Legislature(2017 - 2018)BARNES 124

03/01/2017 01:00 PM RESOURCES

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Audio Topic
01:02:43 PM Start
01:03:20 PM HB111
02:41:59 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
Rich Ruggiero, Oil & Gas Consultant, Legislative
Budget & Audit Committee
**Streamed live on AKL.tv**
       HB 111-OIL & GAS PRODUCTION TAX; PAYMENTS; CREDITS                                                                   
1:03:20 PM                                                                                                                    
CO-CHAIR TARR announced that the  only order of business would be                                                               
HOUSE  BILL  NO.  111,  "An  Act relating  to  the  oil  and  gas                                                               
production tax,  tax payments, and credits;  relating to interest                                                               
applicable  to  delinquent  oil   and  gas  production  tax;  and                                                               
providing for an effective date."                                                                                               
1:04:25 PM                                                                                                                    
RICH   RUGGIERO,  Consultant,   Legislative   Budget  and   Audit                                                               
Committee,  Alaska State  Legislature;  Managing Partner,  Castle                                                               
Gap Advisors,  Castle Gap Energy Partners,  provided a PowerPoint                                                               
presentation, entitled  "HB 111,"  dated [3/1/17].   Mr. Ruggiero                                                               
noted that his previous presentations  have discussed oil and gas                                                               
tax provisions that  were not directly "on point" to  HB 111.  In                                                               
his experience, [governments] with an  issue before them may fail                                                               
to see  the "whole environment,"  and his  previous presentations                                                               
intended to give  the committee a better understanding  of all of                                                               
the factors  of Alaska's oil  and gas tax environment.   Further,                                                               
in making  changes to Alaska's  petroleum tax  environment, there                                                               
is a need to establish long-term  goals and short-term needs.  In                                                               
the past decade, Alaska has  experienced an increase in spending,                                                               
an  arresting of  decline, and  an increase  in production.   Mr.                                                               
Ruggiero  advised Alaska's  system  is one  of  the most  complex                                                               
petroleum taxation systems.                                                                                                     
MR. RUGGIERO stated  a goal of any taxation  system is durability                                                               
-  not  stability  -  because durability  can  be  attained  with                                                               
frequent changes; in fact, he said,  "As long as changes are made                                                               
in a responsive  manner to the market and  the circumstances, you                                                               
can have a  large number of changes and still  be deemed a stable                                                               
place to  do business."   Furthermore, infrequent changes  in the                                                               
wrong  direction can  make  a  system unstable  [slide  2].   Mr.                                                               
Ruggiero discussed  long-term goals,  or guiding  principles, and                                                               
short-term  objectives, such  as production  flowing through  the                                                               
Trans-Alaska   Pipeline   System   (TAPS)  and   addressing   the                                                               
challenges to state  government due to low  income from petroleum                                                               
operations  [slide  3].    He  observed  Alaska  has  made  major                                                               
structural  and  narrowly  focused  changes to  its  current  tax                                                               
system over the last six or seven years.                                                                                        
1:09:57 PM                                                                                                                    
REPRESENTATIVE JOHNSON  returned attention  to slide 2  and asked                                                               
how  HB  111  would  fulfil the  first  short-term  objective  of                                                               
keeping industry activity as high  as possible during a period of                                                               
low  to  negative margins.    [Response  is  found later  in  the                                                               
MR. RUGGIERO  said he would  address HB 111 beginning  with slide                                                               
[6]  of his  presentation.   He continued  with observations  and                                                               
pointed out the goal of  Alaska's current taxation legislation is                                                               
to create balances  between big and small, and  new and incumbent                                                               
industry  parties   in  a  complex   system.    In   response  to                                                               
Representative Johnson, he  said that the model  on net operating                                                               
loss  (NOL) that  was previously  provided to  the committee,  is                                                               
correct, although  one part  needs to be  corrected and  he would                                                               
make changes to  the model - based on new  understanding from the                                                               
administration  -  as soon  as  possible.    He stated  that  the                                                               
complexity  of Alaska's  tax  system  requires significant  state                                                               
resources to  administer, and significant taxpayer  resources are                                                               
required  to understand  and file  taxes.   Mr. Ruggiero  said he                                                               
would  provide  corrected  data  to  the  committee  as  soon  as                                                               
possible [slide 4].                                                                                                             
1:13:21 PM                                                                                                                    
MR. RUGGIERO referred to the  previous committee presentation [on                                                               
2/27/17] of  an alternative option  to current law, which  was to                                                               
show  how to  simplify Alaska's  tax system  and return  it to  a                                                               
common  business  model  of revenue  minus  expenses  times  tax,                                                               
without  multiple complicating  factors.   He explained  that the                                                               
model  was meant  to  show  a simplified  option  and  was not  a                                                               
recommendation for  dramatic changes to Alaska's  taxation system                                                               
[slide 5].                                                                                                                      
1:14:58 PM                                                                                                                    
REPRESENTATIVE  BIRCH  referred  to  a  slide  presented  at  the                                                               
committee's work  session [2/27/17],  which compared  Senate Bill                                                               
21 [passed  in the Twenty-Eighth  Alaska State  Legislature] with                                                               
"stepped net" [income] and showed  that the two systems result in                                                               
nearly identical  [state] take.   He asked if  the aforementioned                                                               
graph was affected by the incorrect NOL model.                                                                                  
MR. RUGGIERO  responded the  aforementioned model  was unaffected                                                               
and is  accurate.  Continuing,  he grouped the  suggested changes                                                               
within  HB  111 into  two  categories.    The first  category  is                                                               
increasing taxation,  including items that minimize  the downside                                                               
risk for the  state at low prices as follows:   raising the gross                                                               
minimum,  hardening the  floor, changing  the conversion  rate on                                                               
net operating  losses (NOLs) from  35 percent to 15  percent, and                                                               
reducing  the  per barrel  credits.    In  order to  address  the                                                               
state's short-term  need, it is understandable  to increase state                                                               
take;  however,  he  cautioned   that  regimes  make  changes  to                                                               
government  take   for  a  variety  of   reasons,  including  the                                                               
situation Alaska  is facing,  and raising  taxes when  others are                                                               
