Legislature(2017 - 2018)BUTROVICH 205

01/31/2018 03:30 PM RESOURCES

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Audio Topic
03:30:15 PM Start
03:30:49 PM Oil and Gas 102 to the Alaska Legislature
04:50:34 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Agenda Change --
+ Overview: Alaska's State Managed Game Refuges TELECONFERENCED
Sanctuaries & Critical Habitat Areas
- Department of Fish & Game
-- Testimony <Invitation Only> --
<Above Item Rescheduled to 2/02/18>
<New Item Added Below>
Overview: Oil and Gas 102 to the Alaska
- Consultants to the Legislative Budget & Audit
Committee In3ergy:
Mr. Rich Ruggiero
Ms. Christina Ruggiero
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        January 31, 2018                                                                                        
                           3:30 p.m.                                                                                            
MEMBERS PRESENT                                                                                                               
Senator Cathy Giessel, Chair                                                                                                    
Senator Natasha von Imhof                                                                                                       
Senator Bert Stedman                                                                                                            
Senator Kevin Meyer                                                                                                             
Senator Bill Wielechowski                                                                                                       
Senator Click Bishop                                                                                                            
MEMBERS ABSENT                                                                                                                
Senator John Coghill, Vice Chair                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
Senator Berta Gardner                                                                                                           
COMMITTEE CALENDAR                                                                                                            
OIL AND GAS 102 TO THE ALASKA LEGISLATURE                                                                                       
     - HEARD                                                                                                                    
PREVIOUS COMMITTEE ACTION                                                                                                     
No previous action to record                                                                                                    
WITNESS REGISTER                                                                                                              
RICH RUGGIERO                                                                                                                   
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Presented "Oil and Gas 102."                                                                              
CHRISTINA RUGGIERO                                                                                                              
Juneau, Alaska                                                                                                                  
POSITION STATEMENT: Helped present "Oil and Gas 102."                                                                         
ACTION NARRATIVE                                                                                                              
3:30:15 PM                                                                                                                    
CHAIR  CATHY   GIESSEL  called  the  Senate   Resources  Standing                                                             
Committee meeting  to order at 3:30  p.m. Present at the  call to                                                               
order  were Senators  Stedman, Wielechowski,  Bishop, Von  Imhof,                                                               
Meyer, and Chair Giessel. Senator Coghill was excused.                                                                          
^Oil and Gas 102 to the Alaska Legislature                                                                                      
            Oil and Gas 102 to the Alaska Legislature                                                                       
3:30:49 PM                                                                                                                    
CHAIR GIESSEL  announced the  only order  of business  today, the                                                               
presentation:  Oil and  Gas  102 to  the  Alaska Legislature.  On                                                               
October  18,  2017,  she  and co-chair  of  the  House  Resources                                                               
Committee coordinated  with Senator Stedman to  hold an (all-day)                                                               
introductory course  entitled "Oil  and Gas 101."  It is  on line                                                               
for the  public to  see and  it lays  the foundation  for today's                                                               
presentation, which is called "Oil and Gas 102."                                                                                
3:32:18 PM                                                                                                                    
RICH  RUGGIERO, In3nergy,  introduced himself  and said  he would                                                               
present "Oil and Gas 102."                                                                                                      
CHRISTINA  RUGGIERO, In3nergy,  introduced herself  and said  she                                                               
would help present "Oil and Gas 102."                                                                                           
SENATOR STEDMAN said they are trying  to lay down a base level of                                                               
knowledge  about oil  and  gas for  elected  officials and  their                                                               
staff, as well as other interests in the public.                                                                                
3:33:16 PM                                                                                                                    
MR. RUGGIERO said  when they were asked to put  "Oil and Gas 102"                                                               
together, he went  back and looked at "Oil and  Gas 101" and then                                                               
got together  with members  of the  Legislative Budget  and Audit                                                               
(LB&A)  staff   and  all  the   other  consultants  and   got  an                                                               
appreciation for  the level of understanding  of certain concepts                                                               
within the legislature. He formulated  what they thought would be                                                               
helpful to  them as they  think through petroleum  fiscal policy.                                                               
The presentation  will repeat some  of the concepts from  the 101                                                               
course and cover some future unexpected scenarios.                                                                              
CHAIR GIESSEL commented,  so he understands who  his audience is,                                                               
that  with  the exception  of  Senator  Von Imhof,  every  person                                                               
sitting  here has  been in  the  legislature for  at least  eight                                                               
3:35:16 PM                                                                                                                    
MS. RUGGIERO  started on slide 13  saying a mentor once  told Mr.                                                               
Ruggiero: "Torture numbers and they  will tell you whatever story                                                               
you want  to hear." She  advised that lawmakers should  always be                                                               
thinking and  asking: "What is it  that they are not  telling me?                                                               
What data or information do they  hope I will not find?" She said                                                               
they  are  experts and  can  explain  the  past, but  they  don't                                                               
predict the  future nor can  anyone else.  So, how does  one plan                                                               
for a future that is uncertain and can't be predicted?                                                                          
3:37:41 PM                                                                                                                    
MS.  RUGGIERO  advised  not  taking   a  number,  conclusion,  or                                                               
