Legislature(2017 - 2018)BUTROVICH 205

04/18/2017 02:00 PM RESOURCES

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Audio Topic
02:00:12 PM Start
02:00:36 PM HB111
04:35:07 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
Heard & Held
-- Testimony <Invitation Only> --
Department of Revenue, Tax Division
Legislative Budget & Audit Consultants
       HB 111-OIL & GAS PRODUCTION TAX; PAYMENTS; CREDITS                                                                   
2:00:36 PM                                                                                                                    
CHAIR GIESSEL  announced the  consideration of  HB 111  [CSHB 111                                                               
(FIN)(EFD FLD)]. She said the  Alaska Department of Revenue (DOR)                                                               
will conclude  their presentation  that addresses HB  111, titled                                                               
"New Sustainable Alaska Plan."                                                                                                  
2:01:05 PM                                                                                                                    
KEN ALPER, Director, Tax Division,  Alaska Department of Revenue,                                                               
Juneau,  Alaska, continued  the department's  presentation on  HB
111,  "New Sustainable  Alaska Plan,"  commencing with  slide 24,                                                               
"Fiscal Analysis: Impact of North  Slope Tax Rate Change, per one                                                               
barrel  of  taxable non-Gross  Value  Reduction  (GVR) oil;  FY18                                                               
costs per Fall 16 Revenue Sources  Book (RSB)." He noted that the                                                               
previous  meeting  ended with  the  section  in the  department's                                                               
report that looked at how  the bill's specific provisions worked,                                                               
and the  report's next  section shows  how the  bill's provisions                                                               
fit together. He  addressed slide 24 and referenced  a table that                                                               
compared "Status Quo Versus HB 111" at $60 and $120 per barrel                                                                  
as follows:                                                                                                                     
Status Quo:                                                                                                                   
   · Price                          $60/BBL        $120/BBL                                                           
        o Transport:                 $9.77          $9.77                                                                       
        o GVPP:                     $50.23        $110.23                                                                       
        o Lease Expenditures        $33.64         $33.64                                                                       
        o PTV(net):                 $16.59         $76.59                                                                       
        o Tax at 35 pct.:            $5.81         $26.81                                                                       
        o Per-BBL Credit:            $8.00          $4.00                                                                       
        o Tax per Net:              -$2.19         $22.81                                                                     
        o Minimum Tax:               $2.01          $4.41                                                                     
        o Higher Of:                 $2.01         $22.81                                                                 
        o Tax as Pct. of Price:       3 pct.        19 pct.                                                                     
        o Tax as Pct. of GVPP:        4 pct.        21 pct.                                                                     
        o Tax at Pct. of PTV:        12 pct.        30 pct.                                                                     
HB 111:                                                                                                                       
   · Price                          $60/BBL        $120/BBL                                                           
        o Transport:                 $9.77          $9.77                                                                       
        o GVPP:                     $50.23        $110.23                                                                       
        o Lease Expenditures        $33.64         $33.64                                                                       
        o PTV(net):                 $16.59         $76.59                                                                       
        o Tax at 25 pct.:            $4.15         $19.15                                                                       
        o Surtax at 15 pct.          $0.00          $2.49                                                                       
        o Tax per Net:               $4.15         $21.64                                                                   
        o Minimum Tax:               $2.01          $4.41                                                                       
        o Higher Of:                 $4.15         $21.64                                                                 
        o Tax as Pct. of Price:       7 pct.        18 pct.                                                                     
        o Tax as Pct. of GVPP:        8 pct.        20 pct.                                                                     
        o Tax at Pct. of PTV:        25 pct.        28 pct.                                                                     
MR. ALPER detailed the table's first four lines for the "status                                                                 
quo" and HB 111 tax calculations as follows:                                                                                    
   · Cost of Transport (Transport):                                                                                             
        o Pipeline-tariff plus "marine."                                                                                        
   · Gross Value at the Point of Production (GVPP):                                                                             
        o Also known at the "wellhead value" upon which the                                                                     
          state's royalty is charged and any gross base; i.e.,                                                                  
          the minimum taxes charged.                                                                                            
   · Lease Expenditures:                                                                                                        
       o Sum-total of operating and capital expenditures.                                                                       
   · Production Tax Value (PTV).                                                                                                
MR. ALPER  addressed the  "status quo" tax  rate and  pointed out                                                               
that when  oil prices are  cut in half  the taxable net  drops by                                                               
more than three  quarters, just by the nature  of the net-profits                                                               
tax. He  pointed out that  Alaska's highly elastic tax  system is                                                               
the reason  why the  state's revenue  went down  by more  than 90                                                               
percent   when  the   price  drop   occurred,  specifically   the                                                               
production-tax revenue.  He explained  that the "status  quo" tax                                                               
rate is  35 percent  and the table's  rates ranged  between $5.81                                                               
and $26.81. He said at the  lower oil price the per-barrel credit                                                               
is the  "full" $8  and $4  at the higher  price. He  detailed the                                                               
"actual tax,"  (Tax per  Net), at  the lower  oil price  would be                                                               
negative or  zero because the  calculation cannot be  below zero.                                                               
He added that the "actual tax"  at the higher price of $22.81. He                                                               
summarized  that the  "minimum  tax"  of $2.01  is  the tax  that                                                               
governs at the lower oil price.                                                                                                 
He addressed HB 111 and explained  that by getting rid of the per                                                               
barrel credit and replacing it  with the lower tax, everything in                                                               
the table  is the same  until the  tax calculation at  25 percent                                                               
