Legislature(2017 - 2018)SENATE FINANCE 532

04/15/2017 02:00 PM RESOURCES

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02:01:11 PM Start
02:03:00 PM HB111
04:58:08 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ -- Joint with the Senate Finance Committee -- TELECONFERENCED
-- Please Note Time and Location --
Heard & Held
Uniform Rule 23 Waived
Overview with Legislative Consultants
                    ALASKA STATE LEGISLATURE                                                                                  
                         JOINT MEETING                                                                                        
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                    SENATE FINANCE COMMITTEE                                                                                  
                         April 15, 2017                                                                                         
                           2:01 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
SENATE RESOURCES                                                                                                                
 Senator Cathy Giessel, Chair                                                                                                   
 Senator John Coghill, Vice Chair                                                                                               
 Senator Natasha von Imhof                                                                                                      
 Senator Bert Stedman                                                                                                           
 Senator Shelley Hughes                                                                                                         
 Senator Kevin Meyer                                                                                                            
 Senator Bill Wielechowski                                                                                                      
SENATE FINANCE                                                                                                                  
 Senator Lyman Hoffman, Co-Chair                                                                                                
 Senator Anna MacKinnon, Co-Chair                                                                                               
 Senator Click Bishop, Vice Chair                                                                                               
 Senator Peter Micciche                                                                                                         
 Senator Natasha von Imhof                                                                                                      
 Senator Donald Olson                                                                                                           
 Senator Shelley Hughes                                                                                                         
MEMBERS ABSENT                                                                                                                
SENATE RESOURCES                                                                                                                
 All members present                                                                                                            
SENATE FINANCE                                                                                                                  
 All members present                                                                                                            
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Gary Stevens                                                                                                            
COMMITTEE CALENDAR                                                                                                            
COMMITTEE SUBSTITUTE FOR HOUSE BILL NO. 111(FIN)(EFD FLD)                                                                       
"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;  relating to  carried-                                                               
forward  lease expenditures  based on  losses and  limiting those                                                               
lease expenditures to  an amount equal to the gross  value at the                                                               
point of  production of oil  and gas  produced from the  lease or                                                               
property where  the lease expenditure  was incurred;  relating to                                                               
information concerning  tax credits, lease expenditures,  and oil                                                               
and gas taxes; relating to  the disclosure of that information to                                                               
the public; relating  to an adjustment in the gross  value at the                                                               
point  of  production;  and relating  to  a  legislative  working                                                               
     - 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)       Heard & Held                                                                                           
02/27/17       (H)       MINUTE(RES)                                                                                            
02/27/17       (H)       RES AT 7:00 PM CAPITOL 106                                                                             
02/27/17       (H)       Heard & Held                                                                                           
02/27/17       (H)       MINUTE(RES)                                                                                            
03/01/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/01/17       (H)       Heard & Held                                                                                           
03/01/17       (H)       MINUTE(RES)                                                                                            
03/01/17       (H)       RES AT 6:00 PM BARNES 124                                                                              
03/01/17       (H)       Heard & Held                                                                                           
03/01/17       (H)       MINUTE(RES)                                                                                            
03/06/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/06/17       (H)       Scheduled but Not Heard                                                                                
03/06/17       (H)       RES AT 6:30 PM BARNES 124                                                                              
03/06/17       (H)       Heard & Held                                                                                           
03/06/17       (H)       MINUTE(RES)                                                                                            
03/08/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/08/17       (H)       Heard & Held                                                                                           
03/08/17       (H)       MINUTE(RES)                                                                                            
03/08/17       (H)       RES AT 6:00 PM BARNES 124                                                                              
03/08/17       (H)       Heard & Held                                                                                           
03/08/17       (H)       MINUTE(RES)                                                                                            
03/09/17       (H)       RES AT 5:00 PM BARNES 124                                                                              
03/09/17       (H)       -- MEETING CANCELED --                                                                                 
03/10/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/10/17       (H)       Heard & Held                                                                                           
03/10/17       (H)       MINUTE(RES)                                                                                            
03/11/17       (H)       RES AT 12:00 AM BARNES 124                                                                             
03/11/17       (H)       -- MEETING CANCELED --                                                                                 
03/13/17       (H)       RES AT 1:00 PM BARNES 124                                                                              
03/13/17       (H)       <Bill Held Over from 3/11/17>                                                                          
03/14/17       (H)       RES AT 3:00 PM BARNES 124                                                                              
03/14/17       (H)       -- Continued from 3/13/17 Meeting at                                                                   
                         1:00 PM --                                                                                             
03/15/17       (H)       RES RPT CS(RES) NT 4DP 4DNP 1AM                                                                        
03/15/17       (H)       DP: PARISH, DRUMMOND, JOSEPHSON, TARR                                                                  
03/15/17       (H)       DNP: TALERICO, BIRCH, RAUSCHER, JOHNSON                                                                
03/15/17       (H)       AM: WESTLAKE                                                                                           
03/20/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/20/17       (H)       Heard & Held                                                                                           
03/20/17       (H)       MINUTE(FIN)                                                                                            
03/21/17       (H)       FIN AT 9:00 AM HOUSE FINANCE 519                                                                       
03/21/17       (H)       Heard & Held                                                                                           
03/21/17       (H)       MINUTE(FIN)                                                                                            
03/21/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/21/17       (H)       Heard & Held                                                                                           
03/21/17       (H)       MINUTE(FIN)                                                                                            
03/22/17       (H)       FIN AT 9:00 AM HOUSE FINANCE 519                                                                       
03/22/17       (H)       -- Continued from 3/21/17 at 1:30 PM --                                                                
03/22/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/22/17       (H)       Heard & Held                                                                                           
03/22/17       (H)       MINUTE(FIN)                                                                                            
03/23/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/23/17       (H)       Heard & Held                                                                                           
03/23/17       (H)       MINUTE(FIN)                                                                                            
03/24/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/24/17       (H)       Heard & Held                                                                                           
03/24/17       (H)       MINUTE(FIN)                                                                                            
03/25/17       (H)       FIN AT 10:00 AM HOUSE FINANCE 519                                                                      
03/25/17       (H)       Heard & Held                                                                                           
03/25/17       (H)       MINUTE(FIN)                                                                                            
03/27/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
03/27/17       (H)       Heard & Held                                                                                           
03/27/17       (H)       MINUTE(FIN)                                                                                            
04/07/17       (H)       FIN AT 1:30 PM HOUSE FINANCE 519                                                                       
04/07/17       (H)       Heard & Held                                                                                           
04/07/17       (H)       MINUTE(FIN)                                                                                            
04/08/17       (H)       FIN AT 1:00 PM HOUSE FINANCE 519                                                                       
04/08/17       (H)       Moved CSHB 111(FIN) Out of Committee                                                                   
04/08/17       (H)       MINUTE(FIN)                                                                                            
04/09/17       (H)       FIN RPT CS(FIN) NT 4DP 4DNP 2NR 1AM                                                                    
04/09/17       (H)       DP: GARA, GUTTENBERG, SEATON, FOSTER                                                                   
04/09/17       (H)       DNP: WILSON, THOMPSON, PRUITT, TILTON                                                                  
04/09/17       (H)       NR: ORTIZ, GRENN                                                                                       
04/09/17       (H)       AM: KAWASAKI                                                                                           
04/10/17       (H)       MOVED TO BOTTOM OF CALENDAR                                                                            
04/11/17       (H)       TRANSMITTED TO (S)                                                                                     
04/11/17       (H)       VERSION: CSHB 111(FIN)(EFD FLD)                                                                        
04/12/17       (S)       READ THE FIRST TIME - REFERRALS                                                                        
04/12/17       (S)       RES, FIN                                                                                               
04/13/17       (S)       RES WAIVED PUBLIC HEARING NOTICE,RULE                                                                  
04/13/17       (S)       FIN WAIVED PUBLIC HEARING NOTICE,RULE                                                                  
04/14/17       (S)       RES AT 3:00 PM BUTROVICH 205                                                                           
04/14/17       (S)       Heard & Held                                                                                           
04/14/17       (S)       MINUTE(RES)                                                                                            
04/15/17       (S)       RES AT 9:00 AM SENATE FINANCE 532                                                                      
04/15/17       (S)       FIN AT 9:01 AM SENATE FINANCE 532                                                                      
04/15/17       (S)       FIN AT 2:00 PM SENATE FINANCE 532                                                                      
04/15/17       (S)       RES AT 2:00 PM SENATE FINANCE 532                                                                      
WITNESS REGISTER                                                                                                              
RICH RUGGIERO                                                                                                                   
Castle Gap Advisors, LLC.                                                                                                       
Legislative Consultants                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided comments on HB 111.                                                                             
CHRISTINA RUGGIERO                                                                                                              
Castle Gap Advisors, LLC.                                                                                                       
Legislative Consultants                                                                                                         
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided comments on HB 111.                                                                             
ACTION NARRATIVE                                                                                                              
2:01:11 PM                                                                                                                    
CHAIR  CATHY  GIESSEL called  the  joint  meeting of  the  Senate                                                             
Resources  Standing Committee  and  the  Senate Finance  Standing                                                               
Committee to  order at 2:01  p.m. All members of  both committees                                                               
were present at the call to  order. Senator Gary Stevens was also                                                               
        HB 111-OIL & GAS PRODUCTION TAX;PAYMENTS;CREDITS                                                                    
2:03:00 PM                                                                                                                    
CHAIR   GIESSEL  announced   consideration  of   HB  111.   [CSHB
111(FIN)(EFD FLD)was before the committee.]                                                                                     
2:03:04 PM                                                                                                                    
RICH RUGGIERO, Castle Gap Advisors, LLC, introduced himself.                                                                    
CHRISTINA   RUGGIERO,  Castle   Gap  Advisors,   LLC,  introduced                                                               
MR. RUGGIERO  thanked the committee  for the opportunity  to talk                                                               
about oil  and gas taxation.  He said they  were here to  give as                                                               
much advice and  background as they can, so  legislators have the                                                               
best  understanding   possible,  given  that  they   are  citizen                                                               
legislators, to help them make informed decisions.                                                                              
He  provided his  experience and  perspective and  said he  would                                                               
provide  a review  of what  has been  happening since  the Alaska                                                               
Clear and Equitable Share (ACES) period.                                                                                        
MR.  RUGGIERO  said he  has  over  40  years of  energy  industry                                                               
experience:  two  decades  with  big oil  involved  in  projects:                                                               
presenting them  to the board and  deciding which ones to  do and                                                               
development  of everything  from upstream  to midstream  projects                                                               
including pipelines and  LNG. He spent over a  decade helping run                                                               
the sovereign  advisory practice for Gaffney,  Cline & Associates                                                               
and  had assignments  with  over two  dozen  governments in  that                                                               
period directly  working on everything  from prime  ministers and                                                               
presidents to oil ministers and  presidents down to the "C Suite"                                                               
of  the  national oil  companies  within  those countries.  After                                                               
Gaffney,   Cline  &   Associates  was   purchased,  he   had  the                                                               
opportunity to sit  as an executive for Baker Hughes  and saw the                                                               
service  industry's perspective  and  became  involved in  Alaska                                                               
His  fiscal   background  includes  designing  from   scratch  or                                                               
redesigning petroleum  fiscal systems for multiple  countries. In                                                               
2002  as East  Timor became  the world's  newest country  and had                                                               
petroleum resources  offsetting the  prolific Northwest  Shelf of                                                               
Australia, he  was involved with  everything from running  a data                                                               
round to writing the legislation,  the regulation, the contracts,                                                               
and then  running the first  full bidding round and  getting that                                                               
started,  as well  as negotiating  all their  LNG contracts  with                                                               
ConocoPhillips on the Bayu-Undan project.  His firm has done this                                                               
with countries with less knowledgeable  people in their position;                                                               
a lot of  them were freedom fighters in the  jungle for years all                                                               
the   way  to   working   with  the   "highly  involved,   highly                                                               
comprehensive and intelligent folks  of the Middle East countries                                                               