assumption  at  face  value.  She  encouraged  asking  questions,                                                               
digging  deeper,  and understanding  where  they  came from.  For                                                               
instance, at what  price per barrel does a net  tax cross over to                                                               
a gross  tax? What one should  ask is where does  that $72/barrel                                                               
come  from.  The answer  is  that  it  comes  from a  dataset  of                                                               
specific costs  from a snapshot  in time when that  data existed.                                                               
But, the  difference is that  the same circumstance might  not be                                                               
in  place today  nor will  it be  in the  future. They  know that                                                               
$72/barrel is going  to move. So, the question is:  is the fiscal                                                               
system in  Alaska prepared for  that change whether the  price of                                                               
oil goes to $90/barrel or to $60/barrel?                                                                                        
3:38:57 PM                                                                                                                    
MR. RUGGIERO added that the  Tax Division recently testified that                                                               
the  current  crossover  is  in   the  mid-$60/barrel  range.  In                                                               
reality,  that is  based  off  average data.  All  the fields  in                                                               
Alaska that  are impacted  by the net  versus gross  decision may                                                               
range from  $50-$80-plus/barrel, depending  on the field  and its                                                               
cost structure. That  crossover point is the  oil price including                                                               
costs and that has changed every day, historically.                                                                             
3:39:54 PM                                                                                                                    
MS.  RUGGIERO said  there is  no a  global standard  or an  ideal                                                               
structure,  but there  are parameters  and  pillars for  success.                                                               
Each  country   has  different  goals,  different   drivers,  and                                                               
different needs. Their populations  are different; their resource                                                               
is  different. A  successful system  is durable  but changes.  It                                                               
marries the goals,  the drivers and the needs  of the government.                                                               
A  country that  is  short on  reserves  is one  that  has a  low                                                               
reserve base - they know what  resource they have, but likely the                                                               
oil is  being produced faster than  new oil is being  found. That                                                               
could be a  time they want to incentivize  exploring and drilling                                                               
through  the fiscal  system. If  a country  is long  on reserves,                                                               
maybe it  has spent more  investment dollars in finding  oil than                                                               
in  developing it.  If that's  the case,  then the  fiscal system                                                               
would  want   to  incentivize  the  development   and  production                                                               
3:41:52 PM                                                                                                                    
She repeated that  change is the constant in this  industry and a                                                               
good  fiscal  design  anticipates  that.  Good  petroleum  fiscal                                                               
design is one  that learns from, but doesn't  replicate or repeat                                                               
the  past, and  uses "self-correcting  mechanisms" to  succeed in                                                               
the inevitable changing future.                                                                                                 
MR.  RUGGIERO said  an example  of setting  policy on  a specific                                                               
number that didn't  really work was when the gross  tax came into                                                               
being. The  tax was  zero up  to $15/barrel  and 4  percent above                                                               
$25/barrel.  In   summary,  the  total  all-in   cost  was  about                                                               
$15/barrel  back then.  So, the  zero was  set at  a point  where                                                               
whatever revenue  the oil  companies made was  eaten up  by their                                                               
costs (their breakeven point). The idea  was to not tax them to a                                                               
point where they had to dig into  their pocket to pay for it. The                                                               
$25/barrel represented  a significant value above  $15. So, there                                                               
was value  and thus the 4  percent tax. Fast forward  to 2018 and                                                               
the breakeven cost  for the legacy fields is  $37/barrel. Now the                                                               
zero percent tax  at $15 set many years ago,  because it happened                                                               
to  be coincident  with the  breakeven point,  today would  tax 4                                                               
percent at  prices below their  breakeven point all the  way down                                                               
to $15/barrel.  This is where  the need to continually  change or                                                               
update a system comes from.                                                                                                     
3:46:46 PM                                                                                                                    
MS.  RUGGIERO continued  that one  of the  concepts they  want to                                                               
expand upon  is competitiveness and  that Alaska is  competing on                                                               
the global  stage. But what  does "competitiveness"  really mean?                                                               
We  are  competing  for  finite resources,  a  finite  amount  of                                                               
investment  capital, and  a finite  amount of  industry personnel                                                               
with expertise.  Add to that,  rigs and  technology availability.                                                               
So,  Alaska is  competing for  allocation of  the resources  in a                                                               
boardroom when  a company has  a limited amount of  money. Alaska                                                               
has  always faced  that,  but  this year,  the  LNG project  adds                                                               
another  layer  to  that  definition  in  that  it  is  now  also                                                               
competing for market.                                                                                                           
CHAIR  GIESSEL  noting   that  Mr.  Ruggiero  had   been  in  the                                                               
boardrooms when  investment decisions  were made, asked  what was                                                               
discussed  in  making those  decisions  to  move capital  to  one                                                               
location versus another.                                                                                                        
MR.  RUGGIERO replied  that they  would  get into  that a  little                                                               
later in  the slides, but  the short  answer is that  every group                                                               
that works an area - for instance  Company X in Alaska - will put                                                               
together a list  of their projects and will  champion them within                                                               