instead of  35 percent. He  detailed that the tax  calculation at                                                               
the lower  oil price is  $4.15 versus  $2.01 in the  "status quo"                                                               
calculation.  He  said,  as  Senator  Stedman  alluded  in  prior                                                               
testimony, that  HB 111 moves  the crossover point  between gross                                                               
and net substantially to the  left with the net system exhibiting                                                               
a wider range of prices. He  pointed out that the tax calculation                                                               
table  shows a  substantial tax  increase  in the  lower oil  per                                                               
barrel price  ranges. He emphasized that  the tax is on  a single                                                               
barrel of  non-GVR taxable oil,  also known as "royalty  oil." He                                                               
disclosed  that there  are approximately  150 million  barrels of                                                               
non-GVR taxable oil in a typical year.                                                                                          
He summarized that  HB 111 would double the tax  at the lower oil                                                               
prices; however,  the tax rate  is similar at higher  oil prices,                                                               
within 5 percent  of each other. He pointed out  that a small tax                                                               
cut  occurs at  higher prices,  something that  could easily  get                                                               
lost  in the  noise of  the  individual variation  in per  barrel                                                               
spending from one company to another.                                                                                           
2:06:53 PM                                                                                                                    
He  addressed slide  25, a  graph showing  the "Fiscal  Analysis:                                                               
Effective Tax  Rates (Legacy/non-GVR  oil)." He  noted that  in a                                                               
presentation  at a  prior meeting  he  had a  similar slide  that                                                               
compared effective tax  rates and net operating  loss (NOL) rates                                                               
for  tax  laws that  encompassed  "Alaska's  Clear and  Equitable                                                               
Share" (ACES),  and SB  21. He specified  that the  same modeling                                                               
set is  used in  slide 25,  but without  the ACES  comparison. He                                                               
detailed that the graph displayed the following:                                                                                
   · Status quo: (SB 21), blue curve on the chart.                                                                              
   · CSHB 111(RES): red curve on the chart.                                                                                     
   · CSHB 111(FIN): green line on the chart.                                                                                    
MR. ALPER said as  he noted in the similar slide  that there is a                                                               
substantial  difference between  the  effective  tax rate,  which                                                               
varies  between 35  percent and  then ramping  down as  the price                                                               
gets lower,  currently the rate  is 15  percent, and the  rate at                                                               
which the  state is  giving benefit  for a  carried-forward loss,                                                               
it's  also the  rate  of tax  benefit the  state  gives for  what                                                               
companies earn for their incremental  spending; for example, if a                                                               
company, even  a profitable company,  spends another  $1 million,                                                               
the  company would  get  a  $350000 tax  reduction  based on  the                                                               
current tax  code of 35  percent, even though the  effective rate                                                               
is  somewhat lower  because of  the  impact from  the per  barrel                                                               
He said the red curve represented  CSHB 111(RES) on the graph and                                                               
detailed as follows:                                                                                                            
     What the  House Resource Committee did  was interesting                                                                    
     in that it was a  tax increase across the board between                                                                    
     that red curve that is the  minimum tax to the left and                                                                    
     that jagged  step to the  right which is  the reduction                                                                    
     in the per-barrel credit. But  the other thing they did                                                                    
     was  cut the  carry-forward  to 50  percent; what  that                                                                    
     meant in practical  terms was if you  are carrying half                                                                    
     of your  losses forward to  use against the  35 percent                                                                    
     tax,  that's  the equivalent  of  a  17.5 percent  NOL,                                                                    
     basically you  are offsetting the  35 percent  tax with                                                                    
     half of your spending.                                                                                                     
He explained that  the purpose of CSHB  111(RES), with equivalent                                                               
NOL, was to put the line in the  middle of the tax range which it                                                               
does as  shown on  the graph  where the  dotted red  line crosses                                                               
through the  middle of  the red curve  rather than  sitting above                                                               
which the blue curve does.  However, the change created a serious                                                               
distortion  between the  money  being spent  on  new projects  by                                                               
incumbents  versus companies  that  are investing  for the  first                                                               
time.  He  explained that  an  example  of  an "incumbent"  is  a                                                               
company that is profitable but is  investing in a new project and                                                               
continues  to  get  the  35 percent  benefit  whereas  a  company                                                               
investing in its  future with their first project  could only get                                                               
the 17.5 percent benefit.                                                                                                       
MR. ALPER said the distortion  from CSHB 111(RES) that was unfair                                                               
to  newcomers  was  resolved  in  the  House  Finance  Committee,                                                               
represented by the  "green line" on the chart.  He explained that                                                               
the green  line is the  effective tax curve of  HB 111 with  a 25                                                               
percent net tax in addition  to a bracket-of-progressivity to the                                                               
right of  $100 per barrel  that closely tracks the  effective tax                                                               
curve of SB  21 after $100 per barrel. He  pointed out that there                                                               
is no  dotted green  line on  the chart because  there is  no NOL                                                               
rate per se, because the  carry-forwards are at the statutory tax                                                               
rate and the effective tax rate  are the exact same thing because                                                               
there is no per barrel credit  anymore. The value of those carry-                                                               
forwards is  at the statutory  tax rate where the  companies will                                                               