not  "is not  something that  would absolutely  view Alaska  in a                                                               
good light."   Conversely, a change in minimum take  by 4 percent                                                               
or 5  percent in Alaska  may be balanced  by the fact  that other                                                               
jurisdictions  are  leasing acreage  for  20  percent royalty  or                                                               
more.   Mr.  Ruggiero cautioned  that  for a  project, the  gross                                                               
minimum,  including  royalty,  is  the  first  hurdle  to  clear.                                                               
Furthermore,  he  suggested  the legislature  and  administration                                                               
model  the impacts  of changing  the minimum  and the  per barrel                                                               
credits across a $50-$80 range in oil price [slide 6].                                                                          
1:20:32 PM                                                                                                                    
REPRESENTATIVE BIRCH  advised the  ultimate downside risk  to the                                                               
state is  no production, which  is zero [revenue];  also, raising                                                               
the gross  minimum tax to  5 percent  creates a higher  hurdle to                                                               
investment that may  compromise Alaska's ability to  compete in a                                                               
world market for  investment capital.  He restated  the real risk                                                               
is no production because the royalty share will always be there.                                                                
MR. RUGGIERO explained  that because Alaska has  long lead times,                                                               
"shut[ting]  down  the  investment  engine"  could  postpone  the                                                               
return of investments  for years, even with  incentives in place.                                                               
The taxation policy  must balance the state's  current needs with                                                               
the  risk of  shutting  down investment  and thereby  production.                                                               
For example, the committee should  consider the impact of changes                                                               
to the  taxation policy  on the  three recent  large discoveries,                                                               
which are very important to the state.                                                                                          
MR. RUGGIERO  said the  other category of  changes brought  by HB
111  is  how  to  handle  credits.   Alaska  is  very  unique  in                                                               
converting NOLs  to credits and  then offering cash  for credits,                                                               
which  at  the time  [the  tax  system  was devised]  was  deemed                                                               
necessary to attract  new investment and "players"  to the state.                                                               
Although effective,  the system  is very  complex, and  he opined                                                               
the state  can still attract  new investment with  other options;                                                               
in fact,  around the  world, regimes  allow investors  to recover                                                               
their  costs  -  within  a  set of  rules  and  guidelines  -  at                                                               
production, either immediately  or over time.   He questioned the                                                               
need for  converting NOLs  to credits, and  said, "If  it becomes                                                               
the same,  whether I deduct  the NOL and  apply the tax  and then                                                               
the barrel credits or  I apply the 35 tax and  then the $8 barrel                                                               
and then subtract the NOL credit -  tax credit - and it comes out                                                               
the same,  why go through all  that?"   Mr.  Ruggiero recommended                                                               
allowing  existing producers  to  carry forward  and offset  NOLs                                                               
against  future taxable  income,  in a  manner  similar to  other                                                               
jurisdictions.  He  acknowledged there are some  places that have                                                               
unique or additional  credits, as opposed to  converting costs to                                                               
MR.  RUGGIERO   further  recommended  that   non-producers'  NOLs                                                               
created  by  exploration,  appraisal,  and  development  activity                                                               
resulting  in production,  should  be carried  forward as  costs,                                                               
which could  later be recovered through  the project's production                                                               
revenues.   He remarked,  "In some locations,  those NOLs  ... do                                                               
receive  some degree  of uplift  to  compensate for  the time  it                                                               
takes  between exploration,  appraisal, and  that ultimate  first                                                               
oil into a pipeline."  He  said for non-producers, where NOLs are                                                               
created by exploration  but result in a dry hole,  the NOL can be                                                               
converted to a cashable credit  at a percentage; however, payment                                                               
of the credit is subject to  a set of prerequisites, such as data                                                               
delivery,   payment  of   all   service   contractors,  and   the                                                               
relinquishment of all leases.  This  type of payout is not paying                                                               
a company for  leaving, but paying a company to  take the risk of                                                               
coming  to  Alaska and  putting  in  an  exploration well.    The                                                               
credits   reduce  the   risk  of   exploration   and  the   state                                                               
participates  as   an  indirect  investor  in   the  exploration.                                                               
Finally,  he acknowledged  the state  has outstanding  credits to                                                               
pay and  suggested offering  a degree of  uplift until  funds are                                                               
available to pay the credits [slide 7].                                                                                         
1:28:58 PM                                                                                                                    
REPRESENTATIVE  RAUSCHER asked  whether  such an  offer would  be                                                               
MR. RUGGIERO  said his experience  has shown both  outcomes; some                                                               
oil companies have  found such an offer  acceptable, while others                                                               
have found  it completely unacceptable.   In further  response to                                                               
Representative Rauscher,  he explained  a "person" in  a contract                                                               
is defined as the pertinent entity.                                                                                             
CO-CHAIR  TARR noted  that  one goal  [of HB  111]  is to  remain                                                               
competitive for new  entrants and smaller oil  and gas companies.                                                               
She  asked for  further explanation  of uplift  opportunities for                                                               
the benefit of non-producers and exploration companies.                                                                         
MR.  RUGGIERO explained  that  if an  exploration  company has  a                                                               
discovery  and turns  the  project over  to  another company  for                                                               
development,  "the NOLs  would  go with  the  project," thus  the                                                               
second  company would  use the  credits after  it took  the field                                                               
into production.   On the other hand, tax is  assessed by company                                                               
and not  by project,  so the exploration  company could  bring in                                                               
partners; at  that point, the question  is how the NOLs  would be                                                               
divided  between the  working  interests in  the  property.   Mr.                                                               
Ruggiero suggested  the division  of the  NOLs may  be determined                                                               
between the parties at the time  the joint venture is formed.  In                                                               
his experience, divisions  can be based entirely  on each party's                                                               
working interest,  or the  exploratory company  may keep  all the                                                               
tax breaks for use against future  income.  He said he was unsure                                                               
whether Alaska law dictates that "things  have to work one way or                                                               
the other,  I believe that they'd  leave it up to  the commercial                                                               
arrangement between the parties."                                                                                               