their global  environment. The  people in  the boardroom  look at                                                               
the longevity,  the overall  economics, and  risk. After  a great                                                               
discussion, a line  will get drawn and the project  that is above                                                               
the  line is  picked.  Then  the person  who  is championing  the                                                               
project that  came in  just below  the line  tries to  figure out                                                               
what it needs  to get it above the line  and secure that capital.                                                               
If  some of  that is  a government  issue, he  would go  back and                                                               
start working with the government  in the country he was assigned                                                               
to see if he could get his projects above the line.                                                                             
3:50:10 PM                                                                                                                    
MS.  RUGGIERO said  global change  is constant  and Alaska  is no                                                               
different. Its discussions  have changed from a  year ago. Alaska                                                               
is asking if the fiscal system  is prepared for these changes. Is                                                               
it ready for the opening of  ANWR or the federal tax change? Will                                                               
the AKLNG  project affect our  fiscal system. Is  that successful                                                               
for the state or not?                                                                                                           
3:51:15 PM                                                                                                                    
She said  there is  a lot  of discussion  about the  headline tax                                                               
rate globally (slide  25). It's the report card  that people talk                                                               
about, but  much like an  iceberg the  headline tax rate  is what                                                               
sticks out  of the  top of  the water  and the  mass of  a fiscal                                                               
structure is  what lies  beneath the  water. The  components that                                                               
under water are  the ones discussed in  boardrooms, for instance:                                                               
lease costs/bonuses,  cost recovery,  ring fencing,  risk offset,                                                               
etc. She  said slide 26  focused on  the timing of  cost recovery                                                               
and  how those  affect the  economics of  a project  both from  a                                                               
state perspective and a producer perspective.                                                                                   
MR. RUGGIERO  said slide 27  graphed different  countries' fiscal                                                               
regimes using  the same  project at  one point  in time.  The red                                                               
color coding is  the amount of the tax that  was collected by the                                                               
government  before  the  producers  recovered  their  costs  (the                                                               
breakeven point).  The blue color  coding is called post  pay and                                                               
is after  they got  their costs back,  but they  haven't achieved                                                               
their internal  rate of return  (cost of capital) for  doing that                                                               
project.  That  target is  usually  based  on what  return  their                                                               
investments can  achieve. The  green color  coding is  the profit                                                               
component, and  this is after  the producer has received  all its                                                               
costs back  and met its  corporate investment hurdle rate  and is                                                               
what the government taxes.  Another  way to think about the color                                                               
coding  is  that  it  is  proportional  to  the  amount  of  risk                                                               
contained in the investment.                                                                                                    
He explained that generally alongside  running basic economics, a                                                               
company  will  also  do   a  risk  analysis.  Over-simplistically                                                               
speaking,  a  country that  has  a  lot  of  red is  a  high-risk                                                               
country; that  is because the government  is taking a lot  of the                                                               
revenue well  before costs  are recovered. Blue  is a  little bit                                                               
less and green is the least risky.                                                                                              
SENATOR  BISHOP said  as a  layman one  would think  that an  oil                                                               
company  boardroom  would  weigh  a   decision  in  more  of  the                                                               
countries with the green bar  where costs and rents are recovered                                                               
before government take.                                                                                                         
MR.  RUGGIERO  said,  "Absolutely."  In  this  example  he  would                                                               
recommend the  two in  the center  with a  majority of  green and                                                               
avoiding the ones with a lot of red.                                                                                            
SENATOR BISHOP asked if these  numbers are hypothetical or did he                                                               
pull them off actual countries leaving the names off.                                                                           
MR. RUGGIERO  replied that these  are actual fiscal  systems from                                                               
actual  countries in  his database.  All the  countries are  very                                                               
different; so  if one  compares fiscal systems  item by  item the                                                               
answer will  not be anywhere  near accurate. The totality  of the                                                               
system  needs to  be looked  at.  Probably dozens  of items  make                                                               
minor  differences on  their own,  but a  package of  things make                                                               
major differences and he would focus on those differences today.                                                                
3:57:22 PM                                                                                                                    
SENATOR VON  IMHOF asked  where Alaska might  fall in  that graph                                                               
(slide 27).                                                                                                                     
MR.  RUGGIERO  replied  that  he chose  to  not  include  Alaska,                                                               
because  this  presentation  was  for training  purposes  and  to                                                               
explain the  concepts first. Alaska  was not  one of the  bars on                                                               
the graph.                                                                                                                      
He said  in all his  years of fiscal  modeling he has  found that                                                               
time has more of an impact than  the tax rate, and that goes back                                                               
to the fact  that most capital is spent in  countries that have a                                                               
higher  tax rate  than Alaska.  Slide 28  takes the  same project                                                               
with the same revenues, with the  same costs, with the same split                                                               