get the  value of whatever their  tax rate is. He  explained that                                                               
if the  companies' tax is at  lower prices with a  25 percent tax                                                               
with some expenditures carried forward  from the past, then those                                                               
offset  their taxes.  He said  if  companies are  further up  the                                                               
chain and are  paying a 30 percent rate, then  they would get the                                                               
value  of  those  carry-forwards  at  the  30  percent  rate.  He                                                               
asserted  that  the  "useful  alignment of  math"  noted  in  his                                                               
examples where  the value given  to loses  and the value  paid in                                                               
taxes are at the same  rate, a distortion previously addressed in                                                               
testimony by Mr. Ruggiero.                                                                                                      
SENATOR HUGHES referenced the chart  on slide 25 regarding prices                                                               
between  $50 and  $80 per  barrel.  She remarked  that there  was                                                               
"quite  an  increase"  between  the green  and  blue  lines.  She                                                               
referenced an  earlier slide  from a  previous meeting  where the                                                               
governor's "four priority  concerns" were addressed, specifically                                                               
that  "The  oil  companies  should participate  as  part  of  the                                                               
overall fiscal  plan for Alaska."  She asked, based on  the "four                                                               
priority concerns," if the governor  supports the current form of                                                               
the bill where taxes are increased at low prices.                                                                               
2:11:20 PM                                                                                                                    
RANDALL  HOFFBECK, Commissioner,  Department of  Revenue, Juneau,                                                               
AK, concurred that  the governor for the last two  years has felt                                                               
that everyone should  participate at some level  in balancing the                                                               
fiscal situation that  the state is facing. He  said the governor                                                               
has  supported  some level  of  increased  revenue from  the  oil                                                               
industry as  part of the  plan. However,  he does not  endorse HB
111(FIN)  or any  other. He  agreed with  Director Alper  that HB
111(FIN) contains a  substantial tax increase at  low oil prices.                                                               
He noted  that the governor  had proposed a one  percent increase                                                               
in the  gross tax rate  which more closely aligns  the difference                                                               
between the  chart's "red"  and "blue" lines.  He opined  that HB
111(FIN) tries to  get the tax and credit rates  in alignment and                                                               
then the decision point as to what  the net effect is with the 25                                                               
percent rate. He  pointed out that Director  Alper said alignment                                                               
can be achieved without the level  of tax increase proposed in HB
111(FIN).  He emphasized  that the  governor  addressed the  idea                                                               
that there should  be tax increases at some  level with everybody                                                               
participating in the solution.                                                                                                  
SENATOR HUGHES  asked if  any economic analysis  was done  on the                                                               
impact to  the North Slope from  the tax increase proposed  in HB
COMMISSIONER HOFFBECK replied that  the industry has testified on                                                               
what  they  believed the  impact  would  be.  He noted  that  the                                                               
department has the  capacity to do various  full-life modeling on                                                               
the  North  Slope  fields, but  conceded  that  ascertaining  the                                                               
industry's threshold  point from  a tax  increase for  a go/no-go                                                               
decision is not the kind of insight the department has.                                                                         
SENATOR HUGHES commented that she  has troubling "stomaching" the                                                               
tax  increase from  HB 111(FIN).  She asserted  that the  state's                                                               
energy should  be behind putting as  much oil in the  pipeline as                                                               
possible,  especially  when  the   state  is  in  recession.  She                                                               
remarked that HB 111(FIN) seems to  be focused on the lower price                                                               
range that causes her grave concerns.                                                                                           
MR. ALPER addressed slide 25 and  asked the committee to draw its                                                               
attention  on  the  concept of  reducing  the  state's  liability                                                               
related to large,  future investments. He opined  that the larger                                                               
structural concept is the state's  participation via the value of                                                               
the offsets  of the  carry-forwards where  someone makes  a large                                                               
investment that  comes into future  production at  the 25-percent                                                               
rate; that  is a  more substantial and  material savings  for the                                                               
state than  the specific issue of  the tax increase in  the short                                                               
term. He remarked that the  structural changes that align the tax                                                               
and gets  rid of the system's  distortions are in some  ways more                                                               
important  than  the  tax  increase   and  should  be  looked  at                                                               
separately. He summarized as follows:                                                                                           
     I  think that  there are  structural fixes  to the  tax                                                                    
     system that could be done  without raising taxes if the                                                                    
     will of  the Senate and  the committee is not  to raise                                                                    
     taxes;  but,  because  this version  happens  to  raise                                                                    
     taxes shouldn't  mean that you  shouldn't look  at some                                                                    
     of those  other more technical fixes  that are embedded                                                                    
     within this bill.                                                                                                          
2:15:47 PM                                                                                                                    
CHAIR  GIESSEL explained  that  the  four goals  when  SB 21  was                                                               
written  were  that  the  tax  be:  fair,  simple,  durable,  and                                                               
resulted  in more  production. She  pointed out  that during  the                                                               
previous meeting the committee heard  that the current oil tax is                                                               
working  and  is  workable  for companies.  She  added  that  the                                                               
thought was  that the tax  was durable  as well. She  pointed out                                                               
that the  governor has  said, "We've got  some exposure  here, we                                                               
need to  protect the  state from the  tax credit  exposures." She                                                               
added,  "We  certainly  agree  with that."  She  opined  that  HB