CO-CHAIR  TARR asked  how such  a  tax system  would keep  Alaska                                                               
competitive and attractive for new investment.                                                                                  
MR.  RUGGIERO  acknowledged  Alaska  is at  a  disadvantage  when                                                               
compared to  most places  in the  world, due  to its  higher cost                                                               
structure  and  harsher  work environment.    To  overcome  these                                                               
disadvantages, the state  must offer terms that are  a little bit                                                               
better than  the average  that are offered  around the  globe and                                                               
also maintain an  overall tax structure that is  competitive.  To                                                               
do so,  the tax  structure should  allow NOLs  and use  uplift to                                                               
compensate companies for the time value  of money and to create a                                                               
sense  of urgency.    For example,  a  government may  compensate                                                               
companies  based on  a  certain  timeframe to  get  a project  to                                                               
production, with incentives for  earlier production and penalties                                                               
for delays.                                                                                                                     
1:35:30 PM                                                                                                                    
CO-CHAIR JOSEPHSON asked how a  seismic company would be affected                                                               
if  its earned  NOLs remained  with a  project after  the seismic                                                               
company departed.                                                                                                               
MR. RUGGIERO said  he was unsure.  He explained  that in the case                                                               
of  a  speculative seismic  shoot,  the  company could  sell  its                                                               
datasets of  the survey and  then would have income,  which could                                                               
be  offset against  costs.   For corporate  income tax  purposes,                                                               
there are clear  guidelines for income and expenses,  but he said                                                               
he was  unsure how  the seismic company's  NOLs would  be handled                                                               
from a petroleum tax perspective.                                                                                               
CO-CHAIR  JOSEPHSON turned  the subject  to publically  available                                                               
data  delivery and  transparent  information, which  has not  yet                                                               
been  addressed by  Alaska law.   He  referred to  Mr. Ruggiero's                                                               
comments that companies wouldn't come  to Alaska and invest a lot                                                               
of money without intending to  be successful; in addition, it has                                                               
been  suggested that  the state  should  have a  system of  prior                                                               
approval [regarding oil and gas prospects].   If the quality of a                                                               
play  is known,  he asked  whether "all  comers should  expect to                                                               
receive some  future benefit or  whether the state  should assert                                                               
some sort of jurisdiction or discretion over that."                                                                             
MR. RUGGIERO pointed out the  state grants rights to companies to                                                               
extract the state's  resource.  Therefore, the  state can include                                                               
any  requirements  on  licenses  to extract,  or  within  leases,                                                               
subject to  agreement.    As  the steward  of the  resources, the                                                               
state needs  access to  - and  rights to use  - any  data created                                                               
through  activity on  state land.    He acknowledged  there is  a                                                               
degree  of   competitiveness  to   balance;  for   example,  some                                                               
information can  be released and  shared, but companies  may seek                                                               
to keep information  that they have developed  confidential for a                                                               
period of  time.   Generally, in  countries that  have production                                                               
sharing contracts,  any and all  data - and all  derivative works                                                               
on the data - are owned by the state.  He continued:                                                                            
     The state is  generally allowed to use as  much of that                                                                    
     as  they need  to encourage  investors on  new acreage,                                                                    
     new license  rounds, et cetera,  because it's  in their                                                                    
     best interest that  they get highest value  on the bid,                                                                    
     but also that time and  money is not spent doing things                                                                    
     when they've  already got a bit  of an idea of  where a                                                                    
     good spot is, versus where a  bad spot is, based on all                                                                    
     the  surrounding data  that  they have.    So, this  is                                                                    
     where you'll  find that balance but  generally, outside                                                                    
     the  U.S.,  you'll  find   that  the  governments  that                                                                    
     control minerals, they control all the data.                                                                               
1:40:10 PM                                                                                                                    
CO-CHAIR TARR asked how converting  from credits to carry forward                                                               
losses  would impact  non-producers,  and how  that change  would                                                               
situate  Alaska  -  relative  to   other  regimes  -  related  to                                                               
incentives that are available to non-producers.                                                                                 
MR.  RUGGIERO observed  that when  a  producer comes  into a  new                                                               
regime and has  a new development, the producer is  able to carry                                                               
and  recover  its  costs [of  development]  into  the  production                                                               
period; however, "If you're an explorer  and you have a dry hole,                                                               
in most places, that's your cost:   100 percent."  Thus, offering                                                               
a  conversion  to  credit,  and   subsequently  to  cash,  is  an                                                               
incentive that  puts Alaska a  notch ahead of other  places where                                                               
the costs  of exploration are  usually a  100 percent loss.   For                                                               
producers, some countries  allow project ring fencing  - a method                                                               
of taxation  where losses on one  project are allowed to  be used                                                               
against income in  another project.  Alaska  allows "ring fencing                                                               
by operator"  which allows  an operator to  lump together  all of                                                               
its projects in  Alaska for tax calculations.   Mr. Ruggiero said                                                               
his recommendations on slide 8  are very consistent for operators                                                               
who have a  discovery and will ultimately be a  producer, and are                                                               
an incentive  for new  players to explore  in Alaska,  because an                                                               
explorer who is unsuccessful is able to cash in credits.                                                                        
CO-CHAIR TARR  asked if the foregoing  recommendations would make                                                               
Alaska less competitive, relative to other locations.                                                                           
MR. RUGGIERO opined no.                                                                                                         
REPRESENTATIVE BIRCH stated at the time  of a lease sale data and                                                               
the terms  and conditions of the  lease are disclosed.   He asked                                                               
how  frequently other  regimes make  changes to  a lease  after a                                                               
company  has complied  with the  terms of  the lease  and made  a                                                               
MR. RUGGIERO acknowledged there is  a tendency for governments to                                                               
"meddle with the system" because  after every election there is a                                                               