whose whole economy is run off of  the oil and gas that they take                                                               
They have been  able to see everything in this  business from the                                                               
new to  the old, the  sophisticated to the  unsophisticated, gas-                                                               
rich  areas and  oil-rich  areas;  so there  is  quite  a bit  of                                                               
background.  In  addition,  Christina  and  others,  as  part  of                                                               
Gaffney, Cline  & Associates,  was one  of the  top three  or was                                                               
four reserve  certification specialists, depending on  which list                                                               
you look at in the world. As  part of doing reserves, you have to                                                               
be able to  model every system that your client  is involved with                                                               
and all the nuances that go  with those systems, because in order                                                               
to claim something as a  reserve instead of a resource, according                                                               
to whatever  the rules were at  the stock exchange that  they are                                                               
located on, you  had to be able to look  at their contract, build                                                               
the  model, and  then make  an assessment  for the  reserves that                                                               
they ultimately  would report  to their  stock exchange  or their                                                               
regulatory body.                                                                                                                
MR. RUGGIERO  said he wanted  to emphasize that they  don't bring                                                               
experience of  just having  read about something  and done  a few                                                               
analyses; they  have actually  been on the  ground; he  has lived                                                               
through three  attempted coups. They  have built  everything from                                                               
the simple  high level to  the very detailed and  complex models.                                                               
He noted when  the Alaska Gas Inducement Act  (AGIA) was ongoing,                                                               
Gaffney, Cline &  Associates built a fully  integrated model that                                                               
took  gas all  the way  from the  North Slope  to markets  in the                                                               
Midwest  U.S. It  predicted the  ultimate  tariff estimates  that                                                               
came out  for both  the Canadian and  the U.S.  portion pipelines                                                               
within 5 percent of what they were.                                                                                             
2:08:30 PM                                                                                                                    
They have also negotiated multi-billion  dollar contracts, and to                                                               
do  that you  have to  understand the  breadth and  comprehensive                                                               
nature of  what you are doing.  Fiscal systems are like  that. He                                                               
and Christina  have a lot  of midstream background on  putting in                                                               
pipelines and  LNG. So, understanding  things that  impact Alaska                                                               
such as  the TAPS, or  gathering pipelines,  and the cost  of the                                                               
logistics for LNG are something they are very familiar with.                                                                    
2:09:45 PM                                                                                                                    
His approach to fiscal design:                                                                                                  
First,  understand from  a high  level or  macro perspective  the                                                               
general  landscape of  oil and  gas developments  within country-                                                               
based fiscal  systems. He said a  lot of people sit  in the chair                                                               
he  is in  and offer  up comments  about things  being difficult,                                                               
complex, changing,  and whatnot, and  he wanted to put  all those                                                               
into context  of what  really happens in  the bigger  picture and                                                               
then  bring it  down to  the  specific issues  Alaska is  dealing                                                               
with. He wanted  to make sure everyone was on  common footing and                                                               
has common  drivers, because without  that they can't all  end up                                                               
in the  same place. He would  put forth what he  understands from                                                               
the meetings he  has been in in the other  body, things that have                                                               
been done, and what he believes the drivers are.                                                                                
Third, he would  review how the multiple  options the legislature                                                               
has had before actually played  out, because things happened that                                                               
weren't  contemplated or  the prices  and  costs weren't  modeled                                                               
that low or  that high. He said  he had seen the price  go up and                                                               
the  price come  down five  times and  now is  the middle  of his                                                               
fifth  time.  It  should  be   no  surprise.  He  explained  that                                                               
companies  that are  excellent at  business planning  in the  oil                                                               
patch  plan for  multiple different  scenarios and  if one  would                                                               
pull the annual  business reports from the  large major companies                                                               
each  talk about  the different  multiple  scenarios from  things                                                               
like solar and  batteries taking over to a  continuation of rapid                                                               
growth in the  Indian and Chinese markets  where hydrocarbons are                                                               
still going to be in great  demand. Then legislators need to draw                                                               
conclusions  on  how  in a  multi-faceted  highly  interdependent                                                               
system to make choices on what to change.                                                                                       
2:12:36 PM                                                                                                                    
MR.   RUGGIERO  said   change   in   fiscal  parameters   doesn't                                                               
necessarily mean  instability in his  world, but a change  in the                                                               
wrong direction does. The U.K. is  always ranked in the top three                                                               
of  stable places  to do  business.  He spent  six years  working                                                               
there  and during  that time,  they  changed the  tax code  three                                                               
times, and that is because they  tended to always act in what the                                                               
industry  would consider  the right  direction. When  prices went                                                               
down, they lessened their take, but  they were also very quick to                                                               
increase their take when prices went up.                                                                                        
2:13:01 PM                                                                                                                    
So, Mr.  Ruggiero disagreed wholeheartedly  that change  leads to                                                               
instability, because  change always  happens -  but it  should be                                                               
change in the right direction and at  the right time, so as to be                                                               
responsive to  the market  and the needs  of the  industries that                                                               
they are trying to help support.                                                                                                
He said  that he  often helps fix  the following  problem: fiscal                                                               
systems built on predicted future  outcomes that "fail" sooner or                                                               
later.  If the price moves greatly  up or down, it will fail very                                                               
soon. If  the price  is steady  then it  doesn't fail  that much.                                                               
When he  says "fail"  and "predicted  futures," that  means tying                                                               
something  to  the price  of  oil.  Costs  change with  time  and                                                               
technology  changes  the  overall cost  structure  for  different                                                               
types of  plays, but  if a  system is  built around  a particular                                                               
cost and at $10 or $30, or $60  they make this much profit, so at                                                               
$60 we're going to tax them this  much, they will get it wrong in                                                               
a very  short period of  time. He is a  very big advocate  of the                                                               
combination  of   systems  that   ties  the   net  to   the  unit                                                               
profitability (not  to the  price). That is  what CSHB  111 (FIN)                                                               
2:15:32 PM                                                                                                                    
Why do  a lot  of sovereigns change?  Mr. Ruggiero  answered that                                                               
sovereigns highly  dependent on oil  and gas revenue  always have                                                               
the challenge of  solving the immediate need to  keep the economy                                                               
and the  government going and  wait for  the next price  spike. A                                                               
lot of  countries don't  say why  they are  driven to  do certain                                                               
things. It's  hard to  say I  should have saved  for a  rainy day                                                               
four years  ago when faced with  the fact that you  don't have it                                                               
and you need to.                                                                                                                
MR. RUGGIERO said  the only constant in the oil  patch is change.                                                               
He has never seen a "steady state  period" in his 40 years in the                                                               
oil  patch. Something  is always  changing: he's  talking drastic                                                               
changes.  The   type  of  challenge  changes   depending  on  the                                                               
circumstances:  what is  going on  in the  world as  a whole  and                                                               
whether it's  a high price  or a low  price? The challenge  for a                                                               
body  like this  is how  to  design durability  in an  industrial                                                               
environment (oil and gas) that is anything but stable.                                                                          
2:16:44 PM                                                                                                                    
MR. RUGGIERO said he helped put  in an LNG project when Gaffney &                                                               
Cline was  acquired in 2008. The  first thing he was  asked to do                                                               
was go to the Baker Hughes  Board, because they had been told the                                                               
U.S. was  going to be bombarded  with all this imported  LNG, and                                                               
that  was going  to kill  U.S. based  oil and  gas drilling.  And                                                               
Baker Hughes should be thinking  about moving their equipment and                                                               
people overseas, because  there would be no need for  them in the                                                               
U.S. But back  in 2005 they were looking to  import 8 bcf/day. At                                                               
one time  there were over 50  LNG import terminals in  the permit                                                               
process  at  FERC.  In  fact,  the  terminals  that  got  permits                                                               
approved totaled over 25 bcf/day of import capacity.                                                                            
Fast  forward  to  2015  and  go through  a  price  dip  and  the                                                               
technological  change  of  producing hydrocarbons  out  of  shale                                                               
formations, he  said, and in just  a decade, shale gas  is one of                                                               
the most prolific things in the  Lower 48 and other basins around                                                               
the world. In  just one decade the U.S. went  from 50-plus re-gas                                                               
terminals  and  importing  8   bcf/day  to  40-plus  liquefaction                                                               
permits  and  exporting 8  bcf/day.  The  16  bcf/day is  a  huge                                                               
turnaround. A  quarter of the  U.S. market just flipped  from one                                                               
direction to the other and all  the capital that was committed to                                                               
bring it  in is now  trying to be  redirected to exporting  it at                                                               
the same time.                                                                                                                  
It's tough  for companies like  Baker Hughes  to know what  to do                                                               
with their  people and fleets.  They ask themselves is  the shale                                                               
stuff real?  Should I move them  to Marcellus or Eagle  Ford? The                                                               
legislature  has to  look at  the  same thing:  will prices  come                                                               
back?  When will  they  come  back? If  they  do,  will there  be                                                               
another  technology  change that  will  either  make Alaska  more                                                               
desirable  or a  tougher place  to  do business  as other  places                                                               
become easier to do business.                                                                                                   
MR. RUGGIERO  presented a graph  of a  field he worked  with that                                                               
discovered a  water spike. Internally, the  major company decided                                                               
to sell it to a midsize  company since production was bad and the                                                               
cost per  barrel was too  much. The  midsize company was  able to                                                               
arrest the  decline with a  totally different  business approach.                                                               
The message here is that it was  given up for dead, but from when                                                               
the  major company  let this  field go,  the expected  cumulative                                                               
production is  now 10 times  what that major oil  company thought                                                               
was the maximum it could get out of it.                                                                                         
He is bringing  this up because whereas the super  majors and the                                                               
very large  oil companies  bring great  talent and  great capital                                                               
into a process,  they can't get stagnant in their  belief of what                                                               
is going  on out  there and need  to bring in  new ideas  and new                                                               
people. And  since one  of Alaska's  goals is  to bring  more oil                                                               
into the  pipeline, Mr.  Ruggiero said, the  state also  wants to                                                               
bring more new and different players  into the mix as it has been                                                               
doing,  because they  will bring  a different  look at  what they                                                               
might  believe is  a producing  horizon that  in the  past others                                                               
thought was not  a producing horizon. In fact  this just happened                                                               
on the North Slope.                                                                                                             
2:20:19 PM                                                                                                                    
The take-away  is that generally  it takes the large  capital and                                                               
weight of some  of the big companies to get  some things started.                                                               
The North Slope has been under way  for quite a while, so now the                                                               
state wants to attract other  players because they have different                                                               
risk profiles and  different ideas about how to  go about things.                                                               
The  smaller  players  have  a   great  track  record  of  always                                                               
increasing production  beyond what the first  company thought was                                                               
absolutely the limit of economic recovery.                                                                                      
2:23:00 PM                                                                                                                    
The take-away  summary for this  is that change is  continuous in                                                               
the  oil  patch.  Designing  something  for  a  specific  set  of                                                               
circumstances is  a very  shallow and  micro-focused view  of the                                                               
world. That  has to be expanded  and an understanding of  how the                                                               
different mechanisms  in the tax  system work across  the broader                                                               
range  of both  price  and cost  scenarios  and circumstances  is                                                               
needed going forward.                                                                                                           
MR. RUGGIERO also exhorted the  committee to not get discouraged,                                                               
because there is  no ideal system. Some systems are  better for a                                                               