111(FIN), "goes far  off the rails from that."  She asserted that                                                               
the bill is an increase in  tax rates under a current regime that                                                               
has  resulted in  more production,  something that  the committee                                                               
has concerns with.  She pointed out that  life-cycle modeling has                                                               
been mentioned by  the department, but it has  not been presented                                                               
to this committee or previous committees.                                                                                       
COMMISSIONER HOFFBECK  responded that the department  did a life-                                                               
cycle analysis  in other committees, but  the department received                                                               
criticism for not properly accounting  for the timeframes between                                                               
initial exploration work and bringing  things into production, so                                                               
the department decided not to  include life-cycle analysis in its                                                               
presentation. He said the department  would be happy to work with                                                               
the committee  in presenting a life-cycle  analysis, but conceded                                                               
that  the  department  would  be  required  to  spend  time  with                                                               
industry  participants that  are  developing the  fields to  make                                                               
sure the  analysis is properly  calibrated to  accurately reflect                                                               
what is going on.                                                                                                               
CHAIR  GIESSEL replied  that she  appreciated the  commissioner's                                                               
statement. She  noted that Senator Wielechowski  had commented in                                                               
an earlier  meeting that  the Legislature has  never seen  an oil                                                               
policy  bill come  from a  legislator, that  the bills  have come                                                               
from the  administration and  that the  administration has  had a                                                               
consultant of its own who could do credible modeling.                                                                           
SENATOR WIELECHOWSKI  added that he  too would like to  see life-                                                               
cycle modeling on a variety  of Prudhoe Bay's fields, both legacy                                                               
and new fields.  He noted that Commissioner  Hoffbeck had earlier                                                               
mentioned  that he  did  not have  an idea  of  what the  "hurdle                                                               
rates" would be.  He pointed out that  department has established                                                               
hurdle  rates,   at  least  the  Alaska   Department  of  Natural                                                               
Resources (DNR)  has established  rates. He recollected  that the                                                               
DNR has  established hurdle  rates that the  industry uses  at 15                                                               
percent  and noted  that  he believed  the  "royalty relief"  for                                                               
[Caelus Energy] to  be 17.5 percent. He asked if  the hurdle rate                                                               
he  previously noted  is a  fair rate  to be  considered for  the                                                               
life-cycle models, net  present value, and the  internal rates of                                                               
returns on the oil fields.                                                                                                      
2:19:36 PM                                                                                                                    
COMMISSIONER  HOFFBECK agreed  that historically  the 15  percent                                                               
hurdle rate is  not unreasonable and is consistent  with what has                                                               
been  presented to  the  state in  the past.  He  noted that  the                                                               
department does not  have information on lower  hurdle-rates in a                                                               
low-return  environment where  there is  concern by  companies on                                                               
what their  investments can earn  versus past earnings.  He added                                                               
that  the department  will  never have  information  on what  the                                                               
competing projects are  in a company's portfolio  and what hurdle                                                               
rates might trip a project.                                                                                                     
MR. ALPER  specified that the  department's life-cycle  model was                                                               
built on a similar life-cycle  model from enalytica, the previous                                                               
consultants to the legislature.  He disclosed that the department                                                               
discovered that  the status quo  appeared too weak for  the rates                                                               
of return of a large  field under current conditions. He revealed                                                               
that even  $80 oil  was not  as economic  as what  the department                                                               
believed it  to be and  what the project sponsors  have presented                                                               
them to be. He said the  department thinks the primary reason for                                                               
the  weak rates  of  return has  to  do with  the  timing of  the                                                               
capital-spending  curve.   He  surmised  that  a   large  project                                                               
probably is  not as  front-loaded in  the assumptions  of capital                                                               
spending  as what  the  department shows,  that  the buildout  is                                                               
slower.  He emphasized  that "when"  the capital  spending occurs                                                               
makes a  big difference in a  large project's rate of  return. He                                                               
disclosed  that  the  department  was  reluctant  to  change  its                                                               
assumptions in the  middle of the session because  a track record                                                               
was established in hearings that  was based on certain status quo                                                               
results. He  conceded that the department's  "starting point" may                                                               
be a little bit off in its  impact analysis on the oil tax bills,                                                               
but stands behind  its accuracy in how its modeling  goes from "A                                                               
to B."  He emphasized that the  committee should not get  hung up                                                               
on the specific rates of return  in the result and suggested that                                                               
the  focus be  on  the change  in rates  of  returns between  the                                                               
starting point and whatever a bill being introduced specifies.                                                                  
SENATOR STEDMAN  remarked that the  current oil tax system  has a                                                               
gross tax at  some dollar amount and below, roughly  high $60s or                                                               
$70 where below  there is a gross  tax and above is a  net tax at                                                               
35 percent with  credit mechanisms and other things  going on. He                                                               
pointed out that  the committee started the week  with $1 billion                                                               
noted in  production-tax value, also  known as "profit  oil," and                                                               
now the committee  is told there is $2.2 billion  or $2.3 billion                                                               
due  to  industry  cost containment,  increased  production,  oil                                                               