new administration  and a  new "view";  in fact,  in most  of the                                                               
world,  the  extraction  of  hydrocarbons  is  contractual,  even                                                               
though contracts are  not always honored.  It is  not uncommon to                                                               
find governments  changing terms agreed to  in previous contracts                                                               
because circumstances have changed over time.                                                                                   
1:45:15 PM                                                                                                                    
CO-CHAIR  JOSEPHSON  referred  to  a document,  entitled  "A  Net                                                               
Profits  Tax is  very Volatile  to  Price," provided  by the  Tax                                                               
Division, Department  of Revenue,  and included in  the committee                                                               
packet.   The document shows tax  as a percent of  gross value at                                                               
the  point  of  production  (GVPP) over  a  spread  of  different                                                               
prices:  at  $80 per barrel the state's take  would be 10 percent                                                               
and  at $100  per barrel  it would  be 18  percent.   He returned                                                               
attention to  slide 6  and Mr.  Ruggiero's previous  comment that                                                               
increasing  the minimum  tax  would create  a  larger hurdle  for                                                               
investors.   He asked if  the current tax  system is fair  to the                                                               
State of  Alaska when tax  as a percent of  GVPP is 4  percent at                                                               
$60 per barrel and 18 percent at $100 per barrel.                                                                               
MR. RUGGIERO remarked:                                                                                                          
     What  I can  tell  you  is that  where  that stands,  I                                                                    
     think,  is very  favorable, relative  to other  regimes                                                                    
     where  [the regimes]  invest.   So,  if you're  talking                                                                    
     about an  $80 world  and only  a net  10 percent  tax -                                                                    
     granted  that lumped  on top  of that  is royalty,  and                                                                    
     states  see   it  as  corporate  income   tax,  federal                                                                    
     corporate income tax - you  get an overall non-operator                                                                    
     take that is very competitive.   Whether that's fair to                                                                    
     the state or not, that's not for me to decide.                                                                             
MR. RUGGIERO indicated  slide 8 is not specific to  HB 111 and is                                                               
also relevant to other proposed bills  regarding oil and gas.  He                                                               
recommended the following:                                                                                                      
   · stay with a net tax because the state is most competitive                                                                  
     when taxing profitability and not revenue                                                                                  
   · stay with ring fencing by operator because ring fencing by                                                                 
     project adds complexity                                                                                                    
   · simplify where possible                                                                                                    
   · base sliding scales on margin if used                                                                                      
   · establish a data transparency program                                                                                      
1:49:01 PM                                                                                                                    
REPRESENTATIVE   RAUSCHER  asked   for   an   explanation  of   a                                                               
comprehensive data transparency program.                                                                                        
MR. RUGGIERO  recalled previous  discussion that  the legislature                                                               
could   make   more   informed   decisions   if   it   had   more                                                               
"disaggregated" information; in fact,  other regimes in the world                                                               
are  much more  transparent, and  he suggested  the state  attach                                                               
data  transparency   conditions  to  future   licenses,  credits,                                                               
uplifts, or incentives.                                                                                                         
REPRESENTATIVE RAUSCHER questioned whether  some data is withheld                                                               
because release would compromise [a company's] competitive edge.                                                                
MR. RUGGIERO  opined a private,  for-profit company  will release                                                               
only what  it has to because  the information can be  used by its                                                               
competitors.   In his experience,  governments have been  able to                                                               
optimize  [production] in  their country  and minimize  costs for                                                               
facilities and  other entities, and  he provided an example.   He                                                               
acknowledged  it  is  uncomfortable   to  give  away  competitive                                                               
advantage,  but  governments  with  the most  data  can  increase                                                               
competitive advantage and provide informed advice.                                                                              
REPRESENTATIVE  WESTLAKE   noted  that   oil,  gas,   and  mining                                                               
industries are  important to  his district,  and the  related tax                                                               
system is extremely  complicated.  He stated his  support for the                                                               
"idea  for  dry holes."    Although  provisions of  previous  tax                                                               
structures   have   inadvertently   caused   problems,   previous                                                               
legislators acted  "with the  best information  that they  had in                                                               
front  of  them."    He  agreed  revisiting  the  tax  system  is                                                               
necessary, and  asked whether the  state should  make incremental                                                               
changes,  to prevent  severe impacts  to his  district and  other                                                               
districts, or change the bulk of the system.                                                                                    
MR. RUGGIERO recommended fixing the  system and making it simple,                                                               
although doing so  is not easy, and would  require political will                                                               
and time.  However, as  the system is simplified, the legislature                                                               
could   add  durable   and  self-correcting   pieces  so   future                                                               
legislatures don't have to revisit  every individual provision of                                                               
the legislation.                                                                                                                
1:54:11 PM                                                                                                                    
CO-CHAIR  TARR  asked  if eliminating  credits  and  using  carry                                                               
forward  losses   instead  helps  a  system   become  more  self-                                                               
correcting because it is more responsive to actual costs.                                                                       
MR. RUGGIERO explained  when NOLs are converted to a  credit at a                                                               
percentage, the tax  rate that will be effective at  the time the                                                               
[credits]  are  actually used  cannot  be  known.   He  cautioned                                                               
against  trying to  predict  the future,  and  instead urged  the                                                               
committee to allow  the losses to be carried forward  as they are                                                               
for  corporate income  taxes.   For example,  for the  purpose of                                                               
calculating  corporate  income taxes,  a  carry  forward loss  is                                                               
created  in a  year when  the  taxpayer's effective  net rate  is                                                               
zero,  but then  is carried  forward  and used  to offset  future                                                               
income [at the  effective tax rate at the time  the NOL is used].                                                               
In  further response  to  Co-Chair Tarr,  Mr.  Ruggiero said  the                                                               