between the government  and the producer. The  only difference is                                                               
that he artificially changed when  the monies are received by the                                                               
government and when they are received by the producer.                                                                          
The upper  left-hand quadrant of  slide 28 has a  distribution of                                                               
revenues  such  that it  creates  a  27  percent rate  of  return                                                               
project  - usually  well above  most corporate  hurdle rates.  He                                                               
varied the timing  of when the same dollars  are distributed. So,                                                               
referencing slide  27, he  said the project  in the  bottom right                                                               
has  more tax  taken during  the red  period and  the one  in the                                                               
upper left has  more tax taken in  the green period.   The one on                                                               
the lower  right has a  6 percent rate  of return and  a negative                                                               
NPV (meaning  that project would actually  decrease the corporate                                                               
value). Most companies would not do that project.                                                                               
The concept  of time value of  money is not well  understood, Mr.                                                               
Ruggiero said,  but it needs  to be  understood. He can  take all                                                               
the same  numbers and  go from  something that  absolutely almost                                                               
every company would  likely do (subject to the  risk analysis) to                                                               
a  project that  none of  them  would do.  He couldn't  emphasize                                                               
enough how  when things  happen is  a very  important key  to the                                                               
investment decision-making  that is  likely being done  by Alaska                                                               
SENATOR  BISHOP asked  how much  of that  methodology would  hold                                                               
true if  one believes  in peak  demand coming  X number  of years                                                               
down the road.                                                                                                                  
MR. RUGGIERO  replied if you  believe that peak demand  - meaning                                                               
the world  will be in  supply quite a way  out, he would  set the                                                               
system such that  it would incentivize the activity  they want to                                                               
see. If you  think there won't be  a market for gas  in 20 years,                                                               
then  you should  be incentivizing  everything  onstream now.  He                                                               
stated  that one  should  do  five or  ten  things regardless  of                                                               
whether the  future is supply  long or supply  short. Incentivize                                                               
those  things  and  then  remain   a  bit  nimble  to  adjust  to                                                               
circumstances as they unfold.                                                                                                   
MR.  RUGGIERO  said  the timing  of  "first  significant  dollars                                                               
spent" to  first dollars into  the revenue coffers  is important.                                                               
In the Lower  48, it takes on  average 60 days for  most wells to                                                               
get oil into  a pipeline from first drill. For  Alaska, it's five                                                               
He really  wanted to emphasize that  for institutional investors,                                                               
private equity,  and others,  it's not just  about the  time. For                                                               
example, he compared  two $500 million projects:  one is drilling                                                               
50 shale wells in West Texas and  the other is putting in a small                                                               
field  in Alaska.  In his  shale example,  each well  costs about                                                               
$100 million  and he can  drill one every  month. By the  time he                                                               
drills the  10th well  they have  started generating  enough cash                                                               
flow,  in excess  of operating  expenses  that he  can funds  the                                                               
remaining  $400 million  investment program  from cash  flow. The                                                               
investor is  looking at  $100 million out  of pocket,  maybe $110                                                               
million if a few things don't go quite right.                                                                                   
In Alaska  and other places that  have long lead times  - Gulf of                                                               
Mexico, North Sea, etc. - the  whole $500 million has to be spent                                                               
before first  oil and maybe  $600 million  if things do  go quite                                                               
right. The  risk to  the investor  in the  first project  is $100                                                               
million  and the  in  the other  it is  $500  million. Those  two                                                               
projects will  be looked  at very  differently by  the investment                                                               
community. He  can't say  for sure about  folks in  the corporate                                                               
oil company boardrooms, but he can  say that working a lot in the                                                               
last three  years with private  equity, that is exactly  how they                                                               
look at  it. In a  different twist,  they always ask:  "What's my                                                               
maximum cash out? How many turns do  I get if I reinvest the cash                                                               
flow from the early wells and  the operations that come into it?"                                                               
The timing  means they  are able to  recover costs  very quickly,                                                               
well before they are done with the last well drilled.                                                                           
4:06:05 PM                                                                                                                    
CHAIR GIESSEL asked  if timelines take precedent  over tax policy                                                               
in the boardroom  in terms of weighing a decision  for or against                                                               
a project.                                                                                                                      
MR.  RUGGIERO  replied that  they  don't  totally override  other                                                               
considerations, but the timing to get  money back and the time it                                                               
takes  to do  certain things  really impacts  the economics  of a                                                               
project.  It's the  economics  and the  risk  analysis that  goes                                                               
alongside it that will generate the company's decisions.                                                                        
However, Mr.  Ruggiero said his  experience in working  in places                                                               
like the North Sea and  bringing major projects forward that have                                                               
long lead  times and high  capex up  front, is that  those fields                                                               
tend to  last a whole lot  longer. How long has  Prudhoe Bay been                                                               
producing,  for instance,  as  compared to  a  shale well?  North                                                               
Dakota has had 10,000-15,000 shale  wells drilled to get into the                                                               