prices moving  a little  bit, and a  few other  changes; however,                                                               
the state  has ended up  with $1.2 billion  or so in  more profit                                                               
oil.  He asked  if  there was  any thought  about  what size  the                                                               
profit oil should be before  the state starts looking at changing                                                               
the mechanism from out of a gross tax into something else.                                                                      
2:24:38 PM                                                                                                                    
MR.  ALPER concurred  with  Senator Stedman  that  the state  has                                                               
ended up with approximately $1.3  billion in divisible profits in                                                               
FY2017 due to the reasons he had given.                                                                                         
He  addressed the  graph on  slide 25  and pointed  out that  the                                                               
minimum tax kicks  in for the green line/CSHB 111(FIN)  at $50 or                                                               
$52 a barrel  and stays in the  net tax for a  wider range versus                                                               
the blue  line/SB 21. He  acknowledged Senator  Hughes' question,                                                               
and said  looking at structural  change that reduces  the state's                                                               
exposure  without  a  tax  increase was  worth  looking  at.  For                                                               
example,  if  the green  line/CSHB  111(FIN)  was lowered  to  15                                                               
percent, what  he described as  a non-material tax  increase, and                                                               
then the line would follow the  blue line/SB 21 to the right. The                                                               
result  is  a revenue-neutral  change  that  would still  do  the                                                               
important policy  direction of reducing the  state's exposure and                                                               
keeping the state in a net tax,  albeit a 15 percent net tax, all                                                               
the way down to $55 a barrel  or so. He emphasized that there are                                                               
several different ways to do this.                                                                                              
He noted  that Mr. Ruggiero  previously spent time  talking about                                                               
how to ensure the entirety  of the carry-forwards get monetizable                                                               
and  the importance  that the  companies can  use 100  percent of                                                               
their losses.  He said the  question is  what tax rate  should be                                                               
used for the carry-forwards.                                                                                                    
SENATOR COGHILL  asked if Mr.  Alper has modeled the  impact from                                                               
CSHB 111(FIN) on the effective tax  rate where oil fields must be                                                               
separated for a  loss, carry-forward credits change,  and the tax                                                               
rate plus the investment strategy are affected.                                                                                 
MR.  ALPER  explained  that   a  life-cycle  model  fundamentally                                                               
isolates a single  oil field as a resource where  "X" barrels are                                                               
in  the ground,  total  capital spend  is going  to  be, how  the                                                               
capital  is going  to be  spent,  what the  operations will  look                                                               
like,  and what  the production  will be.  He specified  that the                                                               
inherent default  of the life-cycle  model is that the  costs are                                                               
contained  in  an  oil  field  or  ring-fenced.  He  detailed  as                                                               
     If there were  not a ring-fence it would  only get more                                                                    
     economical  in the  company's  favor  because it  would                                                                    
     mean some of  those carry-forwards would be  able to be                                                                    
     monetizable  in some  way sooner  than the  model would                                                                    
     otherwise  show, the  model shows  they can't  get that                                                                    
     value until they come into production.                                                                                     
MR. ALPER  noted that  ring-fencing was  addressed at  a previous                                                               
meeting  and  he   wanted  to  make  sure   the  committee  fully                                                               
understands what ring-fencing  does and does not  do. He detailed                                                               
as follows:                                                                                                                     
     If  a company  has  multiple projects  in parallel,  it                                                                    
     doesn't  necessarily  mean  that  they  are  all  taxed                                                                    
     separately,  especially  if  that  is  an  encumberment                                                                    
     company  who is  otherwise profitable.  If the  company                                                                    
     does not  have a negative  cashflow for the  year there                                                                    
     is no  separation in between their  different projects,                                                                    
     it is  a single,  unitary tax  across the  North Slope.                                                                    
     It's only when  that company is in  a loss circumstance                                                                    
     for the year  which would be expected if  a new company                                                                    
     was having  a single, large project,  for example. Then                                                                    
     those losses would get tied  to that field so that they                                                                    
     can't be  used until that field  comes into production.                                                                    
     But  the way  the  bill  is written  now,  it does  not                                                                    
     impact say  if you  have a company  who has  profit and                                                                    
     they are  reinvesting a portion  or even almost  all of                                                                    
     that  profit  in  a  new   field.  There  would  be  no                                                                    
     attachment of that spending with the new field.                                                                            
SENATOR  COGHILL said  what the  committee heard  was that  was a                                                               
"value call" and  there is going to  be less oil if  there is the                                                               
inability to make  a value call, something  Alaska cannot afford.                                                               
He said  the committee  will have  to look  at the  "value thing"                                                               
when going through the very complex oil structure.                                                                              
2:29:57 PM                                                                                                                    
COMMISSIONER  HOFFBECK disclosed  that  he  had discussions  with                                                               
producers regarding ring-fencing and  they concurred with Senator                                                               
Coghill that the  ability to monetize credits on  a field earlier                                                               
makes their field development more  economic in the long term. He                                                               
specified  that the  ring-fence  idea was  to  make sure  credits                                                               