regime or a  government than others because of  the uniqueness of                                                               
the drivers,  and those drivers  have to do with  everything from                                                               
the type  of resource they  have, the location of  that resource,                                                               
their  markets,  and in-country  needs  for  other industry,  and                                                               
other capabilities that they have or not and want to develop.                                                                   
MR. RUGGIERO  emphasized that any  proposed increase in  tax will                                                               
not  have any  industry  support, because  they  are for  profit.                                                               
However, there  can be support for  a tax increase if  there is a                                                               
simplification of the system that  allows their cost structure to                                                               
go down. Alaska needs new players, new blood, new thinking.                                                                     
2:25:11 PM                                                                                                                    
How does Alaska  compare to other regimes? Mr.  Ruggiero showed a                                                               
classic curve done by fiscal  expert, Daniel Johnson that plotted                                                               
the marginal tax  rate after the passage of ACES  for a number of                                                               
regimes including Alaska.                                                                                                       
MR.  RUGGIERO said  before drawing  a conclusion  as to  Alaska's                                                               
competitiveness,  one  needs  to  ask,  "What  exactly  is  being                                                               
compared?"  Is it  a  licensing with  tax and  royalty?  Is it  a                                                               
production  sharing contract  (PSA) or  is it  something that  is                                                               
emerging  more  and  more: technical  service  agreements  (TSA)?                                                               
These  are  all  forms  of  a government  giving  rights  to  oil                                                               
companies to  come in  to explore  and develop  hydrocarbons, and                                                               
sets the fiscal systems they have to pay.                                                                                       
A typical comparison of data puts  Alaska in the middle, but what                                                               
is  not  included  is extremely  important.  Most  analysts  roll                                                               
petroleum tax  and royalty  together. In a  lot places,  if there                                                               
are  commitments to  the local  infrastructure  like a  hospital,                                                               
roadways, and  schools that aren't captured,  because the authors                                                               
of these documents  usually get their hands on  only a bootlegged                                                               
copy of  the production sharing  contract (PSC) or they  read the                                                               
legislation and only  pull out the petroleum  tax components. So,                                                               
they  don't  have  all  the pieces.  This  curve  didn't  include                                                               
private  royalties  for  other states'  locations,  because  most                                                               
people  don't  put  it  in.   So,  when  someone  shows  a  slide                                                               
illustrating that Alaska is 20  points worse than North Dakota or                                                               
Texas,  they usually  leave out  the  private royalty.  Signature                                                               
bonuses are another  item that is frequently  left out. Signature                                                               
bonuses were also left out of  this chart. One of the most recent                                                               
on  record is  the  first $1  billion bonus  bid  for acreage  in                                                               
SENATOR BISHOP  asked if private  royalty would be  applicable to                                                               
North Dakota,  because individual  landowners own  the subsurface                                                               
MR. RUGGIERO answered absolutely.                                                                                               
SENATOR BISHOP asked  if the landowner is a free  agent who could                                                               
negotiate a different royalty than his neighbor.                                                                                
MR. RUGGIERO answered absolutely.                                                                                               
SENATOR MEYER noted that this  information is almost 10 years old                                                               
and  asked if  Mr. Ruggiero  had  something more  recent to  show                                                               
where Alaska compares with the rest of the world.                                                                               
MR. RUGGIERO said  he could put that together, but  it would show                                                               
essentially the  same thing. In  fact, the reason he  picked this                                                               
curve  is because  the arrows  show where  the countries  were in                                                               
1997 and where  they ended up in 2007. The  same number of arrows                                                               
indicate terms got worse and terms  got better for the regimes in                                                               
that 10-year period. So, an  average number of countries moved in                                                               
both directions.                                                                                                                
2:31:38 PM                                                                                                                    
MR. RUGGIERO said other payments  are not included in the charts,                                                               
like  huge bonuses.  Bonuses for  some  of the  offshore Gulf  of                                                               
Mexico sales, for example, have  to be recovered by the operator.                                                               
Even though they were paid to  the government, it is not shown as                                                               
government  take  or  non-producer  take  on  these  charts.  One                                                               
company paid  a little over $900  million and $1 billion  for the                                                               
right  to go  in and  start  exploring and  possibly develop  two                                                               
2:32:38 PM                                                                                                                    
MR. RUGGIERO  said the  conclusion he has  drawn from  doing this                                                               
for over a decade  is that this chart is in  no way indicative of                                                               
where people  invest or don't  invest. It shows  marginal dollars                                                               
and the arrows  show the movement, so one would  think a rational                                                               
argument  would be  - for  Alaska in  the middle  - that  all the                                                               
investment dollars would go to all  the countries in the top half                                                               
where the  tax rate  is less  than Alaska and  that little  to no                                                               
investment would  go to  the countries in  the bottom  half where                                                               
the stated government  take is far in excess of  Alaska. But data                                                               
from annual reports  and analyst presentations of  the very large                                                               
oil  companies  indicate that  hundreds  of  billions of  dollars                                                               
collectively  have  been invested  in  regimes  with far  greater                                                               
takes than Alaska by the major  oil companies. Iraq at 98 percent                                                               
government take  has significantly greater take  than Alaska, and                                                               
yet  tens of  billions of  dollars  have been  committed by  just                                                               
about every major oil company to be a player there. He                                                                          
SENATOR MICCICHE  said Mr. Ruggiero talked  about his experiences                                                               
related to  net present value  (NPV) of project economics  (go or                                                               
no go  based on net expected  return), and just now  he said that                                                               
the government take has little to  do with where people choose to                                                               
invest, that it's  all on a case  by case basis, and  the cost of                                                               
exploration,  development,  production,  and  transportation  are                                                               
higher in  Alaska, so wouldn't  he agree that government  take is                                                               
an important part of NPV?                                                                                                       
MR.  RUGGIERO  replied,  "The  government tax  rate  is  but  one                                                               
component of the decision to invest  or not." But he was going to                                                               
talk about why  hundreds of billions get spent  in countries that                                                               
have marginal tax  rates in the 80 and 90  percent range. Senator                                                               
Micciche is exactly correct: the  economics will have to have the                                                               
right risk  reward balance.  So, these  companies have  looked at                                                               
the  risks and  the reward,  and even  though there  is an  80/90                                                               
percent tax  rate, they have  gotten themselves  comfortable with                                                               
the  idea of  investing billions  of dollars  in those  countries                                                               
because they  believe they are  going to  make a good  return for                                                               
themselves and  their shareholders. They wouldn't  invest if they                                                               
didn't think the  proper net present value or the  proper rate of                                                               
return weren't there for that investment.                                                                                       
2:37:06 PM                                                                                                                    
SENATOR BISHOP said they hadn't  seen the details on the personal                                                               
services  contract (PSC),  and that  has to  be a  big driver  to                                                               
deciding to invest on top of the marginal rate.                                                                                 
MR.  RUGGIERO  answered that  the  PSCs  are a  contractual  form                                                               
between  oil  companies  and the  government,  and  whereas  some                                                               
countries are pretty religious that  they will publically write a                                                               
PSC and tie it to their  bidding round (by bidding, one agrees to                                                               
sign it as  is). So, there is some transparency  to the contract.                                                               
In other cases,  the PSCs are specially negotiated,  and he added                                                               
that  in the  last five  years he  had negotiated  three PSCs  on                                                               
behalf of  his employer.  He explained  that he  negotiated terms                                                               
that mitigated the biggest risks  his employer was worried about,                                                               
and when he took care of  those risks, the other issues just fell                                                               
out of the economics.                                                                                                           
SENATOR MEYER noted  that there is very little  risk with service                                                               
agreements in  Iran and Iraq,  because the discoveries  have been                                                               
made and  they just  want the  companies to  produce the  oil for                                                               
MR. RUGGIERO responded  that he spoke at many  workshops with the                                                               
companies  that  were thinking  about  investing  there and  they                                                               
didn't  see it  as  a  low risk  environment.  They  did see  low                                                               
geologic risk,  but some  of those operators  would have  to take                                                               
production up  four or five  fold before they start  getting paid                                                               
back. Then  they had to  deal with other  sorts of risks:  one he                                                               
dealt  with  was land  mine  clearing,  for instance,  and  risks                                                               
around procuring equipment.                                                                                                     
SENATOR MEYER said  he didn't want to belabor this,  but asked if                                                               
countries like Iran and Iraq with  known oil fields put it out to                                                               
competitive bid  or choose  a company to  do that  production for                                                               
MR. RUGGIERO replied more often than  not they tend to put it out                                                               
to competitive  bid, because  that gets  the government  the best                                                               
terms.  He, as  part of  Gaffney Cline,  participated in  all the                                                               
service  contracts for  Malaysia, Indonesia,  Ecuador, Argentina,                                                               
Peru, and Mexico, and all were competitive bids.                                                                                
He said the  Internet also transformed the  international oil and                                                               
gas business.  It used  to be  if you did  a deal  in Mozambique,                                                               
Indonesia didn't  find out about  it for  five or six  years. Now                                                               
you do  a deal  in Mozambique  and Indonesia  knows about  and is                                                               
knocking on your office door in  Jakarta wanting to know why they                                                               
didn't get that  deal that you just gave that  other country. So,                                                               
transparency  and movement  of information  is  much greater  and                                                               
faster  now,  and a  conformity  of  terms  is starting  to  show                                                               
2:41:59 PM                                                                                                                    
MR. RUGGIERO  said he chose  Texas to illustrate what  the charts                                                               
don't  tell you.  For this  example,  where legacy  leases had  a                                                               
standard one-eighth royalty, but that went  up to a minimum of 20                                                               
percent.  The state gets royalty on  quite a bit of land and some                                                               
of  it gets  set aside  for  the education  system. Colleges  and                                                               
others benefit from the royalty monies off of those lands.                                                                      
From his experience  with vendor financing deals  that new leases                                                               
are  going  anywhere  from  15  to  30  percent.  So,  Alaska  is                                                               
competing with  someone at 30  percent, but also with  the person                                                               
who  has a  12.5 percent  royalty rate.  If a  person has  legacy                                                               
acreage and legacy  royalty, but he either doesn't  have the will                                                               
or the capital to  develop it at the pace some  of the West Texas                                                               
oil is  being developed, he sells  the acreage. So, a  lot of the                                                               
difference  between  the one-eighth  and  the  25 or  30  percent                                                               
royalty is  gone in the sale  of the acreage. This  is where land                                                               
that five or six years ago was going  for $500 an acre and now is                                                               
going for $2,500 to $30,000 an acre.                                                                                            
MR. RUGGIERO  said those figures  are hundreds of times  what the                                                               
average acre costs  in Alaska. How does that come  into play? For                                                               
a typical shale well in Eagleford,  one is generally looking at a                                                               
well (generally  on 160-acre spacing)  with an  economic ultimate                                                               
recovery (EUR)  somewhere between 300,000 and  500,000 barrels of                                                               
oil. So,  the acreage  purchases average  from $5  to $15/barrel.                                                               
The drilling capex  is $4 to $7 million depending  on how deep or                                                               
how shallow the well is and how  many stages are in the frack job                                                               
which  is  reflected  somewhere   between  $8  and  $18/bbl.  The                                                               
operating expenses  run plus or  minus around $8 to  $10/bbl. So,                                                               
depending on when you got your  acreage and how much you paid for                                                               
it and whether or not you  waited for your neighbors to drill the                                                               
expensive wells so  you can benefit from the  learning curve that                                                               
the  drill  rigs and  the  service  companies have  done,  you're                                                               
paying  somewhere between  $20 and  $40/barrel just  to get  your                                                               
well. Now that $40/barrel all-in  should sound pretty familiar to                                                               
the Alaska's numbers  where transportation is around  $10 and the                                                               
opex and capex  is around $30. So, Texas can  actually have total                                                               
all-in costs that are the same as in Alaska.                                                                                    
2:45:55 PM                                                                                                                    