current  system  has  a  35  percent  [tax]  base  with  negative                                                               
progressivity, therefore,  as stated  before, [the  effective tax                                                               
as a percent of  GVPP is 4 percent at $60  per barrel, 10 percent                                                               
at  $80 per  barrel, and  18  percent at  $100 per  barrel].   He                                                               
     So, when  you convert  something today, you  don't know                                                                    
     if  it's going  to be  one  year, two  years, or  three                                                                    
     years  -  if you've  got  a  major development,  you're                                                                    
     going to be accumulating some  very large NOLs.  And if                                                                    
     you convert  them to credits,  it may be  several years                                                                    
     down the  road before you use  them.  And if  you don't                                                                    
     know  what the  price  is  going to  be  ... -  certain                                                                    
     things get  used at different effective  rates, and get                                                                    
     converted -  and you don't  know what the  absolute tax                                                                    
     rates  going to  be in  the future.  ... So  as not  to                                                                    
     create any  potential differences  in the  future, just                                                                    
     ... carry  it forward as a  loss, [and] use it  when it                                                                    
     comes up.                                                                                                                  
MR. RUGGIERO added  the aforementioned mechanism is  also used in                                                               
production sharing contracts.  He continued:                                                                                    
     They  don't call  them  carry  forward losses,  they're                                                                    
     just unrecovered costs and they  get carried forward as                                                                    
     costs.   They aren't converted  to anything else.   And                                                                    
     ultimately when there's enough cost  oil in the system,                                                                    
     they get  to recover  those costs.   And  then anything                                                                    
     after that is deemed profit  oil, and then whatever the                                                                    
     split  is  on  the  profit  oil,  that's  how  that  is                                                                    
     distributed between the parties.                                                                                           
CO-CHAIR  TARR  suggested  the  committee  reconsider,  based  on                                                               
recommendations, the  elimination of cashable credits,  which was                                                               
a provision  in the original  bill.  She reviewed  the following:                                                               
The cashable credits for which  the state pays cash are reflected                                                               
on the expense side of  [an accounting spreadsheet], and the NOLs                                                               
used against tax  liability are reflected on the  revenue side of                                                               
a  spreadsheet as  a reduction  in  the revenue  the state  would                                                               
receive after  the company [that  earned the  loss/credit] became                                                               
profitable,  and  at  which  point the  loss  would  be  deducted                                                               
against any of the company's profit prior to applying taxes.                                                                    
CO-CHAIR TARR  then asked for details  on steps for the  state to                                                               
take if it  were to have prior approval of  projects, noting that                                                               
suggestions  have  been  made  that the  state  review  plans  of                                                               
production  and plans  of development  as  a project  progresses.                                                               
She  asked  for  Mr.  Ruggiero's opinion  on  strategic  ways  to                                                               
protect the state's status as a co-investor.                                                                                    
2:00:47 PM                                                                                                                    
MR. RUGGIERO  was unsure of  the steps already undertaken  by the                                                               
Department of  Natural Resources  (DNR), the  Alaska Oil  and Gas                                                               
Conservation   Commission   (AOGCC),   and  the   Department   of                                                               
Environmental Conservation (DEC) to  review projects.  During his                                                               
experience in  the North  Sea working  with three  countries, oil                                                               
and gas projects went through  three to five governmental reviews                                                               
before being approved for development;  projects were reviewed by                                                               
governmental  agencies   ranging  from  reservoir   engineers  to                                                               
treasury  officials,  beginning at  the  initial  scoping of  the                                                               
project,  up  to very  detailed  analysis.    At  the time  of  a                                                               
company's formal submission for  approval to develop the project,                                                               
"it was just  a rubber stamp exercise,"  because the governments'                                                               
issues  and  concerns  about  the  size  of  the  infrastructure,                                                               
pipelines,   optimum  costs,   and   efficient  operations   were                                                               
addressed  earlier.    The governments  slightly  influenced  the                                                               
scheduling of  projects, but  companies were  made aware  well in                                                               
advance.   Mr. Ruggiero  told of  recently concluding  a 12-month                                                               
review  process for  a  25-year  project in  Asia;  while he  was                                                               
negotiating his contract, the government  reviewed all aspects of                                                               
the project in detail.  He remarked:                                                                                            
     The dialogue  within those reviews helped  me get terms                                                                    
     in  that contract  that they  might not  otherwise have                                                                    
     given  me, because  we had  these detailed  reviews and                                                                    
     they were  able to  understand what  I was  planning on                                                                    
     doing and  what my  needs were, as  opposed to  what my                                                                    
     wants were.                                                                                                                
CO-CHAIR TARR asked if governments  ever refused a project during                                                               
a particular review  phase and if so,  whether affected companies                                                               
were  given   an  opportunity  to   reevaluate  and   propose  an                                                               
MR. RUGGIERO  said he was  told no many times;  however, refusals                                                               
were helpful  for companies  to "define  where the  boundary line                                                               
is," and also  allowed companies to propose  potential changes to                                                               
a government's conditions, and he gave an example.  He remarked:                                                                
     It was always a process  that allowed us to bring forth                                                                    
     the, the  innovation, the technology, and  whatnot that                                                                    
     we  thought we  could add  to, and  get them  to change                                                                    
     some  of  the  rules  and the  requirements  that  they                                                                    
     otherwise had had in place.                                                                                                
CO-CHAIR  TARR asked  if any  part  of the  approval process  was                                                               
linked to incentives or regime investment.                                                                                      
MR.  RUGGIERO  said, "Whatever  was  in  place as  the  petroleum                                                               
fiscal system, once  I got approval, then I had  to do everything                                                               
within that petroleum  fiscal system."  For  example, one project                                                               
had  requirements  linked to  it  because  of its  size,  capital                                                               
commitment, and  the 10  years of  company fiscal  stability that                                                               