stayed with  an oil field and  the credits would drive  the field                                                               
into  production. He  noted  that a  softer  ring-fence could  be                                                               
considered that  allowed investment transfer with  a claw-back if                                                               
a  field is  not brought  back  into production.  He opined  that                                                               
ring-fencing is  the simplest option, but  conceded that "simple"                                                               
has collateral issues around it.                                                                                                
SENATOR STEDMAN  pointed out  that he did  not receive  an answer                                                               
regarding  the  size  of  the  profit  oil  before  a  switch  is                                                               
considered. He said  at some point having a  discussion on profit                                                               
oil  would be  nice because  if there's  virtually no  profit oil                                                               
then there  is nothing  to cut  up, no  production tax  value. He                                                               
explained  that  if  the  production tax  value  was  sitting  in                                                               
aggregate between  $2 billion  to $5 billion,  at some  point the                                                               
Legislature needs to  consider when to trigger in and  out of the                                                               
minimum-tax range.                                                                                                              
He addressed ring-fencing  and said the inability  for a producer                                                               
to take a loss  on a field, but pay taxes on  gains seemed odd to                                                               
him. He said  he is struggling with the concept  of screening out                                                               
the  ability to  immediately deduct  your losses  where there  is                                                               
production, asserting  that the  committee will  have to  work on                                                               
that concept. He remarked that he  did not know if the department                                                               
supports  the  concern  he  pointed out,  because  the  bill  was                                                               
introduced from a colleague in the legislature.                                                                                 
2:33:14 PM                                                                                                                    
COMMISSIONER HOFFBECK  addressed a statement made  earlier in the                                                               
meeting regarding SB 21's "four  pillars" and opined, "I think we                                                               
maybe didn't quite  hit the simplicity pillar in SB  21." He said                                                               
one  of  the  things  that  the state  has  in  the  current  tax                                                               
structure is  a blended  gross tax/net  tax that  is the  best of                                                               
both worlds as  far as the state is concerned.  He explained that                                                               
the state has  a gross tax at  the low oil prices,  but setting a                                                               
gross  tax across  the entire  spectrum  of prices  tends not  to                                                               
capture  the upside  because  the gross  tax is  set  so high  to                                                               
capture  the upside  that the  tax would  be onerous  on the  low                                                               
side. He said having the  blended-tax structure for a minimum tax                                                               
at the low side and allowed  to capture revenues at the high side                                                               
by switching to  a net tax is  an oil tax structure  that is well                                                               
designed  for the  state's position.  He  concurred with  Senator                                                               
Stedman that the  question becomes where is the  trigger point, a                                                               
question that the department is trying to answer.                                                                               
MR.  ALPER recounted  a  statement  made by  Mr.  Ruggiero in  an                                                               
earlier  meeting  where he  expressed  a  fundamental issue  with                                                               
anything  tied  to  gross  in  the  tax  and  viewed  that  as  a                                                               
distortion in  the system.  He detailed that  the history  of the                                                               
gross was originally passed as  part of the Petroleum Profits Tax                                                               
(PPT).  He  noted that  Mr.  Ruggiero  questioned where  the  $25                                                               
figure comes from, why the tax  is 4 percent only at prices above                                                               
$25 and why  does it go to  zero at $15 oil. He  asserted that no                                                               
one  is realistically  contemplating $15  oil and  specified that                                                               
minimum-tax triggers  are tied to  the annual average  price, not                                                               
to a low  point occurring in a fixed month.  He believed that Mr.                                                               
Ruggiero  would  advocate  for  no  minimum tax  at  all,  but  a                                                               
stronger  net tax  so  that when  there was  a  profit the  state                                                               
received a more reasonable share  while companies who were losing                                                               
money were not being penalized. He  emphasized that nor he or the                                                               
governor  were   advocating  what  he  surmised   Mr.  Ruggiero's                                                               
position is  regarding a minimum  tax. However, he  stressed that                                                               
Mr.  Ruggiero's  argument has  previously  been  made before  the                                                               
committee this week.                                                                                                            
2:35:35 PM                                                                                                                    
MR.  ALPER addressed  the graph  on slide  26, "Fiscal  Analysis:                                                               
Effective Tax  Rates (New/Gross Value  Reduction (GVR)  Oil)." He                                                               
said  slide 26  shows how  the effective  rate works  on the  GVR                                                               
eligible oil, the so called "new  oil." He explained that the way                                                               
the per-barrel credit works with  GVR-eligible oil is the tax can                                                               
go to zero,  roughly below $70 oil, and then  the impact is shown                                                               
on  the  graph  from  the  reduced 35  percent  of  the  adjusted                                                               
production tax value after the GVR  with the $5 credit that shows                                                               
the  curve  going  up.  He  expounded  that  the  House  Resource                                                               
Committee placed a  hard floor at 4 percent, but  was modified by                                                               
the House Finance  Committee at 3.2 percent, the result  is a tax                                                               
increase at  low prices and a  tax cut at high  prices, something                                                               
noted earlier  in the committee  as "irrational." He  opined that                                                               
that tax increase at low prices and  a tax cut at high prices was                                                               
inadvertent,  a mathematical  byproduct of  other decisions  that                                                               
were made in formulating the bill.                                                                                              
He continued to analyze slide 26 as follows:                                                                                    
   · On the right side is the lower tax rate, the 25                                                                            