He said  for North Dakota to  take its production over  a five or                                                               
six  year period  from 150,000/bbl/day  up  to 1  million/bbl/day                                                               
took over  10,000 wells at  an average  cost of about  $8 million                                                               
per well. Over  $80 billion was invested. With taxes  and opex of                                                               
$20-$30/bbl, they  have only  recovered about  40 percent  of the                                                               
capital spent, and  yet the production is  rapidly declining. The                                                               
reason he  brings this up  is to  illustrate how a  fiscal system                                                               
matches the  type of project both  in the spending curve  and the                                                               
production  curve that  you are  looking to  bring on.  If Alaska                                                               
were to be a next big shale play  it would bring on five, six, or                                                               
seven mega  projects over  the next  decade: much  different than                                                               
drilling  10,000 wells.  They are  two totally  different systems                                                               
that  are  responsive to  two  very  different oil  developments,                                                               
although they are competing in the  same world market and get the                                                               
same ultimate market prices, somewhere.                                                                                         
CHAIR GIESSEL asked him to compare  the time it takes to get from                                                               
discovery in Texas to production versus in Alaska.                                                                              
MS.  RUGGIERO replied  it takes  about a  month or  two in  Texas                                                               
depending on the availability of  rigs and service companies. But                                                               
many  horizontal  wells that  are  being  fracked in  Texas  take                                                               
between 12 and 30 days before  the well is finished being drilled                                                               
and is  producing. In Alaska  the permitting process can  be 5-10                                                               
MS. RUGGIERO added  that she also wanted to expand  on a question                                                               
Senator  Bishop   asked  earlier  about  royalty   owners  having                                                               
different  royalties.  That  is  true, and  those  Texas  mineral                                                               
rights  owners are  choosing to  share  information between  each                                                               
other to strengthen their position  in negotiating royalty rates,                                                               
to  understand  their  geology  holds,  and  what  operators  are                                                               
finding within their leases.                                                                                                    
2:49:37 PM                                                                                                                    
MR. RUGGIERO  said one  aspect of  the new  leases -  to Alaska's                                                               
competitive detriment  - is that  they are now designed  as drill                                                               
or drop  leases. The royalty  owners have gotten smart  enough so                                                               
that they now have activity  commitments. If that activity is not                                                               
taken, they will drastically ratchet  up the annual lease payment                                                               
or do  an expiration  and termination  of the  lease arrangement.                                                               
Those usually  have 5-7 year  terms. A  lot of those  leases were                                                               
signed  after the  2008  financial crisis  and  when the  private                                                               
equity (PE) money  came flowing in in 2010/11.  So, companies are                                                               
coming  up on  the expiration  of  a number  of discoveries,  but                                                               
there is  no room for these  companies to borrow more  capital to                                                               
drill. They  still have  obligations to drill  or they  will lose                                                               
their lease, and if  they lose it, it will be  renewed at an even                                                               
tougher rate.                                                                                                                   
2:50:53 PM                                                                                                                    
SENATOR MICCICHE noted that acreage  is changing hands at a range                                                               
of  $2,500 to  $30,000/acre, but  there is  also a  range of  $5-                                                               
15/acre. He was  trying to understand how much acreage  is in the                                                               
$30,000 range and how much is in the $2,500 range.                                                                              
MR. RUGGIERO answered a majority of  the acreage is in the $2,500                                                               
to $5,000 range.  Even after the price fell last  year, a sale in                                                               
the Delaware  Basin, New  Mexico, went  for $85,000/acre.  It was                                                               
purchased by  a foreign entity  that wanted a position  there. He                                                               
explained that  he tried to  be generous  on the ranges  and took                                                               
what he  thought was  the more prevalent  range and  applied both                                                               
300,000/bbl  and  500,000/bbl  and  came up  with  the  $5-15/bbl                                                               
SENATOR MICCICHE said  the $20-40/bbl estimate for  opex seemed a                                                               
bit rich to him.                                                                                                                
2:53:34 PM                                                                                                                    
MR. RUGGIERO responded  that in creating those ranges,  he took a                                                               
best  and a  worst case  scenario and  used figures  from vendor-                                                               
financed deals in the Eagle Ford  that he closed on behalf of his                                                               
employer  that were  in the  $20-$40 range  with a  flat $60  oil                                                               
price.  He  roughly  estimated  30/70  for  expenses/royalty  and                                                               
2:54:51 PM                                                                                                                    
MR. RUGGIERO  said there  is a  lot of talk  about Norway,  so he                                                               
investigated  it a  little  bit more.  Topically,  he knows  that                                                               
Norway is a little  bit different, but he had to  ask in the last                                                               
10 years  when Norway has  had a relatively unchanged  78 percent                                                               
net tax  rate and  Alaska always  had a lot  less than  that, why                                                               
billions more were  invested in Norway than in  Alaska. His first                                                               
conclusion is  that the  tax rate was  not the  compelling factor                                                               
that caused  people to choose to  either invest or not  in one or                                                               
the other.                                                                                                                      
A lot  of other things come  into play. He explained  that having                                                               
worked  over there,  he  knows the  government  has pretty  tight                                                               
control  over the  pipeline  infrastructure offshore,  especially                                                               
for  gas. In  their  own  sweet way,  (without  running afoul  of                                                               
monopoly  laws)  they  make  sure things  get  developed  on  the                                                               
schedule  they want  and at  a point  that maximizes  the use  of                                                               
their infrastructure. This is important  because the flip side is                                                               
that for  every extra  dollar spent  on infrastructure  that they                                                               
allow  to be  deducted, they  also have  an uplift,  meaning they                                                               
don't  want  a   lot  of  excess  infrastructure  or   a  lot  of                                                               
goldplating. In  fact a government  entity is and  equity partner                                                               
is most of their fields. So, they  are very much aware of all the                                                               
data and all the information and everything that is happening.                                                                  
This is where one starts asking  if it's a higher tax, why there?                                                               
It  has to  do with  things  like the  uplift and  how quickly  a                                                               
company  can  recover  the  deductible  versus  a  non-deductible                                                               
expense, and the list goes on.  Mr. Ruggiero said after running a                                                               
few hundred thousand cases of  this system versus that system and                                                               
this item  versus that item,  one starts  to finally get  a sense                                                               
for what parameters  really do influence economics  in a positive                                                               
sense from the  producer standpoint and which  ones are negative,                                                               
versus which ones that don't do much.                                                                                           
2:58:01 PM                                                                                                                    
His  takeaway  is  that  the  marginal  tax  curves  are  not  an                                                               
indicator of  competitiveness or where likely  capital investment                                                               
will take  place, because all  the countries he  highlighted that                                                               
are  much  worse  than  Alaska   on  the  curve  had  significant                                                               
investment by multiple companies.                                                                                               
He explained that  all other parameters being  equal, an increase                                                               
in  the   non-producer  take  will  negatively   impact  producer                                                               
economics,  but because  all  things are  rarely  ever equal,  an                                                               
increase in the tax rate does  not automatically mean a regime is                                                               
less  competitive. It  depends on  what everyone  else is  doing.                                                               
Alaska  is talking  about doing  multiple things,  some of  which                                                               
could have  positive effects and  others that will  have negative                                                               
effects, in isolation.                                                                                                          
MR.  RUGGIERO  said  someone  asked him  how  many  regimes  have                                                               
negatively  changed   their  tax  terms  in   this  downturn  and                                                               
surprisingly  one  of them  is  North  Dakota.  It used  to  have                                                               
special credits  for the first  X barrels  of the first  bunch of                                                               
production  for  all new  horizontal  wells  into the  two  shale                                                               
formations. That was taken away  in their 2015 session right when                                                               
prices were  at their  worst and  had fallen  over $90  a barrel.                                                               
They  also took  away several  other credits;  the only  positive                                                               
they  did was  lower  the  combination of  the  severance and  ad                                                               
velorem taxes from 11-plus percent down to 10 percent.                                                                          
Because Baker  Hughes in doing  vendor financing, was  well aware                                                               
that a  number of countries,  as the  price fell, were  unable to                                                               
pay their share  of whatever the bills were,  asked whoever their                                                               
partners are  to take on the  burden of carrying those  costs and                                                               
doing so  with some interest  to be  paid at some  unknown future                                                               
date. That  increased the  government's take  in a  very indirect                                                               
way and won't be seen written up  anywhere. It won't be seen on a                                                               
chart. But  those governments are actually  increasing their take                                                               
because  there  is  actually  less   left  to  the  producers  to                                                               
repatriate  back   to  the   parent  to   use  in   other  future                                                               
investments, because  they are having  to keep that money  in the                                                               
country  and to  keep the  NOC or  the other  partner as  a going                                                               
concern  there. So,  a lot  of hidden  things greatly  impact the                                                               
attractiveness  or the  non-attractiveness of  a country  and its                                                               
overall fiscal package.                                                                                                         
3:01:38 PM                                                                                                                    
SENATOR MACKINNON said she wondered  since the sovereigns who are                                                               
below  Alaska  on the  chart  that  tax  more  and have  a  great                                                               
investment in  infrastructure if there was  something significant                                                               
they should know  about countries above Alaska on  the chart with                                                               
less  infrastructure,  because  number  of  them  are  developing                                                               
significant hydrocarbon  reserves that  they might be  wanting to                                                               
draw capital into their countries.                                                                                              
MR. RUGGIERO replied that in  fact, one of those countries, Papua                                                               
New  Guinea, had  moved significantly,  and is  where one  of the                                                               
North Slope producers has significant  investment in LNG. So, the                                                               
countries in the  top half do have investment in  places like the                                                               
UK and the Netherlands, but others  when you get into Morocco and                                                               
Ireland that  have extremely low  tax rates, but they  don't have                                                               
any  investment  because they  don't  have  any good  hydrocarbon                                                               
sources. So,  you do tend to  see there is more  capital going to                                                               
the bottom  left hand than  is going to  the upper right  hand on                                                               
that curve.                                                                                                                     
SENATOR MACKINNON  asked if that  is because they  are developing                                                               
fields or  new fields, besides  the rock that is  impacting where                                                               
the investment is going.                                                                                                        
MR.  RUGGIERO answered  that he  could make  a list  of about  30                                                               
different  parameters  when he  was  making  these decisions  and                                                               
recommendations to his  board and all countries  have some unique                                                               
aspects, but  a lot of  times the investment  has to do  with the                                                               
perceived ability to get things  to market. For example, a number                                                               
of entities  in the upper  half have huge stranded  gas reserves.                                                               
So,  that means  development of  petrochemical gas  conversion to                                                               
liquids technology  or LNG to  get it to  market, and then  a 10-                                                               
year lead  time from discovery  to actually getting  something to                                                               
market. In  that timeframe,  there will  a lot  of effort  by the                                                               
government  to  find the  right  terms  that  work to  make  that                                                               
happen. But  there really won't  be that much spending  until the                                                               
whole thing comes together.                                                                                                     
3:05:18 PM                                                                                                                    
SENATOR MACKINNON  said it appears  there are 19  countries above                                                               
Alaska  and  26 below,  and  she  was  trying to  understand  the                                                               
average  investment to  understand the  impact of  what is  being                                                               
asserted today.                                                                                                                 
MR.  RUGGIERO  said he  will  provide  that, because  it  already                                                               
exists in the record.                                                                                                           
CHAIR GIESSEL said  slide 19 talks about the  acreage purchase as                                                               
a factor in the total operator  cost and asked if acreage cost is                                                               
included in Alaska's cumulative costs for an operator.                                                                          
MR. RUGGIERO answered no; they aren't.                                                                                          