number-two  producing   position,  and  for  the   most  part  in                                                               
somewhere between one  and a half and three years,  90 percent of                                                               
the ultimate  production will have been  produced, plus companies                                                               
have to keep drilling wells to keep production up.                                                                              
4:08:10 PM                                                                                                                    
MR.  RUGGIERO said  last year  he testified  to something  called                                                               
"the  wasted NOL,"  the  perceived inability  for  a producer  to                                                               
recover its costs.  He heard comments like  allowing recovery was                                                               
a subsidy, but he said now what  he said back then, "It is really                                                               
the norm around the globe that  you get to recover your costs and                                                               
when you  recover those  costs, they aren't  taxed." If  a regime                                                               
does  not allow  those costs  to be  recovered, and  in a  timely                                                               
fashion, that  would be more indicative  of being non-competitive                                                               
than a high tax rate.                                                                                                           
Also, in cost  recovery something is not  always well understood.                                                               
Regimes  differ  on  what  they   allow  and  don't  allow  as  a                                                               
deductible cost.  Standard deductions  on overhead  and financing                                                               
costs, but if the exploration  costs and abandonment (traditional                                                               
oil field  operations) protocols aren't added  in, the producer's                                                               
real  costs and  return  can't  be accounted  for  deciding on  a                                                               
fiscal  system tax  rate.  He was  trying to  point  out that  as                                                               
lawmakers look at doing anything  with the fiscal system that the                                                               
tax rate is a big piece, but equally  big, if not bigger in a lot                                                               
of the fiscal systems, is the timing  on when and how much of the                                                               
costs get recovered.                                                                                                            
4:11:11 PM                                                                                                                    
MR.  RUGGIERO said  slides 31  and 32  were example  of countries                                                               
that have  more than one  type of tax regime  in play at  a time.                                                               
Although some have only one. The  chart on slide 32 shows some of                                                               
the hidden things that don't  become real evident when looking at                                                               
the totality  of a  fiscal system,  like the  limits that  can be                                                               
placed on how fast costs can be recovered.                                                                                      
He explained  that Production Sharing  Contracts (PSC)  have cost                                                               
oil and profit oil.  Angola puts a cap on how  much each year one                                                               
can call cost oil. The remainder  of that is profit oil under the                                                               
definition of the contract and  gets taxed even while other costs                                                               
need to be  recovered. Other PSCs allow all the  revenue to go to                                                               
costs  until  they are  recovered  and  then  the profit  oil  is                                                               
created. his  example regimes  design their systems  in a  lot of                                                               
different ways  to impact  the costs that  are recovered  and the                                                               
timing  of their  recovery.  He  advised them  in  the future  to                                                               
concentrate not only on the  tax rate (royalty, severance, gross,                                                               
and net)  but on costs and  timing aspects when someone  comes in                                                               
with a comparison.                                                                                                              
MS.  RUGGIERO  clarified that  these  are  just examples  of  oil                                                               
producing companies  and they  are in no  way advocating  for any                                                               
one structure.                                                                                                                  
4:13:50 PM                                                                                                                    
She cautioned  that the more levers  the system has, the  more it                                                               
costs to administer  and in a complex system the  risk of dispute                                                               
goes higher  as the complexity  increases (slide 33).  Then there                                                               
are   unintended   consequences.   By  creating,   revising,   or                                                               
eliminating  one aspect  of a  complicated tax  system, there  is                                                               
very likely  a risk that  other areas of  the tax system  will be                                                               
affected  to  the  detriment  of   one  or  more  parties.  These                                                               
unintended  consequences can  undermine  the  intent of  original                                                               
efforts  and are  often difficult  to see  or anticipate.  Before                                                               
making changes, a  thorough analysis should be  performed to make                                                               
sure the level and degree  of interdependency of certain taxation                                                               
terms are understood and addressed.                                                                                             
4:15:31 PM                                                                                                                    
SENATOR  STEDMAN  asked how  complex  Alaska's  fiscal system  is                                                               
compared to other basins he has seen and worked on.                                                                             
MR. RUGGIERO answered  that it's one of the  more complex systems                                                               
that he has dealt with.                                                                                                         
4:20:13 PM                                                                                                                    
MS. RUGGIERO  said another one  of the presentation's  key themes                                                               
is  about growing  the legislature's  knowledge  base. Much  good                                                               
information is  available to  them from a  lot of  public sources                                                               
like government  agencies: the Energy  Information Administration                                                               
(EIA), the International Energy  Agency (IEA), and the Extractive                                                               
Industries Transparency Initiative (EITI),  and that data can all                                                               
be  exported   into  an  excel   spreadsheet  where  it   can  be                                                               
manipulated any  way one wants.  In addition, oil  companies like                                                               
BP  do   annual  statistical  reviews  and   oil  field  services                                                               
companies  like Schlumberger  do oil  field glossaries.  She also                                                               