was needed to overcome the risk of development at that time.                                                                    
2:07:23 PM                                                                                                                    
REPRESENTATIVE  BIRCH questioned  whether the  aforementioned 25-                                                               
year agreement  gets revisited periodically  or is  a contractual                                                               
MR. RUGGIERO answered it is a contractual agreement.                                                                            
2:07:45 PM                                                                                                                    
[Co-Chair Tarr handed the gavel to Co-Chair Josephson.]                                                                         
REPRESENTATIVE TALERICO  returned attention to slide  3 and asked                                                               
whether the long-term goals and  short-term objectives are listed                                                               
from most to least important.                                                                                                   
MR. RUGGIERO indicated yes.                                                                                                     
2:08:34 PM                                                                                                                    
The committee took an at-ease from 2:08 p.m. to 2:10 p.m.                                                                       
[Co-Chair Josephson handed the gavel back to Co-Chair Tarr.]                                                                    
2:10:01 PM                                                                                                                    
CO-CHAIR  TARR  observed  per  barrel  credits  and  gross  value                                                               
reduction  (GVR)  are incentive  opportunities.    She asked  Mr.                                                               
Ruggiero  whether  "the  interplay"  of  changing  from  cashable                                                               
credits to carry  forward losses should influence the  use of per                                                               
barrel credits, or gross value reduction (GVR), as incentives.                                                                  
MR. RUGGIERO said:                                                                                                              
     I  don't think  there's an  interplay between  the two.                                                                    
     But it does  bring dynamics of, "If you have  a GVR and                                                                    
     you've got the  per barrel, how much of  the per barrel                                                                    
     credit do  you use?"  I  know you've had that  issue of                                                                    
     migrating  of the  per barrel  credits, but,  also, how                                                                    
     much of  the NOL that  you use.  Is  it only up  to the                                                                    
     point where  the minimum  tax takes  effect, or  do you                                                                    
     have to use it all to  get to zero and then the minimum                                                                    
     tax  applies?   ...   When  you have  all these  moving                                                                    
     parts you get all these different questions as to how                                                                      
     the different aspects interplay between each other.                                                                        
CO-CHAIR  TARR expressed  her understanding  that Mr.  Ruggiero's                                                               
previous  recommendation  to  use bracketed  profit  margins  [on                                                               
which to  base the  tax rate  instead of  oil price]  and thereby                                                               
eliminate some other provisions  - because incentives wouldn't be                                                               
used, and  taxes would be  based on profitability -  would change                                                               
the dynamic.                                                                                                                    
MR. RUGGIERO clarified the aforementioned  option would take away                                                               
unnecessary levers and  would attain the same  effective tax rate                                                               
without worrying  about migrating credits; he  reiterated the tax                                                               
would be based on simple income minus allowable costs.                                                                          
CO-CHAIR  JOSEPHSON questioned  whether one  benefit of  reducing                                                               
complexity is to make the system easier to audit and understand.                                                                
MR. RUGGIERO said exactly; audits  should be "orders of magnitude                                                               
easier"  as  would be  compliance  by  taxpayers.   Further,  the                                                               
proposal  would eliminate  many administrative  costs, and  avoid                                                               
many disputes between the companies and government.                                                                             
CO-CHAIR  TARR asked  if simplifying  audits  and payments  would                                                               
give  a company  higher confidence  to invest  in a  new project,                                                               
regardless of  a long lead  time.   For example, the  current per                                                               
barrel credits are  based on the price of oil,  so companies have                                                               
to adjust  for variability that  might occur in future  prices to                                                               
determine  a  project's  economics; in  addition,  removing  some                                                               
aspects of the system and focusing  on profit margins may make an                                                               
investment decision easier for a company.                                                                                       
MR.  RUGGIERO responded  that simplifying  the system  allows for                                                               
the  use of  a much  simpler economic  model that  has less  of a                                                               
chance  for  mistakes.    In  fact, companies  can  make  a  more                                                               
predictive  model  based on  an  expected  base rate,  production                                                               
curve, cost, and price forecast.   With a simpler system, he said                                                               
companies  would   only  have   uncertainty  in   whether  future                                                               
legislatures  would  change  tax  rates at  any  of  the  various                                                               
bracket points.                                                                                                                 
2:15:31 PM                                                                                                                    
REPRESENTATIVE  PARISH stated  that he  is leery  of net  systems                                                               
because they do not clearly  incentivize cost savings on the part                                                               
of  companies  as  well  as   do  gross  production  systems;  in                                                               
addition, net systems are also  harder to administrate.  He asked                                                               
if it  is feasible  to create  a bracketed  gross system  tied to                                                               
price, which  would approximate the  current tax  environment or,                                                               
"Are gross  systems just  going to  be inherently  more punishing                                                               
for these  actors or those actors?"   Further, he inquired  as to                                                               
how the  state could  level the  playing field  for non-producer,                                                               
new entrants in a gross system.                                                                                                 
MR.  RUGGIERO said  it is  possible to  build a  gross system  to                                                               
mirror a net system, but it  would not be accurate after the cost                                                               
structure changed.  He continued:                                                                                               
     The  minute the  cost  structure  changes, then  you're                                                                    
     getting results  different than what you're  trying to,                                                                    
     to model.  And, the one  thing that we do know ... from                                                                    
     one of the  charts that I've copied from  Ken Alper and                                                                    
     the  administration,  we've  seen sort  of  the  all-in                                                                    
     transportation,  OPEX, CAPEX  numbers change  from plus                                                                    
     or  minus [$]15  to up  over $40  a barrel  in just  10                                                                    
     years.  And if you tried  to build a gross [system] off                                                                    
     of where you're at today ...,  in a few years you'll be                                                                    
     grossly wrong and you'd be fixing it again.                                                                                
MR.  RUGGIERO,  in  response to  Representative  Parish's  second                                                               