CHAIR  GIESSEL  asked  him  to elaborate  on  what  uplift  means                                                               
referring to slide 20.                                                                                                          
MR.  RUGGIERO replied  it  has become  a term  of  art in  fiscal                                                               
system design: it is a secret  code name for interest. The reason                                                               
he didn't call it interest is  because a lot countries have a lot                                                               
of rules  about what  you can  and can't  do with  interest. Most                                                               
production  sharing   contracts  don't  allow  the   recovery  of                                                               
financing charges,  and interest is  a kind of  financing charge.                                                               
So the term "uplift"  is used; it is a form  of interest that can                                                               
be used  one time, periodically,  quarterly, or annually,  and it                                                               
can be simple or compounded.                                                                                                    
3:07:48 PM                                                                                                                    
One  thing  all sovereigns  have  to  deal  with is  the  balance                                                               
between short  term and  long term goals.  He believes  Alaska is                                                               
trying  to  deal with  the  growing  obligation that  comes  with                                                               
cashable credits for the short term  and how to fill TAPS for the                                                               
long term  and asking  if it is  possible to  design something(s)                                                               
that will allow both to be addressed at the same time.                                                                          
MR. RUGGIERO  said if it was  up to him  (but he know it's  up to                                                               
the legislature)  he would have a  predominantly net-based system                                                               
that would be self-correcting, meaning  it would have low take at                                                               
low margins  and high  take at high  margins and  people wouldn't                                                               
have  to worry  about at  what  price that  happens, because  low                                                               
margins can happen for legacy  fields at $40/barrel and for heavy                                                               
oil at  $90/barrel. He reasoned that  if you tie anything  to the                                                               
price of oil,  you're going to get one wrong.  It would also have                                                               
durability and wouldn't need fixing  as often. For example, right                                                               
now, AS  55.160 has seven  different ring fences for  doing taxes                                                               
all because they are trying to  do something special for one part                                                               
of the constituency of the producer community.                                                                                  
He believed  that with a  little time a progressive  system could                                                               
be designed that  accomplished everything with maybe  just one or                                                               
two tweaks. You can get it down  to where you don't have to worry                                                               
about six  year audits,  whether it  is an oil  expense or  a gas                                                               
expense, or  was designed to site  a common facility or  not, and                                                               
all the rest.                                                                                                                   
MR.  RUGGIERO recommended  eliminating the  cashable credits.  He                                                               
knows of only one country that  will pay some cash for NOLs. Nine                                                               
or ten years ago it was discussed  as moving Alaska to the top as                                                               
far   as  attracting   investment.  Coupled   with  credits   for                                                               
exploration  or  spending  coupled with  the  qualifying  capital                                                               
credits, the  marginal tax rate  got above 100 percent,  and that                                                               
is  why an  increased amount  of  investment has  taken place  in                                                               
Alaska. Converting  the tax  credits to  carry forward  (CF) NOLs                                                               
and  the  proper use  of  uplift  (not  being wasted  within  the                                                               
overall  system   of  the  interdependencies  of   the  different                                                               
parameters) the state could get  to the point where the producers                                                               
should be  indifferent as to  whether they  take NOLs as  cash up                                                               
front  or recover  it once  they get  their production  going. He                                                               
could keep the  NPV indifferent through a  different treatment of                                                               
3:12:34 PM                                                                                                                    
MR. RUGGIERO said  slide 25 translates economic  theory into what                                                               
Alaska has  in practice in  terms of  the producers and  the non-                                                               
producers.  The  producer  section   is  broken  down  into  cost                                                               
recovery and return on capital employed (profit). The non-                                                                      
producer's share is all profit or  rent to whoever is holding the                                                               
Every project has costs and  profit and the legislature is trying                                                               
to come up  with what is fair  for the state as a  steward of the                                                               
resource  that is  owned by  the state  and what  is fair  to the                                                               
companies for the  risks and capital they employ  to develop that                                                               
resource and to  turn it from something in the  ground to dollars                                                               
in the bank.                                                                                                                    
MR.  RUGGIERO said  he has  actually testified  on this  from the                                                               
company perspective many times.  He explained that not everything                                                               
that gets  drilled is  a commercial discovery  and ends  up being                                                               
production,  so he  is  trying  to cover  a  number of  different                                                               
things. The  fact that he  was able to  lower cost by  30 percent                                                               
from X  through deployment  of new  technology took  research and                                                               
development dollars. So, from a  company perspective what is fair                                                               
is what  they actually spent, and  the return needs to  cover not                                                               
only what  they believe to  be the  risk premium for  the project                                                               
but a  bit more to cover  their dry holes and  any other expenses                                                               
they  had  that didn't  result  in  an economic  discovery.  Some                                                               
corporate overheads  are not allowed usually  in different fiscal                                                               
systems. And then they have to cover non-allowed expenses.                                                                      
A  number  of  regimes  don't   allow  abandonment  costs  to  be                                                               
recovered, for instance.  They just have to be  paid. Those costs                                                               
can be pretty hefty, especially  for offshore sites, so they have                                                               
to make enough ahead of time to  be able to pay those charges and                                                               
do  a prudent  and environmentally  sound job  of abandoning  the                                                               
site when they are done with it.                                                                                                
MR. RUGGIERO said governments have  two approaches: companies new                                                               
to energy or  highly dependent on energy income  will always want                                                               
some form of  guaranteed revenue on day one  (royalty). They will                                                               
be very  interested in  local content  and the  jobs that  can be                                                               
created  through local  communities  and not  expats or  imported                                                               
labor. When  they become 'experienced'  and not  really dependent                                                               
on oil  income, they are  looking for constant activity  and jobs                                                               
and  become  less interested  in  the  quick  and fast  and  more                                                               
interested in  the slow and steady  - where he would  put Norway.                                                               
Norway has so  much in its petroleum fund and  so few people that                                                               
they are  now looking to  see how they can  maximize hydrocarbons                                                               
as opposed to  maximizing net present value or  internal rates of                                                               
return.  Those   countries  will  generally,  because   they  are                                                               
diversified  in  their  industries, have  more  requirements  for                                                               
local  company participation  and can  demand it  because of  the                                                               
diversification. So,  in trying to  figure out what is  fair rent                                                               
for the  government to take,  it really depends on  the situation                                                               
the government is  in with respect to how  important those energy                                                               
revenues are as  to then how they decide to  take their share and                                                               
determine the size of that share.                                                                                               
3:17:51 PM                                                                                                                    
SENATOR  MACKINNON  said  she  read  somewhere  that  Norway  was                                                               
struggling  with the  low price  of oil  and that  their citizens                                                               
have a high  tax rate: 50-70 percent of their  wages. And because                                                               
of the services  they provide they were actually  having to think                                                               
about using their sovereign wealth fund differently.                                                                            
MR.  RUGGIERO   responded  that   he  had  not   researched  that                                                               
specifically, but on a per  capital basis their Permanent Fund is                                                               
in  the millions  of  dollars  per capita  (close  to a  trillion                                                               
dollars for  20 million  people). They  have a  lot of  money and                                                               
could run the  government for decades without  taxing the people.                                                               
They  have always  had  high  taxes on  alcohol  and tobacco  and                                                               
things  they  believe that  their  citizens  really shouldn't  be                                                               
doing. There  has also  been a very  European approach  to income                                                               
where those  at the top  are paying 50-70 percent  marginal rates                                                               
on personal income.                                                                                                             
SENATOR MACKINNON said she believes  Norway is one of the highest                                                               
taxed  countries in  the world  and  maybe that  is the  European                                                               
model he is  referencing. She thought they had  been reluctant to                                                               
use the wealth  in their fund, but had to  think about it because                                                               
the individual income couldn't be taxed further.                                                                                
MR. RUGGIERO  responded that if  there were 200 countries  in the                                                               
world, 199  of them  would wish they  had Norway's  problem right                                                               
CHAIR  GIESSEL said  she  had  also heard  the  same about  Saudi                                                               
Arabia  beginning   to  cut  back  significantly   on  government                                                               
services that  used to be paid  for by the government  because of                                                               
the price of oil.                                                                                                               
SENATOR MEYER  said he always  hates comparing Alaska  to Norway,                                                               
because Norway  is a country,  but Alaska  is a state.  If Alaska                                                               
had  access  to   federal  land  like  ANWR   and  some  offshore                                                               
potential, its Permanent  Fund would probably be  much larger and                                                               
the state government, too.                                                                                                      
MR. RUGGIERO said the only reason  he brings up Norway is because                                                               
it's  a  similar  environment, has  similar  cost  structure  and                                                               
distance  from  market,  and  all   similar  players.  Alaska  is                                                               
competing  with Norway  for energy  investment regardless  of the                                                               
fact that it is a state and Norway is a country.                                                                                
3:21:20 PM                                                                                                                    
Slide  28 exemplifies  how quickly  things can  change from  when                                                               
particular legislation  is passed. Any further changes  to fiscal                                                               
policy needs to anticipate change  in parameters and all possible                                                               
3:23:38 PM                                                                                                                    
MR. RUGGIERO went back to circa  2007 timeframe when PPT and ACES                                                               
were  being  discussed;  transportation   for  oil  was  at  $15-                                                               
17/barrel. As  the price  started to  peak in  2014 and  that was                                                               
when the service  companies get back for the hard  cuts they have                                                               
to take when the  price of oil is at $20.  The oil companies know                                                               
they  have to  give  some  value back  to  the service  companies                                                               
because they  can't exist without  them, so the  price structures                                                               
naturally go  up. Therefore,  if you  happen to  design something                                                               
thinking you were  going to have only $25-20/barrel  of costs and                                                               
the cost  structure doubled  in under  10 years,  did you  have a                                                               
system in  place that was  able to contemplate and  change itself                                                               
in order to react to that increase in cost structure?                                                                           
MR. RUGGIERO said he wasn't in  Alaska for PPT, but the gross tax                                                               
was basically saying: no tax when  you're losing money, but a tax                                                               
would progress up from 0 -  4 percent once a production tax value                                                               
of  $10/bbl was  reached (cost  of  $15 and  a $25  price at  the                                                               
wellhead). If  that was the intent  at the time, one  can see why                                                               
they hear a lot  of talk about being hit with  minimum taxes at a                                                               
time when companies are losing money.  Was that the intent at the                                                               
time  this was  put together  or is  that just  now a  convenient                                                               
unintended consequence  that raises  revenue at  a time  when the                                                               
state really  needs revenue?  So, there is  a reluctance  to deal                                                               
with it.                                                                                                                        
This  is another  example of  where  the mechanism  gets tied  to                                                               
something that is fixed; it was  designed based on a situation at                                                               
a point in time, and now events  have moved on from that point in                                                               
time. He emphasized  that there is no ideal  structure out there,                                                               
but they do  know that over time certain tools  have survived and                                                               
continue  to be  used because  they  are useful  and others  have                                                               
disappeared because  they have been  shown not to be  helpful and                                                               
are constantly being changed.                                                                                                   
3:24:53 PM                                                                                                                    
Each  regime  generally  tries  to level  the  playing  field  or                                                               
provide  as much  balance  as possible  between  big players  and                                                               
small players,  new players and incumbents,  and conventional and                                                               
unconventional resources, because  they all know they  need a mix                                                               
of companies  and ideas.  That usually  means nothing  but upside                                                               
for the country involved.                                                                                                       