likes looking at annual reports  and analyst presentations in the                                                               
United State  Securities and Exchange Commission  10-K forms from                                                               
the oil companies. The analyst  presentations can reveal what the                                                               
real  intentions of  a company  are.  Banks also  put together  a                                                               
number  of  useful  presentations.  Because so  much  changes  so                                                               
quickly, she  personally likes  to go to  these sources  at least                                                               
monthly to see  how the numbers have shifted. Their  hope is that                                                               
Alaska  agencies will  work together  to create  a depository  of                                                               
documents and  websites for legislators  and the public to  go to                                                               
to be as informed as possible.                                                                                                  
MS. RUGGEIRO showed examples from the  EIA as part of their long-                                                               
term outlook  report (slide 37).  She pointed out that  the chart                                                               
on the left shows that the U.S.  will be an exporter of energy in                                                               
2024/25. This is  significant when they discuss  the LNG project.                                                               
She skipped to slide 40 that  displayed the crude oil price curve                                                               
from the  1860s but in  2016 dollars and noted  the preponderance                                                               
of volatility  and said that  Alaska should expect  volatility in                                                               
the future.  The only time oil  prices were stable was  when they                                                               
were under tight government controls.                                                                                           
4:22:02 PM                                                                                                                    
MR.  RUGGIERO  said  the  goal of  sovereigns  is  the  'optimal'                                                               
development of its  petroleum resources for the  benefit of their                                                               
people (slide 42). "Optimal" is  not the same for all governments                                                               
and  Alaska needs  to  ensure its  fiscal  structure supports  an                                                               
agreed  set of  goals. The  goal of  oil companies  is to  make a                                                               
profit and  meet investor expectations. These  vary somewhat from                                                               
company  to  company.  When  people come  to  Alaska,  they  have                                                               
different  goals. If  they are  private  equity-backed they  have                                                               
very different expectations as to what  they will do and how they                                                               
will do  it than  a company  that is  guided more  by shareholder                                                               
returns.  Thus,  the attractiveness  of  Alaska  is going  to  be                                                               
different. He  advised to  really understand  the type  of player                                                               
they are trying to attract -  and they may choose to exclude some                                                               
- and  the challenge is to  find where the fiscal  system and the                                                               
expectation of the investor community  and the companies overlap.                                                               
He   emphasized  that   the   private  equity-backed   companies'                                                               
expectations are very different.                                                                                                
CHAIR  GIESSEL asked  if he  would  say that  the private  equity                                                               
investment organizations want faster  return on their investment.                                                               
How would he summarize the difference?                                                                                          
MR. RUGGIERO  replied that  they are always  driven to  get their                                                               
money back as fast as possible.  Time is really key for them, and                                                               
they always  look for an  exit ramp.  They really don't  care who                                                               
comes in,  as long  as the  price is right,  they'll get  out and                                                               
move on.  He has become very  familiar with this approach  in the                                                               
last few years.                                                                                                                 
4:25:34 PM                                                                                                                    
MR. RUGGIERO said  the countries that seem to do  really well and                                                               
have more "stable systems" are those  that are built to achieve a                                                               
set of  transparent goals, so  everyone knows what the  goals are                                                               
and will help  you get there. Without transparent  goals, the oil                                                               
companies and  the investment community  don't know  what project                                                               
to choose.  He said suggested  Alaska petroleum tax  design goals                                                               
were on slide 43.                                                                                                               
4:26:51 PM                                                                                                                    
Slide 44  illustrated the  tension in  the fiscal  design between                                                               
producers trying  to get their  costs back  plus a bit  of profit                                                               
and  the government  trying to  maximize the  sovereign's return.                                                               
Somewhere therein lies the right split for a given situation.                                                                   
4:27:25 PM                                                                                                                    
MR.  RUGGIERO  explained  that  the   orange  part  on  slide  46                                                               
represents  a few  of the  many tools  that governments  have for                                                               
extracting  whatever they  believe  is their  share of  petroleum                                                               
production in  their jurisdiction, but  it all comes down  to net                                                               
and gross  take. It  hasn't changed  in the  decades he  has been                                                               
doing this.  A gross tax is  regressive; it gets worse  the lower                                                               
the profit  gets. It becomes very  penal as prices come  down and                                                               
the costs stay steady.                                                                                                          
He  explained  that  right  now  Alaska's  system  could  have  a                                                               
price/cost scenario  where the company  would have to  reach into                                                               
their  pocket  to  pay  production tax.  He  used  the  following                                                               
analogy: in  a 100-meter dash  the amount  of gross tax  would be                                                               
something like  10 meters out and  the question is what  the size                                                               
of the hurdle  is that each runner  has to go over  before he can                                                               
finish the  remaining 90 meters  of the  race on a  flat surface?                                                               
That is what a regressive tax  is. Royalty is the hurdle that has                                                               