question,  said he  is unsure  what could  be done  to level  the                                                               
playing field under a gross system.                                                                                             
2:18:42 PM                                                                                                                    
REPRESENTATIVE PARISH stated his  concern that net systems create                                                               
a "perverse incentive."  He  pointed out, "Generally, refining is                                                               
a  profitable  business, and  that  those  profits are  made  and                                                               
typically kept in Texas, is just too  bad for us."  He opined net                                                               
systems allow  an externalization  of value;  for example,  for a                                                               
company  making  little  profit,  and suffering  some  losses  in                                                               
Alaska, Alaska production can result  in greater profit, but that                                                               
is profit  that Alaska cannot  tax.  Representative  Parish urged                                                               
for  incentives that  do not  encourage significant  increases in                                                               
costs,  noting that  costs have  almost  tripled in  the last  10                                                               
years.    Under a  net system, some of  those costs are  borne by                                                               
the  state and  the  federal  government, and  he  asked how  the                                                               
legislature could mitigate that.                                                                                                
MR. RUGGIERO acknowledged  every system has "pros  and cons," and                                                               
agreed that under  a net system, oil companies  can "gold plate."                                                               
However, in his  experience, oil companies that have  a high cost                                                               
structure  do  not  last  very  long,  regardless  of  government                                                               
deductions.    Countries  with  net  systems  can  mitigate  risk                                                               
through  detailed  review  processes;  for  example,  governments                                                               
learn  from each  project and  operator, which  helps governments                                                               
compare  projects  and  whether  costs  are  prudent.    Although                                                               
Alaska's costs  have tripled,  the costs can  still be  prudent -                                                               
even with  the best minds and  systems, costs can be  expected to                                                               
go up when oil prices escalate.                                                                                                 
2:22:26 PM                                                                                                                    
REPRESENTATIVE  PARISH returned  attention to  a point  raised in                                                               
the presentation  that one  of the  most glaring  deficiencies of                                                               
Alaska's system is  the inability of the state to  find out which                                                               
companies charge  more than others.   Although he was told  by an                                                               
executive that he had no  business knowing what Alaska taxes were                                                               
paid by  the executive's company,  the same company  reported the                                                               
amount of  taxes it  paid in  Alaska to  the government  of Great                                                               
Britain, which is how Representative  Parish obtained the figure.                                                               
He asked Mr. Ruggiero what the  State of Alaska could do "to hold                                                               
them to the same standard of disclosure."                                                                                       
MR. RUGGIERO restated that the  legislature is the steward of the                                                               
state's  resources,  and  any   future  lease  agreements  and/or                                                               
offered  incentives  should  include requirements,  such  as  for                                                               
disclosure.   [Speaking from his  experience as  a representative                                                               
of an oil company], he said,  "I would not disclose anything more                                                               
than I had to because I never know  when a piece of data is going                                                               
to  help me  or hurt  me."   The legislature  needs to  determine                                                               
whether  it  garners  enough information  to  make  well-informed                                                               
decisions and if  not, it is within the  legislature's purview to                                                               
get the information necessary.                                                                                                  
REPRESENTATIVE PARISH  pointed out  the most important  leases to                                                               
the state  have already been  established; even  though pertinent                                                               
stipulations  could be  added  to  new leases  or  leases up  for                                                               
renewal, the legislature is not able to alter existing leases.                                                                  
MR. RUGGIERO agreed.                                                                                                            
REPRESENTATIVE  TALERICO, [addressing  the issue  of transparency                                                               
and  the collection  of  data  from the  oil  and gas  industry],                                                               
assured the  committee the  state gets "an  overall number."   He                                                               
pointed   out   that   other    taxing   authorities,   such   as                                                               
municipalities,  keep  individual  tax  payments  as  proprietary                                                               
information  for  a certain  amount  of  time, depending  on  the                                                               
competitive nature of a taxpayer's  business.  He asked, "To some                                                               
degree, as  we collect that  type of information,  wouldn't there                                                               
always be - I'll call it a  grace period - but isn't there always                                                               
a   cushion  there   so  that   we're   not  directly   providing                                                               
[information to  competitors] ...?"  Citizen  legislators do need                                                               
to have  good data,  but he cautioned  that legislators  may lack                                                               
sufficient expertise in the industry  and therefore, need to rely                                                               
on  the  expertise  of  DNR  and  AOGCC  when  working  with  the                                                               
producers  of oil  and gas.    He inquired  as to  what level  of                                                               
detail the committee  seeks - whether down to the  nuts and bolts                                                               
-  and advised  that the  committee could  "bury ourselves  with,                                                               
with  data, that  without  serious education,  it  would be  very                                                               
difficult for us to determine  -- when we talk about expenditures                                                               
and things like that ...."   Representative Talerico restated the                                                               
committee needs to  have a level of trust in  the Division of Oil                                                               
and Gas, DNR, and AOGCC,  which work directly with producers, and                                                               
provide valuable information.                                                                                                   
MR. RUGGIERO  agreed.  Ten years  ago, his company was  told that                                                               
it "could almost  double the recovery off North  Slope and arrest                                                               
the  decline  if  we  just  spent a  certain  amount  of  money,"                                                               
although details were not provided  about the work, how fast [the                                                               
recovery] would come, or how  constant the rate of recovery would                                                               
be.   He  opined the  state did  not have  enough information  to                                                               
propose investments  that made sense,  or that were  economic for                                                               
the  industry, but  simply encouraged  the companies  to increase                                                               
production.  He added:                                                                                                          
     So, it's that  type of information that  I believe that                                                                    
     you need.  And as a  state, I don't know if it's public                                                                    
     or whether  it's just you know,  confidentially through                                                                    
     agencies like the  DNR and AOGCC to where  then you can                                                                    