      percent, while maintaining the $5 per barrel credit,                                                                      
    whereas   the   sliding-scale-per-barrel   credit   was                                                                     
   · There's a second jog at around $90 where the minimum                                                                       
       tax gives way to the net tax, then another jog at                                                                        
       around $105, that's where the progressive bracket                                                                        
     would come in.                                                                                                             
He  surmised that  if the  $5-per-barrel credit  were eliminated,                                                               
the  result would  be much  like non-GVR  oil that  is relatively                                                               
revenue neutral at higher prices,  bringing the conversation back                                                               
to low  prices, a realistic  discussion to have should  the floor                                                               
be hardened for GVR oil.                                                                                                        
MR.  ALPER  acknowledged that  GVR  is  inherently time  limited,                                                               
something the  committee knows  because setting  a time  limit on                                                               
GVR was part  of HB 247 that the Senate  helped pass the previous                                                               
year. He remarked  that having GVR may be helpful  to a project's                                                               
bottom line  for a zero  tax for those  three or seven  years. He                                                               
conceded that having  a bill raise prices at one  price point and                                                               
lower at another price point is unusual.                                                                                        
He  addressed  a  graph  on slide  27,  "Fiscal  Analysis:  Total                                                               
Production Tax Revenue  (FY2019)." He pointed out  that the graph                                                               
shows  a triangular  shaped wedge  between the  green line  (CSHB
111(FIN) and  the blue  line (SB 21),  occurring between  $50 and                                                               
$100 area that  shows the straighter 25 percent net  tax leads to                                                               
a tax increase and  then at higher prices a bit of  a tax cut. He                                                               
noted that  the lines  in the  graph can  be adjusted  and viewed                                                               
separately to  show any structurally positive  results that might                                                               
be  made from  simplification  by avoiding  the  tax changes.  He                                                               
pointed  out  that the  graph  shows  the  tax  change of  a  few                                                               
hundred-million  dollars when  the state  is only  receiving $0.5                                                               
billion to  $1.0 billion, but is  more dramatic when oil  is well                                                               
over  $100-per  barrel  where  the production  tax  might  be  $3                                                               
billion or $4 billion.                                                                                                          
He addressed slides 28 and  29 regarding the Tax Division's four-                                                               
page fiscal  note on  the bill. He  referenced slide  28, "Fiscal                                                               
Analysis: Fiscal Note Summary-Tax" as follows:                                                                                  
   · The tax impact is concentrated in the $50 to $100 oil price                                                                
        o Difference between the current effective tax rates,                                                                   
          based on 35 percent of net less the per barrel credit,                                                                
          and a flat 25 percent of net;                                                                                         
        o "Crossover" between gross and net taxes moves                                                                         
          substantially lower, from about $75 to about $50.                                                                     
   · Comparably minor revenue impact at higher prices, actually                                                                 
     a small tax cut.                                                                                                           
He summarized slide 28 as follows:                                                                                              
     The tax impact is  concentrated in that mid-price range                                                                    
     and  that   has  to  do  with   the  elimination;  it's                                                                    
     counterintuitive  to some,  we are  reducing taxes  and                                                                    
     therefore  raising revenue.  We are  lowering the  rate                                                                    
     from 35 percent to 25  percent, but getting rid of that                                                                    
     per-barrel credit;  that means that flat  25 percent of                                                                    
     net  and  again,  the  crossover  moving  from  roughly                                                                    
     $70/$75 to around $50, and then the smaller impact at                                                                      
       higher prices, and this was the choice made in the                                                                       
     other body as how to structure this tax.                                                                                   
MR.  ALPER referenced  slide 29:  "Fiscal  Analysis: Fiscal  Note                                                               
Summary-Budget" as follows:                                                                                                     
   · Additional impact due to near-total elimination of cash                                                                    
     payments for tax credits (reduced spending):                                                                               
        o Long-term   forecast   for   cash   credits   is   $150                                                               
          million/year; reduced to less than $20 million.                                                                       
        o Does not include what "would be" the liability for                                                                    
          possible future large projects.                                                                                       
        o The associated projects don't come into production                                                                    
          during the fiscal note period.                                                                                        
He opined that the analysis on  the budget is getting less focus.                                                               
He pointed out  that one of the fundamental purposes  of the bill                                                               
is  to move  the state  away from  the business  of cash  for tax                                                               
credits and  the bill nearly  eliminates that world.  He detailed                                                               
that   in  the   department's  long-term   forecast  the   credit                                                               
obligation as it  accrues is estimated at $150  million per year.                                                               
He  noted that  before the  passage of  HB 247,  the annual  cash                                                               
credits of  $150 million  per year would  have been  $250 million                                                               
per year.  He detailed  that approximately  $100 million  in Cook                                                               
Inlet credits have fallen out  of the mix; however, he emphasized                                                               
that  the $150  million or  the  "old $250"  are understated.  He                                                               
explained that the  only dollars in the forecast  are the dollars                                                               
that  are connected  to barrels  that are  in the  oil production                                                               
forecast.  He added  that a  lot of  things are  not in  the oil-                                                               