Because a  lot of people  think this doesn't exist,  Mr. Ruggiero                                                               
said every petroleum taxation structure,  even ones he has helped                                                               
design, in use  today have biases. He knows where  the bias is in                                                               
his structures and how to  maximize his position within it. There                                                               
is  no  ideal  fool-proof  system. It  just  doesn't  happen.  He                                                               
wouldn't fuss  over trying  to get everything  down to  the fifth                                                               
decimal point or having long  sections on how to carry everything                                                               
out. He  would make sure the  right intent is in  there, and then                                                               
with a few regulations the thing  happens. When you try to do too                                                               
much and  tie it down too  tight is when you  get into unintended                                                               
3:27:15 PM                                                                                                                    
Mr.  Ruggiero said  everything  that gets  presented  is done  in                                                               
averages, but he could guarantee them  that not a single field or                                                               
a single taxpayer  matches that average. The average  sits in the                                                               
middle  of a  couple mountains  and they're  going to  be a  much                                                               
lower cost structure or a  much higher cost structure. He brought                                                               
this  up   so  that  as  they   look  at  modeling  or   ask  for                                                               
sensitivities to  be run,  they can  understand that  averages is                                                               
not where  anybody is really at.  So, when you get  reaction from                                                               
industry  or  others,  some  will  react  differently,  and  it's                                                               
because one may be on the left  side of the average and the other                                                               
will be on  the right side. You can hear  conflicting things from                                                               
the same people who have units  right next to each other, because                                                               
their  cost  structure, their  legacy  issues,  and their  future                                                               
potential are all going to be a bit different.                                                                                  
3:28:24 PM                                                                                                                    
He urged them  to think realistically in terms of  one or two new                                                               
prospects  coming on  line each  year; over  the next  5-10 years                                                               
they may  have four or  five. A lot  is known about  their legacy                                                               
and only a few major things  can come on, so, field models should                                                               
be  run  with  parameters  that  are  close  enough  and  modeled                                                               
independently and  collectively to  understand the impact  of the                                                               
fiscal  system on  their  economics. Mr.  Ruggiero  said what  he                                                               
thought a  field was going  to be a  good prospect when  his team                                                               
first got  it and didn't resemble  itself when he went  for Final                                                               
investment  decision (FID);  the  two hardly  ever resemble  each                                                               
other. It just happens as one  learns more and technology and the                                                               
world market changes.                                                                                                           
MR.  RUGGIERO urged  legislators  to ask  the  producers what  is                                                               
really next in line to be  brought on and when, because if you're                                                               
making a change you want it  to be responsive to what is actually                                                               
there,  not  some  average.  Companies  can  bring  data  forward                                                               
regarding where they are now.                                                                                                   
3:30:22 PM                                                                                                                    
Another point he urged legislators  to think about is the shut-in                                                               
point on  TAPS. He used  an illustration  to show oil  that would                                                               
have not been produced if the  North Slope wells had been shut in                                                               
at  250,000/bbl/day. What  if one  of the  new projects  is worth                                                               
plus or minus  $20-50 billion? So, when you think  about what you                                                               
are giving to get one of  these new projects on, think about what                                                               
you are getting, he advised. Two  new projects on the North Slope                                                               
could produce  in excess  of 100,000 bbls/day  at peak.  It's not                                                               
only the  revenue the  state takes from  those projects,  but the                                                               
revenue that  will be  generated through the  tax and  royalty in                                                               
the future. There is actually more  at stake for the industry and                                                               
the  state to  ensure  that  new production  gets  into the  pipe                                                               
sooner,  so the  state  can deal  with how  to  handle the  extra                                                               
volumes  instead of  handling when  the flow  is so  low that  it                                                               
won't move down the pipeline anymore.                                                                                           
3:33:30 PM                                                                                                                    
If  it's not  about the  rate, what  is it  about? Why  are these                                                               
hundreds of billions being invested  in places that have a higher                                                               
rate than  Alaska? Mr. Ruggiero  said it  usually has to  do with                                                               
the net present value (NPV) or  the internal rate of return (IRR)                                                               
that is mostly  impacted by how quickly the producer  can get his                                                               
money  back. Getting  it back  quicker means  his risks  are much                                                               
lower. Therefore,  his ability to  go in and make  the investment                                                               
is better.                                                                                                                      
So, Mr. Ruggiero  said, he ran a hypothetical  field that doesn't                                                               
resemble anything only  for the purpose of showing  the effect of                                                               
timing on  producer economics.  He had  a year-one  investment of                                                               
$100. In years 2-10 $400 comes  back: $100 of it becomes the cost                                                               
recovery  and the  $300  left  over is  profit  to split  between                                                               
producer  and the  government. He  wanted  to show  how much  the                                                               
economics can change with just  handling how who gets their share                                                               
when.  One  of  the  more  traditional  items  across  production                                                               
sharing  contracts  is  some form  accelerated  or  delayed  cost                                                               
recovery  and depending  on that  is handled  results in  a range                                                               
from  very a  doable and  profitable  project to  a project  that                                                               
would not get developed.                                                                                                        
3:37:07 PM                                                                                                                    
His example showed  IRRs from 6 percent - 27  percent on the same                                                               
amount of  money. This  is what they  have to  understand because                                                               
this is  driving the  decisions. The rhetoric  will be  all about                                                               
tax rate,  and while  some increases can  be damaging,  there are                                                               
all these other  levers that have as much if  not more importance                                                               
than  the tax  rate on  determining  the economics,  and then  on                                                               
determining whether or not they choose to invest or not.                                                                        
3:40:01 PM                                                                                                                    
MR. RUGGIERO said  he built a price model that  ranges from $20 -                                                               
$200\bbl    and    used    some   assumptions    starting    with                                                               
500,000\bbl\day. He  was just rounding numbers  to show magnitude                                                               
and direction,  and cautioned  them that  these are  not absolute                                                               
numbers. His assumptions were:                                                                                                  
-Non-GVR is about 450,000 bpd                                                                                                   
-GVR is about 50,000 bpd                                                                                                        
-$10/bbl transportation and shipping                                                                                            
-$30/bbl operating and capital costs                                                                                            
-12.5 percent royalty                                                                                                           
The model had two effective net  tax rate curves for oil: one was                                                               
the  status  quo (SB21/HB247)  and  the  other changed  structure                                                               
parameters.  Making  changes  to  the model  -  the  increase  or                                                               
decrease on petroleum  tax relative to what is in  place today  -                                                               
will  make  some green  bars  pop  up  called delta  dollars.  He                                                               
advised that the current structure is  based off the price, but a                                                               
lot of the proposed structure is  based off of PTV, and depending                                                               
what  the cost  assumptions are,  the PTV  moves even  though the                                                               
price doesn't move.                                                                                                             
MR.  RUGGIERO spent  about 10  minutes explaining  how the  model                                                               
worked in detail and answering questions.                                                                                       
3:49:23 PM                                                                                                                    
SENATOR MACKINNON  asked Mr. Ruggiero  to model at oil  prices of                                                               
$40-$70 with $5 increments.                                                                                                     
SENATOR WIELECHOWSKI asked  if he has a similar  model that shows                                                               
NPV and IRR for the state and the companies.                                                                                    
MR. RUGGIERO  answered since  this is just  a "price  step model"                                                               
there is  no concept of  NPV or IRR  for either the  producers or                                                               
the  state and  he eventually  wanted to  get into  a life  cycle                                                               
model using a profile similar to  one of the proposed North Slope                                                               
projects. Then  they could  plug in  a whole  new field  over the                                                               
life of 30 years and be able to  say what that does to the IRR or                                                               
the NPV of all the players: state, federal, and producers.                                                                      
SENATOR WIELECHOWSKI  said that would  be very helpful  and asked                                                               
if he  has the information he  needs from the producers  in order                                                               
to build a model of those hypothetical fields.                                                                                  
MR.  RUGGIERO answered  that  he  has the  same  profiles DOR  is                                                               
using, because  he wants to make  sure their models get  the same                                                               
results with the same profiles. He  didn't want to waste time and                                                               
money on model  errors. They actually compared  their results for                                                               
different things on that model and they are very close.                                                                         
SENATOR MICCICHE observed  the House Resources version  of HB 111                                                               
seemed to take  into consideration the fact that we  don't have a                                                               
crystal  ball.  The  House  Finance version  seems  to  have  the                                                               
approach legislators are warned  against, that is assuming prices                                                               
in a particular range.                                                                                                          
MR.  RUGGIERO said  he is  right. The  House Resources  bill just                                                               
changed the  credits, but  kept them tied  to prices  not margin.                                                               
The House  Finance bill based  the tax  on margin. A  110 percent                                                               
multiplier can be used on the  costs and one will immediately see                                                               
how the curves change and move  relative to each other. The point                                                               
where the minimum  gross takes over from the net  changes and the                                                               
direction of  the curves  change as well.  Those are  the nuances                                                               
and  interdependencies  that  when   looking  a  static  pictures                                                               
doesn't  provide. Those  inform about  one dot  on a  4,000 pixel                                                               
picture and  you need the other  3,999 pixels so you  can see the                                                               
picture.  He tries  to build  the tools  so that  legislators can                                                               
very quickly run any of the  "what-ifs" to start to get the 4,000                                                               
pixel picture instead of the 1 pixel picture.                                                                                   
3:54:57 PM                                                                                                                    
He said he heard the  term "unintended consequences" used earlier                                                               
and how  they are finding out  a lot of things  about the current                                                               
structure that  they didn't think worked  that way.  He  was just                                                               
as  surprised. But,  because  he was  getting  results he  didn't                                                               
understand  after  running  tens  of  thousands  of  runs,  these                                                               
strange  interactions came  to light  in converting  from cashing                                                               
NOL credits  to doing what  99 percent of  the rest of  the world                                                               
does, which is  carry any losses forward as NOLs  and then deduct                                                               
them ultimately from future revenue.                                                                                            
NOL recovery are time is affected  the amount of uplift and total                                                               
recovery time  of costs.  The standard is  that producers  get to                                                               
recover their costs and beyond  that there is no standard. Dozens                                                               
of different  mechanisms do  this. In  fact, some  countries have                                                               
multiple mechanisms in place in  different contracts as they keep                                                               
trying to modify things to find their sweet spot.                                                                               
MR. RUGGIERO  said, however,  he can  tell them  if they  wish to                                                               
handle the  short term issue  - the  cashable credits -  in their                                                               
current structure  and decide  to touch  nothing else,  there are                                                               
some significant  unintended consequences  and the  producers can                                                               
be kept whole. He will show why in the next presentation.                                                                       
3:57:10 PM                                                                                                                    
SENATOR  MICCICHE  asked Mr.  Ruggiero  if  he knows  of  another                                                               
sovereign that has provided cashable  credits that are payable to                                                               
the entity without them having a tax liability.                                                                                 
MR. RUGGIERO  said he was  aware of  only one other  country that                                                               
has paid  for failed exploration.  Other than that  everything he                                                               
is familiar  with if there has  been an expense, the  company has                                                               
to recover it ultimately from production.                                                                                       
3:57:39 PM                                                                                                                    
At ease                                                                                                                         
4:11:17 PM                                                                                                                    