     rely  on  them  when  they come  in  and  testify  that                                                                    
     they've looked at  it, they think this  is viable, they                                                                    
     would  recommend the  following.    But, somewhere  the                                                                    
     state, I  think, needs to  understand that so  that way                                                                    
     prudent  decisions  could  be  made,  relative  to  the                                                                    
     taxation system you've got in  place, to make the right                                                                    
     things happen.                                                                                                             
2:30:02 PM                                                                                                                    
CO-CHAIR  TARR  acknowledged the  difference  in  what the  state                                                               
needs and what  the public needs; however, [as  a legislator] she                                                               
said  she has  not  had enough  information  to fully  understand                                                               
certain issues.   Part of  the challenge regarding taxes  is that                                                               
information  gleaned  by the  Department  of  Revenue (DOR)  from                                                               
proprietary information cannot be  shared [with the legislature].                                                               
In fact,  DOR may recognize a  problem, but a change  proposed by                                                               
DOR cannot  be supported  by information from  tax returns.   Co-                                                               
Chair  Tarr  noted legislation  has  been  introduced related  to                                                               
public  disclosure  of  credits  and incentives  offered  by  the                                                               
MR. RUGGIERO spoke to the fact  that in Alaska, 95 percent of the                                                               
information about  oil and gas is  presented by DOR, which  has a                                                               
confidentiality obligation;  however, in  other tax  regimes, the                                                               
equivalent  of   DNR  presents  information  on   production  and                                                               
spending because most of its data is not confidential.                                                                          
CO-CHAIR TARR  referred to  [Amendment 45,  which had  been moved                                                               
but  failed to  be adopted  during the  House Resources  Standing                                                               
Committee's discussion of] House Bill  247 [passed in the Twenty-                                                               
Ninth Alaska State Legislature].   She related that the amendment                                                               
had intended to  address this issue by  requiring policymakers to                                                               
sign  confidentiality   agreements  and  restricting   access  to                                                               
documents  and  photographing  of   documents.    She  questioned                                                               
whether said  actions are consistent  with the level  of security                                                               
necessary for  such information and  if policymakers  should seek                                                               
better access.                                                                                                                  
MR.  RUGGIERO   responded  that   policymakers  need   access  to                                                               
information  by  whatever  route  available,  so  they  can  make                                                               
informed decisions.                                                                                                             
2:34:23 PM                                                                                                                    
CO-CHAIR  JOSEPHSON  returned  attention   to  the  cost  of  oil                                                               
production in  Alaska, restating that these  costs have increased                                                               
150  percent  in the  last  10  years.    The increase  in  lease                                                               
expenditures and  transportation components has been  linked with                                                               
the rising cost of  oil, and he asked why the  costs did not fall                                                               
as oil prices have fallen, but are "stuck at $40."                                                                              
MR. RUGGIERO  answered that information  from DOR  indicated that                                                               
production  costs   in  2014-2015   have  fallen   [document  not                                                               
provided].   He explained there  is a lead-lag effect between the                                                               
movement  in the  price of  oil and  the movement  in costs,  and                                                               
companies  have responded  to low  oil prices  through reductions                                                               
and belt-tightening.   However, production  costs do not  drop as                                                               
far  as oil  prices because  there are  fixed components  such as                                                               
salaries  and  benefits,  which   actually  grow  with  time  and                                                               
inflation.   A  closer analysis  would be  required to  determine                                                               
which costs are directly impacted by oil prices.                                                                                
CO-CHAIR TARR noted  that one provision under  consideration is a                                                               
change  to  the  per  barrel  credit which  would  result  in  an                                                               
increase to the effective tax rate.   She returned attention to a                                                               
document, entitled "A Net Profits  Tax is very Volatile to Price"                                                               
and pointed out  a mistake in that  at $80 oil price,  the tax as                                                               
percent of  GVPP is  8.4 percent,  not 10 percent  as shown.   If                                                               
adjustments are made to the per  barrel credit that put Alaska at                                                               
the  10 percent  rate, she  queried whether  Alaska would  remain                                                               
competitive.   Co-Chair Tarr  said her focus  is to  minimize the                                                               
downside risk as long as  the low-price environment persists, and                                                               
the  state should  earn more  at  this time.   However,  Alaska's                                                               
long-term goal is to remain competitive.                                                                                        
MR.  RUGGIERO  suggested finding  the  right  "tipping point"  is                                                               
difficult   as   each   company  reaches   different   investment                                                               
decisions.   He  opined making  the aforementioned  change is  "a                                                               
minor movement";  however, the additional  tax is a large  sum of                                                               
money that will  not go unnoticed.  Therefore, it  is a good idea                                                               
to  keep  long-term  goals and  short-term  objectives  in  mind,                                                               
although they  sometimes conflict,  particularly with  a treasury                                                               
shortfall to consider.                                                                                                          
2:39:22 PM                                                                                                                    
CO-CHAIR TARR summarized that the  committee is still evaluating:                                                               
the  elimination of  cash  credits, which  would  be replaced  by                                                               
carry forward  losses; improvements to data  transparency for the                                                               
public    and    the    legislature;    stage-gate    approaches;                                                               
recommendations  on  how  to   remain  competitive;  and  whether                                                               
provisions of  HB 111  are too aggressive.   She  recognized that                                                               
Alaska  is currently  in a  very  different economic  environment                                                               
than it was when Senate Bill 21 was enacted.                                                                                    
[HB 111 was held over.]                                                                                                         

Document Name Date/Time Subjects
HB111 Supporting Document - Castle Gap Advisors_Presentation to House Resources 3.1.17.pdf HRES 3/1/2017 1:00:00 PM
HB 111
HB111 ver O 2.8.17.PDF HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Fiscal Note DOR-TAX 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111
HB111 Sectional Analysis 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HB 111
HB111 Sponsor Statement 2.12.17.pdf HRES 2/13/2017 1:00:00 PM
HRES 2/17/2017 1:00:00 PM
HRES 2/20/2017 1:00:00 PM
HRES 2/22/2017 1:00:00 PM
HRES 2/22/2017 6:30:00 PM
HRES 2/24/2017 1:00:00 PM
HRES 2/27/2017 1:00:00 PM
HRES 3/1/2017 1:00:00 PM
HRES 3/1/2017 6:00:00 PM
HRES 3/6/2017 6:30:00 PM
HRES 3/8/2017 1:00:00 PM
HRES 3/13/2017 1:00:00 PM
HB 111