to be crossed  before anything else happens because  it gets paid                                                               
first. The beauty of that system  is that it is really simple and                                                               
transparent and can  be audited easily. But,  it's not responsive                                                               
to the economics of a project.                                                                                                  
A net  tax system  is either neutral  or progressive,  meaning as                                                               
profits go  up then the  tax follows  along the profit  line. The                                                               
issue with that is figuring out  what net profits to tax from all                                                               
the moving pieces (cost, timing,  what deductions are allowed nor                                                               
not). A net tax tends to  even the playing field between a little                                                               
higher-cost project versus a much  lower-cost project, because it                                                               
taxes the lower cost project a  bit more and the higher cost less                                                               
profitable project less,  so it evens the playing  field. A gross                                                               
tax doesn't discriminate; it just hits everyone the same.                                                                       
Those are  the choices. A lot  of systems are a  hybrid. That way                                                               
they don't  make the  upfront hurdle  rate too  high and  just in                                                               
case things  get really, really,  good they  can catch it  on the                                                               
back end.                                                                                                                       
CHAIR  GIESSEL   recognized  Senator   Gardner  present   in  the                                                               
MR. RUGGIERO summarized their discussion saying that:                                                                           
1. Change is inevitable                                                                                                         
2. You're not going to be  able to predict anything off that past                                                               
other than  what is  a good  practice and  a bad  practice. Going                                                               
forward, more  and more regimes are  going toward self-correcting                                                               
mechanisms  with  a  minimal amount  of  intervention.  It  works                                                               
across a much wider range of circumstances occurring.                                                                           
4:32:05 PM                                                                                                                    
Someone always has  the idea: if we fix this  one item, the state                                                               
could make more  money. However, in the overall  scheme of things                                                               
those are  small items that  don't add  up to savings  because of                                                               
the resulting increased administrative  costs and legal disputes,                                                               
as  well  as the  time  value  loss of  money  to  the state.  He                                                               
concluded  that the  simpler  systems usually  prove  to be  more                                                               
viable and durable than theoretically  ideal but complex systems.                                                               
Simpler systems are  more stable and viable over  time because of                                                               
the associated  administration of  them, fewer disputes,  and the                                                               
time value of money.                                                                                                            
4:32:38 PM                                                                                                                    
In  general, they  are not  making recommendations,  Mr. Ruggiero                                                               
said, but they  want to make one strong one  stemming from his 12                                                               
years of working with the State  of Alaska. He asked himself what                                                               
he  would do  if he  was  sitting in  one  of their  chairs as  a                                                               
freshman in either body. The first  thing he would assert is that                                                               
the state is dependent on oil and  gas and he would want a "state                                                               
of  the  petroleum union"  speech  in  the  first week  of  every                                                               
legislative  session.  People  who  don't  have  to  worry  about                                                               
taxpayer confidentiality and have  a wealth of information should                                                               
do  the presenting  on what  is producing,  what permits  are out                                                               
there, and a  whole list of other issues, so  that everyone knows                                                               
as much as possible about the  petroleum industry at the start of                                                               
each session.  Some of  the most transparent  regimes that  he is                                                               
aware of don't lose competitiveness  or their edge in doing this.                                                               
It's just  the opposite: the  more transparent they are  the more                                                               
investment they have. A well-informed  legislature working with a                                                               
well-informed  producing community  is going  to come  up with  a                                                               
better solution overall.                                                                                                        
4:35:08 PM                                                                                                                    
MR.  RUGGIERO said  the data  exists in  the system  now, but  it                                                               
isn't user  friendly. He  included a slide  with North  Dakota to                                                               
show how  one can go  to their  ministry and find  out everything                                                               
about  their operation.  The data  is available  on line  15 days                                                               
after  the reporting  month. North  Dakota  has one  of the  most                                                               
transparent sites you can go to.  He can track back the ownership                                                               
of a lease,  how many times it  got sold, if that  sale price was                                                               
public, what  wells were drilled  and when; and the  whole gamut.                                                               
Even though Norway  has a higher tax rate than  Alaska, it's very                                                               
transparent  with its  information  and it  gets more  investment                                                               
than  Alaska. He  also showed  a slide  of North  Dakota that  is                                                               
becoming much more dependent on its oil and gas.                                                                                
SENATOR BISHOP commented that, "It's all offshore."                                                                             
MR. RUGGIERO said that was right,  which means it's just like the                                                               
North Slope  that has a  very long lead time,  is environmentally                                                               
sensitive and Arctic conditions.                                                                                                
CHAIR GIESSEL said the Division of  Oil and Gas (DOG) website has                                                               
monthly reports on production and  royalty and where it goes. She                                                               
hoped legislators  used it to see  how much the state  is gaining                                                               
in royalty.                                                                                                                     
