
New Alaska North Slope (New AKNS) meaning the resource is not
right in Prudhoe Bay or Kuparuk (so, needing new
infrastructure). He used the same market price of $60/barrel.
West Texas before paying the corporate income tax makes about
three times what the legacy fields do and about 30 times more
than a new North Slope field does, throwing in the additional
infrastructure costs and slightly higher operating costs.
If one just compares royalty rates in isolation that would lead
one to think that they could be taxed more, but then looking at
the totality and the bottom line before income tax, one knows
why ExxonMobil just announced a big investment in West Texas and
Eastern New Mexico. They can invest the same dollars although
they don't last as long, but they get quick return and a whole
lot more out of every barrel, dollar-wise. One can put North
Dakota or Oklahoma in there and the numbers will change a
little, but the relative ranking will hold no matter where one
looks in the Lower 48.
4:44:40 PM
SENATOR BISHOP asked if shale versus conventional oil makes a
difference in West Texas.
MR. RUGGIERO answered not really and explained that one of the
projects he is consulting in Texas has water flood, vertical
conventional, and horizontal. Whereas the cost of the water
flood structure varies the cost a little bit, on average the
numbers don't change drastically. As they do more drilling the
cost of a well is coming down quite quickly, so what used to be
a $12-million well is now a $7-million well, but the relative
positioning of his number won't change much whether it's
vertical, conventional, or water flood.
4:45:42 PM
He summarized for legislators that when someone offers up a
regime as a comparable to Alaska, make sure to understand
similarities and differences and how much impact they would have
on the economics and risk of a project.
4:46:30 PM
MS. RUGGIERO advised not getting caught up in the average of
12.5 percent royalty, because Alaska has different royalties in
the different geographic and ownership regions including the
fact that the state split is also different in different areas.
4:50:34 PM
CHAIR GIESSEL found no further business to come before the
committee and adjourned the Senate Resources Standing Committee
meeting at 4:50 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Senate Resources - Updated Agenda - 1 - 31 - 2018.pdf |
SRES 1/31/2018 3:30:00 PM |
|
| Senate Resources - Presentation from In3nergy Oil and Gas 102 - 1 -31 - 2018.pdf |
SRES 1/31/2018 3:30:00 PM |
Oil and Gas |