CHAIR  GIESSEL called  the meeting  back to  order and  said they                                                               
would  take up  the second  part of  Mr. Ruggiero's  presentation                                                               
called "Understanding the Impact of NOLs."                                                                                      
4:11:42 PM                                                                                                                    
MR. RUGGIERO  said in  moving from  the unit  price model  in his                                                               
previous testimony  to a full  life cycle model, he  noticed some                                                               
things he couldn't explain. He  uses a "flat and round" technique                                                               
in  building  models that  uses  the  same  price (a  nice  round                                                               
number) and a  nice round number for production. So,  that way he                                                               
can look  at the columns  by year  and make sure  that everything                                                               
calculates  out. So,  having done  that, all  of the  columns and                                                               
rows seem to  add up. It looked fine. Then  he started putting in                                                               
indicative profiles with changing  prices, production, and costs,                                                               
and he  got results that  didn't make  sense. He wondered  if his                                                               
models were missing something. On  the plane ride home he started                                                               
figure  it out  and  decided  it was  really  important. He  went                                                               
through  his  thought process  of  getting  rid of  cashable  NOL                                                               
credits and offering them as  carry forward losses to be deducted                                                               
against their  taxable value, because  then the loss needs  to be                                                               
useful to the producers.                                                                                                        
MR. RUGGIERO said  he would cover how NOLs  are handled generally                                                               
and how they  are handled in Alaska under  the existing structure                                                               
as well as  issues if NOLs are the only  thing that gets changed.                                                               
Then he'll  look at it on  a GVR and a  non-GVR field. Basically,                                                               
NOLs  in any  year of  operation are  the amount  of expenses  in                                                               
carrying  out  activities  that  exceed  the  amount  of  revenue                                                               
available for recovery of those expenses.                                                                                       
In a  pure gross-based system  companies very rarely  worry about                                                               
costs,  but some  governments he  has worked  with do  worry that                                                               
costs between  the market  and back  to the  lease are  not arms-                                                               
length  transactions, because  they  are with  affiliates of  the                                                               
In a net based system, cost  recovery is one of the key elements,                                                               
and  their  timing is  very  important  to  the return  that  the                                                               
producer gets.  In the  world of cost  recovery, PSCs  talk about                                                               
"cost oil", meaning  in any given year the number  of barrels and                                                               
the  revenue  associated with  them  are  made available  to  the                                                               
producer  to recover  their costs.  Generally, different  regimes                                                               
allow  50-100 percent  of the  available revenue  to be  used for                                                               
cost  recovery.   Governments  that   are  highly   dependent  on                                                               
petroleum revenue will tend to limit  NOLs to be used in a single                                                               
year  because they  always want  to  have some  royalty and  some                                                               
corporate income  tax. Whereas  those regimes  that are  not that                                                               
dependent on oil and have  multi-faceted industries tend to allow                                                               
some  more   accelerated  recovery   because  they   aren't  that                                                               
dependent  on the  oil  revenues coming  in.  "Straight line"  or                                                               
"double declining"  are different  forms of  depreciating capital                                                               
assets within a company that many businesses use.                                                                               
4:16:54 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  gross systems tend  to be  a more                                                               
efficient use of expenses by the producers.                                                                                     
MR. RUGGIERO  answered that years  ago some contracts  were known                                                               
as  goldplate  contracts  because   they  basically  allowed  the                                                               
producer  to  recovery  anything including  "the  kitchen  sink."                                                               
Companies tended to  put as many people as they  could into those                                                               
projects because they could get  full recovery of everything they                                                               
paid. But for the most part,  the managers are incentivized to do                                                               
the least cost for what they  need to accomplish and for the most                                                               
part they  are diligent  in trying  to make  sure that  what they                                                               
accomplish is  accomplished in the  least amount of time  for the                                                               
least  amount of  dollars. He  hadn't seen  that much  difference                                                               
between a gross and a net system.                                                                                               
4:18:36 PM                                                                                                                    
What  is  the value  of  cost  recovery? Different  regimes  have                                                               
different economics:  in country A you  would definitely wouldn't                                                               
think  twice about  investing and  in country  B you  would never                                                               
invest. The  variations in these  systems relate not only  to the                                                               
timing  but  other  things  like  uplift  and  interest  allowed.                                                               
Uplifts  are in  the form  of  additional expenses,  so they  are                                                               
deducted at the  top of the ledger. When they  come in as credits                                                               
they are  deducted at the  bottom of the  ledger after a  tax has                                                               
been calculated. Much like Alaska, whether  or not a regime has a                                                               
single rate system or a tiered  system and whether it comes in as                                                               
an expense or a credit has a big  impact on how it's looked at by                                                               
industry. All  of that  together probably  has more  influence on                                                               
whether a project is marginally doable than the tax rate.                                                                       
4:20:18 PM                                                                                                                    
MR. RUGGIERO  said he  made up some  scenarios about  Alaska NOLs                                                               
and  their  unintended  consequences.   NOLs  are  created  in  a                                                               
calendar year  when deducting  allowable expenses  the production                                                               
tax  value (PTV)  is less  than  zero. The  amount of  deductible                                                               
expenses  below a  zero  PTV then  become an  NOL  ($500 in  this                                                               
example). Cashable  credits in  a 35  percent tax  rate structure                                                               
would generate  $175. This $175  represents the maximum  value of                                                             
that $500 NOL  to the producer, which he called  the "100 percent                                                               
used and useful  NOL value." He found that  with the interactions                                                             
of the  various pieces  of the current  tax code,  producers very                                                               
rarely, if  ever, receive $175 in  value of tax savings  for that                                                               
$500, which is what you want to try to get away from.                                                                           
4:22:03 PM                                                                                                                    
His first model used  a GVR field. He said wherever  you are in a                                                               
low price environment, medium or  high, his examples show how the                                                               
value of  the NOLs change and  the modeling shows that  the value                                                               
to the  taxpayer of  the CF  NOLs can  be negatively  impacted by                                                               
credits or other mechanisms within the fiscal system.                                                                           
4:26:32 PM                                                                                                                    
SENATOR WIELECHOWSKI  said his model  was assuming the tax  is 35                                                               
percent, but  that doesn't  happen until oil  is $160\bbl  and he                                                               
was  wondering how  that impacts  things.  He also  asked how  he                                                               
arrived at a  per barrel credit (PBC) of $40  when the highest is                                                               
MR. RUGGIERO answered  don't read anything into how  he went from                                                               
$5/bbl to $40/bbl.  He is just using round numbers  for a simpler                                                               
SENATOR WIELECHOWSKI said numbers were kind of important.                                                                       
MR. RUGGIERO  said he could  make that number bigger  or smaller,                                                               
but the impact  he was trying to show is  still there regardless.                                                               
He would illustrate that with additional runs.                                                                                  
To the first question: even today  when you have a GVR field they                                                               
do this  same calculation. They  will come down to  their taxable                                                               
barrels; they will come down to  the taxable value of the taxable                                                               
barrels. And  then they will apply  the 35 percent and  then they                                                               
will  subtract  the $5/bbl  credit.  So,  in the  calculation  he                                                               
applied a  35 percent rate to  figure out what the  tax is before                                                               
applying the PBCs.                                                                                                              
4:28:12 PM                                                                                                                    
MS.  RUGGIERO  added that  the  $40/bbl  credit is  difficult  to                                                               
understand, and from her perspective  the purpose of choosing the                                                               
$40 is for  the example's sake. It doesn't get  used in the first                                                               
two years, but  it gets used in the following  years. So, the $40                                                               
number  was chosen  really for  example's sake  to compare  years                                                               
where the credit  is not used and years where  the credit applies                                                               
to taxes that are owed.                                                                                                         
SENATOR BISHOP  said the key  takeaway is that the  producer only                                                               
received a 54 percent credit in the first instance.                                                                             
MR. RUGGIERO  said yes.  It would  be as  though he  had cashable                                                               
credits worth  $175 but you only  paid him 54 percent  of that or                                                               
SENATOR MICCICHE said it's important  for the public to know this                                                               
example is a  project that has constant gross value  at the point                                                               
of production of $400/year and is not based on a barrel of oil.                                                                 
MR. RUGGIERO responded that actually  the way it went through his                                                               
head he  had eight barrels at  $50/bbl, which results in  a gross                                                               
value  of  $400  and  the  $40  credit,  and  he  was  trying  to                                                               
illustrate was their interaction and  the resulting loss of value                                                               
to the  producer. It is important  to run actual numbers  to know                                                               
that  what is  being changed  will have  the right  impact moving                                                               
4:30:24 PM                                                                                                                    
SENATOR  COGHILL   remarked  that  Mr.  Ruggiero's   example  was                                                               
probably not close to reality.                                                                                                  
MR. RUGGIERO responded that it's not;  and he used it to show the                                                               
impact of the interaction of  the various pieces with the current                                                               
policy, not to depict reality.                                                                                                  
4:32:38 PM                                                                                                                    
His next  example (slide  14) used a  higher price  and increases                                                               
the gross  value to 25  percent with NOLs  of $500, but  all else                                                               
unchanged. Without use  of any CF NOLs, the total  tax paid would                                                               
be $325. So,  if the NOLs are used and  useful, he should realize                                                               
$175 in  savings and  after applying  the $500  NOL his  tax over                                                               
that five years would be no more the $150.                                                                                      
4:33:43 PM                                                                                                                    
Slide 15  added the NOLs to  the model and because  of the higher                                                               
revenues coming  in and  costs being the  same, they  are totally                                                               
consumed  in two  years.  The tax  comes down  to  $195. At  this                                                               
higher  price  the NOLs  provide  more  value;  they are  now  74                                                               
percent used and  useful (compared to 54 percent  in his previous                                                               
example). He is getting more of  the expected benefit at a higher                                                               
He  added unless  there is  a big  price spike,  because of  cost                                                               
structure, relatively speaking, new  fields are probably going to                                                               
be in  a low PTV per  barrel state for  some time as they  try to                                                               
gear up  to peak production  and pay off  their costs. In  all of                                                               
his examples  the producers are  not being  kept whole, as  he is                                                               
today.  "So,  not being  able  to  recover  your NOLs  puts  your                                                               
economics at a great disadvantage."                                                                                             
4:35:14 PM                                                                                                                    
SENATOR BISHOP said nobody likes to operate in an NOL situation.                                                                
MR.  RUGGIERO responded  that no  one likes  to, but  in the  oil                                                               
patch they always  do. You can't just invest a  dollar and all of                                                               
a sudden have positive revenue come out the other end.                                                                          
SENATOR BISHOP  said that was  fair enough, but  theoretically in                                                               
time  as the  price  increases  you should  come  out  of an  NOL                                                               
situation at some point.                                                                                                        
4:36:45 PM                                                                                                                    
MR.  RUGGIERO said  because  of the  interaction  of the  various                                                               
mechanisms within a fiscal structure,  they need to make sure the                                                               
intended effect actually can occur.  No one item should be viewed                                                               
stand-alone and care  should be taken to make sure  the level and                                                               
degree of  inter-dependency is understood.  So long as  they keep                                                               
some form of GVR, per barrel  credits, and hard floors related to                                                               
gross  minimum taxes,  the  impact  of CF  NOLs  will range  from                                                               
slightly  used and  useful to  almost used  and useful,  but that                                                               
almost  only occurs  at extremely  high prices  and an  extremely                                                               
high PTV per barrel.                                                                                                            
What is really  needed is a full  life cycle model of  one of the                                                               
expected developments on  the North Slope so  legislators can run                                                               
whatever changes  they are thinking against  it, because changing                                                               