MR. RUGGIERO  added that the website  also has some data,  but it                                                               
is hard-wired  and hard to  use, and  encouraged them to  make it                                                               
more user friendly.                                                                                                             
4:38:10 PM                                                                                                                    
MR.  RUGGIERO  said their  summary  is  first,  that a  lot  more                                                               
probing  questions need  to  be asked.  So,  when people  compare                                                               
Alaska to  jurisdictions X,Y,Z, legislators  need to ask  them on                                                               
what basis  are they  making that observation  and drill  down to                                                               
understand more than the headline tax rate.                                                                                     
Second, there isn't  an ideal structure for  sharing the benefits                                                               
of oil and  gas development; it's a matter  of understanding what                                                               
you are trying to achieve, what  the geology is below the surface                                                               
and understanding  the challenges upon the  surface, and defining                                                               
goals, and putting that all together in what is best for Alaska.                                                                
Third, never  have someone say "Wow,  when we did bill  X,Y,Z, we                                                               
didn't  think about  this." Moving  forward, make  sure that  the                                                               
scenarios you  ask your  consultants and  others to  consider are                                                               
broad and wide-ranging. Any  conclusion about competitiveness can                                                               
only be drawn on systems as a whole.                                                                                            
4:39:58 PM                                                                                                                    
Slides  56   &  57   were  generated   by  the   following  phone                                                               
conversation he had:  Texas has a 20 percent  royalty compared to                                                               
Alaska's   one-eighth    or   one-sixth,   and    under   certain                                                               
circumstances  Texas  might  have   a  7  percent  severance  tax                                                               
compared to  Alaska's 4 percent  gross tax. So, the  question is:                                                               
why is  all the money  going to Texas  and not coming  to Alaska,                                                               
and can  Alaska raise its royalty  and tax rates to  those levels                                                               
and still have companies come here?                                                                                             
MR. RUGGIERO  said to answer that,  he sat down and  went through                                                               
the  order  of  operations  in  figuring  tax,  a  "single-barrel                                                               
analysis," for  the Alaska  North Slope  (AKNS), West  Texas (WT)                                                               
New Alaska  North Slope  (New AKNS) meaning  the resource  is not                                                               
right   in   Prudhoe   Bay   or    Kuparuk   (so,   needing   new                                                               
infrastructure).  He used  the same  market price  of $60/barrel.                                                               
West Texas  before paying  the corporate  income tax  makes about                                                               
three times  what the legacy  fields do  and about 30  times more                                                               
than a  new North  Slope field does,  throwing in  the additional                                                               
infrastructure costs and slightly higher operating costs.                                                                       
If one just  compares royalty rates in isolation  that would lead                                                               
one to think  that they could be taxed more,  but then looking at                                                               
the totality  and the  bottom line before  income tax,  one knows                                                               
why ExxonMobil just announced a  big investment in West Texas and                                                               
Eastern New  Mexico. They  can invest  the same  dollars although                                                               
they don't  last as long, but  they get quick return  and a whole                                                               
lot  more out  of every  barrel, dollar-wise.  One can  put North                                                               
Dakota  or  Oklahoma in  there  and  the  numbers will  change  a                                                               
little, but  the relative ranking  will hold no matter  where one                                                               
looks in the Lower 48.                                                                                                          
4:44:40 PM                                                                                                                    
SENATOR BISHOP  asked if  shale versus  conventional oil  makes a                                                               
difference in West Texas.                                                                                                       
MR. RUGGIERO  answered not really  and explained that one  of the                                                               
projects  he is  consulting in  Texas has  water flood,  vertical                                                               
conventional,  and  horizontal. Whereas  the  cost  of the  water                                                               
flood  structure varies  the cost  a little  bit, on  average the                                                               
numbers don't  change drastically. As  they do more  drilling the                                                               
cost of a well  is coming down quite quickly, so  what used to be                                                               
a $12-million  well is  now a $7-million  well, but  the relative                                                               
positioning  of  his  number  won't   change  much  whether  it's                                                               
vertical, conventional, or water flood.                                                                                         
4:45:42 PM                                                                                                                    
He  summarized for  legislators  that when  someone  offers up  a                                                               
regime  as  a  comparable  to Alaska,  make  sure  to  understand                                                               
similarities and differences and how  much impact they would have                                                               
on the economics and risk of a project.                                                                                         
4:46:30 PM                                                                                                                    
MS.  RUGGIERO advised  not getting  caught up  in the  average of                                                               
12.5 percent  royalty, because Alaska has  different royalties in                                                               
the  different geographic  and  ownership  regions including  the                                                               
fact that the state split is also different in different areas.                                                                 
4:50:34 PM                                                                                                                    
CHAIR GIESSEL found no further business to come before the                                                                      
committee and adjourned the Senate Resources Standing Committee                                                                 
meeting at 4:50 p.m.                                                                                                            

Document Name Date/Time Subjects
Senate Resources - Updated Agenda - 1 - 31 - 2018.pdf SRES 1/31/2018 3:30:00 PM
Senate Resources - Presentation from In3nergy Oil and Gas 102 - 1 -31 - 2018.pdf SRES 1/31/2018 3:30:00 PM
Oil and Gas