other mechanisms, such as increasing  the minimum tax or reducing                                                               
per barrel  credits, will alter the  value of the CF  NOLs to the                                                               
producer  and the  state. Because  there  may be  three to  seven                                                               
years of costs before the first  dollar of revenue comes in to be                                                               
able  to apply  to NOLs  to and  recover them,  a company  really                                                               
needs to  know in coming out  of that development period  that it                                                               
is going to get  value for the actual costs that  it put into the                                                               
4:38:16 PM                                                                                                                    
CHAIR GIESSEL said  the present bill limits use of  the NOLs to a                                                               
10-year period  before they  begin to evaporate  by 10  percent a                                                               
year, and  that wouldn't cover  a new  player coming in  who will                                                               
have  at least  seven to  ten years  of development  costs before                                                               
they begin to produce any kind of oil.                                                                                          
MR.  RUGGIERO answered  that is  exactly what  he sees,  but they                                                               
also need to  discuss staging of the deductions.  For example, if                                                               
he has $500  worth of carry forward NOLs, $500  in opex, and $500                                                               
in revenue and  if he has to apply his  current losses first, now                                                               
he has  just carried that $500  another year and lost  a year off                                                               
of whatever  limit there  is. If  he applies  the $500  first, he                                                               
still has  another $500 to carry  forward, but now it's  only one                                                               
year old, not two. So, staging of  the NOLs can make or break the                                                               
economics depending on how the statute is written.                                                                              
CHAIR GIESSEL said  she thought he was pointing out  that this is                                                               
a very  complex tax system  and the  slightest change can  have a                                                               
profound effect.                                                                                                                
MR. RUGGIERO said that was correct.                                                                                             
SENATOR WIELECHOWSKI  asked how complex  it is compared  to other                                                               
countries or jurisdictions and if  Alaska is fairly balancing the                                                               
interplay of  how quickly  companies get  their NOLs  back versus                                                               
the tax rate.                                                                                                                   
MR. RUGGIERO answered if there is  a spectrum with the average in                                                               
the  center,  the ability  for  a  company  to take  any  capital                                                               
spending and  in essence treat  it like an  opex, puts it  on the                                                               
very  positive side  of  that spectrum.  A  lot of  jurisdictions                                                               
distinguish between  opex and capex,  and the capex  goes through                                                               
some  sort  of  deferred   recovery  (his  previous  presentation                                                               
illustrated  how costly  or  beneficial  accelerated or  deferred                                                               
recovery can  be). But in  all the systems  that would be  on the                                                               
favorable side the  producers are actually able  to recover those                                                               
costs in full. A system where  they can't recover their costs for                                                               
one reason  or another  and start  getting taxed  as if  they had                                                               
(because you're taxing profit, which  is usually determined after                                                               
costs), that will  push the needle to the negative  side. How far                                                               
depends  on  how  the  mechanism ultimately  comes  out  and  the                                                               
interplay between the other pieces within the tax code.                                                                         
SENATOR WIELECHOWSKI  asked about the complexity  of Alaska's tax                                                               
MR.  RUGGIERO replied  that from  a  practitioner perspective  of                                                               
someone who has  helped governments write or  modify code, Alaska                                                               
ranks in the top 10 of the most complex.                                                                                        
4:42:41 PM                                                                                                                    
He continued running through the  exact same example on a non-GVR                                                               
field and wasn't  able to fully realize the 100  percent used and                                                               
useful value of those  NOLs. So, if they are going  to get rid of                                                               
the  cashable credits,  a company  needs to  get some  comparable                                                               
value for  what they are  doing. So  mechanisms have to  be found                                                               
around the  interdependency that impacts per  barrel credits, GVR                                                               
reductions, and gross minimum floors.                                                                                           
SENATOR WIELECHOWSKI  asked what most regimes  typically allow in                                                               
terms of NOL recovery.                                                                                                          
MR. RUGGIERO  responded that  other regimes  just don't  give out                                                               
cash, but every jurisdiction he  has worked on and every contract                                                               
he has written  allow full recovery of an  operator's NOLs before                                                               
they  pay profit-based  taxes. All  jurisdictions  have time  and                                                               
uplift  that affect  how fast  a  company gets  that 100  percent                                                               
back; many  get 120 or  180 percent  back. Usually the  uplift is                                                               
inserted  so  that  a  company becomes  indifferent  to  the  net                                                               
present value basis (NPV).                                                                                                      
4:45:58 PM                                                                                                                    
SENATOR  WIELECHOWSKI said  this  where the  tax  rate comes  in,                                                               
because he  has always looked  at it  as a sliding  scale. States                                                               
like Texas  and North Dakota  have very  low tax rates,  but they                                                               
don't fund  any of the  costs. The  countries like Iran  and Iraq                                                               
have a 98 percent government take,  but they allow 100 percent of                                                               
the costs.  Alaska is sort of  a hybrid: if we're  going to allow                                                               
100 percent operating recovery like  Norway that has a 78 percent                                                               
tax  rate -  which is  worth  discussing -  do we  need to  start                                                               
adjusting the  tax structure  upwards if  we start  allowing more                                                               
NOL recovery?                                                                                                                   
MR. RUGGIERO  replied that  Norway, at  78 percent,  controls all                                                               
the  pieces that  are government  take. HB  111 is  talking about                                                               
only one  small portion of  government take, the  production tax,                                                               
and  that one  piece  doesn't have  to be  raised.  Alaska is  65                                                               
percent compared  to Norway's 78  percent. The piece that  is not                                                               
the petroleum  tax are  the two corporate  income taxes  and they                                                               
get to  recover 100 percent of  those costs in a  used and useful                                                               
manner.  He  is recommending  that  they  duplicate that  on  the                                                               
petroleum tax  so that companies  are also  able to get  used and                                                               
useful  recovery of  their  capital spending  and  any other  net                                                               
operating losses.                                                                                                               
SENATOR BISHOP noted that the  state is still banking the royalty                                                               
while they are recovering their capex and opex.                                                                                 
MR.  RUGGIERO said  that is  exactly  right; the  state is  still                                                               
banking royalty, property tax, and state corporate income tax.                                                                  
SENATOR STEDMAN said clearly industry  needs to be able to recoup                                                               
their costs,  but in doing  so, he  hopes Mr. Ruggiero  can bring                                                               
forward a  way to get away  from cashable credits, a  way to make                                                               
the system  less complex, and  reveal suggestions on how  to deal                                                               
with any other unintended consequences the system has.                                                                          
CHAIR GIESSEL asked  Mr. Ruggiero if he had placed  the NOLs in a                                                               
location in this calculation that  makes them no longer fall into                                                               
the  credit   category,  because  they  are   coming  before  the                                                               
calculation of the tax.                                                                                                         
MR.  RUGGIERO  replied  that was  accurate,  because  instead  of                                                               
converting the  NOL to credits he  is carrying them forward  as a                                                               
loss. NOL  is a fancy name  for operating costs that  are not yet                                                               
recovered.  So, he  was  putting  it in  the  same  place in  the                                                               
calculation as their other operating loss.                                                                                      
4:50:22 PM                                                                                                                    
SENATOR MICCICHE asked if every  net-based tax system returns 100                                                               
percent of losses.                                                                                                              
MR. RUGGIERO  responded everyone he  is aware of and  worked with                                                               
is able to get that  expected tax benefit through his definition:                                                               
"100 percent used and useful."                                                                                                  
SENATOR MICCICHE  asked if he also  said that time and  method of                                                               
the 100 percent recovery determines the NPV.                                                                                    
MR. RUGGIERO answered those do  heavily impact the return and the                                                               
NPV of a project.                                                                                                               
SENATOR MICCICHE asked  if he said in some  cases uplift recovers                                                               
more than 100 percent of a company's losses.                                                                                    
4:51:31 PM                                                                                                                    
MR. RUGGIERO answered yes; for  example the project that has five                                                               
years of  spending before  it ever goes  into production  and the                                                               
spend is of  such a significant value that it  takes them another                                                               
five or six years to fully  recover those NOLs, it could be seven                                                               
or eight  years from  the date  they first create  an NOL  to the                                                               
last date they recover them. Using  a 15 percent discount rate on                                                               
a project  that is  10 years  out has  a NPV  today of  less than                                                               
half. So,  in order  for it to  have the same  value today  in 10                                                               
years, it  has to  be uplifted  to a much  higher amount  so that                                                               
when he discounts it back it  has the same net present value. The                                                               
state can choose to go with a  15 percent discount rate or pick a                                                               
number - like 10 or 12 percent.                                                                                                 
SENATOR MICCICHE said  he is with Senator Stedman;  he has always                                                               
viewed  cashable credits  as playing  poker  with someone  else's                                                               
money. His question is: Is HB  111 the only potential regime that                                                               
does not allow 100 percent used and useful NOLs?                                                                                
MR. RUGGIERO answered that is correct.                                                                                          
4:53:18 PM                                                                                                                    
His non-GVR  example on slide  20 at  a higher price,  again, the                                                               
NOLs  were 11  percent used  and useful.  Slide 21  added in  the                                                               
other pieces  of the  system and  he noted  the numbers  were all                                                               
over  the board.  He was  running  just a  simple rounded  number                                                               
example and  he had come up  with the used and  useful NOL values                                                               
of  0, 9,  11, 34,  36,  50, 54,  and  74. He  calls that  highly                                                               
complex. And  for an  operator to come  to Alaska,  especially if                                                               
they  are not  previously familiar  with it  and try  to build  a                                                               
model, they would  probably do what he did when  he first built a                                                               
model:  build it  the way  that  he logically  thought it  should                                                               
work,  but then  get  hit with  the reality  of  how it  actually                                                               
works. So, they  have to bridge the gap between  how people think                                                               
it works with how it actually does work.                                                                                        
SENATOR  BISHOP commented  that the  tax auditors  are trying  to                                                               
apply the same complex system.                                                                                                  
MR. RUGGIERO  responded that he  has been accused  of eliminating                                                               
work for  consultants and auditors  by urging  simplification. He                                                               
remembered in  working through  the SB  21 process,  that nothing                                                               
like this was  brought up, mainly because they  weren't forced to                                                               
because  everything was  a  cashable credit.  It's  come up  now,                                                               
because  the state  is  moving  towards treating  it  like it  is                                                               
treated everywhere else.  It is a solvable  situation he hastened                                                               
to assure them.                                                                                                                 
SENATOR WIELECHOWSKI  asked what  sort of  general impact  to the                                                               
treasury in  next few  years would  happen in  going to  a system                                                               
that allows 100 percent recovery of NOLs.                                                                                       
4:56:17 PM                                                                                                                    
MR.  RUGGIERO answered  if  you  came up  with  a mechanism  that                                                               
ensured those 200,000 bbl/day fields  coming onboard on the North                                                               
Slope they  would be  adding another $50  billion along  with the                                                               
existing fields to the treasury.                                                                                                
SENATOR WIELECHOWSKI asked for any short-term impacts.                                                                          
MR. RUGGIERO  answered the beauty of  this is there is  no short-                                                               
term  impact, because  (in this  CS)  those costs  stay with  the                                                               
entity in  that field and  that unit.  It doesn't cost  the state                                                               
anything until  there is actual  production that would  have owed                                                               
taxes but for the NOLs. That concluded his presentation.                                                                        
4:58:08 PM                                                                                                                    
CHAIR GIESSEL found  no further business and  adjourned the Joint                                                               
Senate  Resources and  Senate Finance  Committee meeting  at 4:58                                                               

Document Name Date/Time Subjects
Agendas - 4 - 15 - 17.pdf SRES 4/15/2017 2:00:00 PM
HB 111- Presentation 1 from Castle Gap Advisors - 4 - 15 - 17.pdf SRES 4/15/2017 2:00:00 PM
HB 111
HB 111- Presentation 2 from Castle Gap Advisors - NOLs - 4 - 15 -17.pdf SRES 4/15/2017 2:00:00 PM
HB 111