production forecast  yet and  if any fall  into the  forecast the                                                               
dollars associated with them will enter the forecast as well.                                                                   
2:41:41 PM                                                                                                                    
SENATOR STEDMAN  readdressed his  question regarding how  big the                                                               
production-tax  value  or  profit  oil is  before  the  gross/net                                                               
switch-out. He suggested  that a sensitivity analysis  be done to                                                               
see  where the  new volume,  price structure,  and production-tax                                                               
value would be at the tipping  point. He noted that the last time                                                               
a sensitivity analysis was done  the price tripped-out at $70. He                                                               
recommended that  FY2017 be used  because a large portion  of the                                                               
year  has  already  elapsed.  He estimated  that  the  state  has                                                               
approximately  $2.2 billion  to $2.3  billion in  profit oil  and                                                               
expected the number to be larger  than $4 billion. He said he was                                                               
not saying  the profit oil's change  in size is good  or bad, but                                                               
emphasized  that  the total  focus  should  not  be just  on  per                                                               
barrel, but  to also  look at the  components, GVR,  non-GVR, and                                                               
then to  look at, "The  whole can of  soup as  we put all  of the                                                               
ingredients together and stir it up."                                                                                           
MR. ALPER noted  that his presentation was put  together prior to                                                               
the spring forecast  and the department did not  have the benefit                                                               
of  being  able to  come  out  publicly  with those  numbers.  He                                                               
admitted that a  couple of things are going to  move based on the                                                               
spring  forecast.  He  suggested  that   a  bit  more  of  higher                                                               
production be  "baked in" for the  near term due to  the inherent                                                               
staleness of the FY2018 and FY2019 production numbers.                                                                          
2:43:40 PM                                                                                                                    
He readdressed  slide 29 and pointed  out that the bill  does not                                                               
"completely" eliminate  cash credits  because cash  credits exist                                                               
in the  "Middle Earth," the region  not in the Cook  Inlet or the                                                               
North  Slope. He  disclosed that  cash  credits for  middle-earth                                                               
   · NOL credit: 15 percent,                                                                                                    
   · Capital expenditure: 10 percent,                                                                                           
   · Well drilling credit: 20 percent.                                                                                          
He  explained that  the  credits  amount to  $20  million to  $30                                                               
million  in the  near term  and a  little lower  beyond that.  He                                                               
reiterated that  the credits do  not include projects  that might                                                               
get  sanctioned in  the  future that  could  include hundreds  of                                                               
millions of dollars in credit liability.                                                                                        
He  disclosed that  the other  remaining cashable  credit in  the                                                               
system other than middle-earth is  the refinery credit, which has                                                               
another  three  years  left to  a  refinery  capital  improvement                                                               
credit against the  corporate-income tax as well  as the interior                                                               
gas  utility has  access  to  a gas  storage  credit should  that                                                               
project come  to fruition.  He detailed that  the credit  for the                                                               
gas storage  facility was  modeled after  the Cook  Inlet Natural                                                               
Gas  Storage Alaska  (CINGSA) given  to  the underground  storage                                                               
facility  in  Kenai  that  remains   as  a  cashable  credit.  He                                                               
summarized that the  passage of CSHB 111(FIN) would  be the limit                                                               
of what remains for cashable credits.                                                                                           
SENATOR  STEDMAN  asked  that  the following  be  included  in  a                                                               
     Maybe if  I could do the  current FY2017 and then  if I                                                                    
     could have it  rerun at $5 on the  per-barrel, like the                                                                    
     Senate had  it initially on  SB 21,  and then $0  so we                                                                    
     could  see the  full  gamut of  how  that number  moves                                                                    
     around, and I'm not saying any of them is good or bad                                                                      
     or otherwise, I'd just like to know what it is.                                                                            
MR. ALPER  replied that the  department will comply.  He remarked                                                               
that the  $8 credit will  keep Alaska in  the gross tax  range, a                                                               
wider range of prices than  anyone really contemplated. He opined                                                               
that the  fact the state is  still in a  gross tax at $70  oil is                                                               
not what the  Legislature expected when SB 21  passed. He pointed                                                               
out that  if the Senate's  version was  used with the  $5 credit,                                                               
the  crossover point  would  be,  "Somewhat to  the  left of  the                                                               
2:46:01 PM                                                                                                                    
He  referenced slide  30, "Fiscal  Analysis:  Fiscal Note  Table-                                                               
Impact at  Range of Prices."  He addressed two subtotal  lines in                                                               
the table: "Total  Revenue Impact" and "Total  Budget Impact." He                                                               
detailed that the  subtotal lines have about 10  lines above them                                                               
that  corresponds to  an individual  component of  the bill  that                                                               
shows individual  impact at different  price points  at different                                                               
years with a  price-point presumption of the  fiscal forecast. He                                                               
disclosed that  the official forecast  price range for  next year                                                               
is $54 and  $60 the year beyond. He detailed  that "Total Revenue                                                               
Impact"  is how  much  more in  taxes the  state  is expected  to                                                               
receive and  noted that the  revenue amount  will show up  in the                                                               
department's online  payment system as  money in the bank  to the                                                               
state. He explained  that "Total Budget Impact"  is the reduction                                                               
in  the  state's  obligation  for  buying  cash-tax  credits  and                                                               
reiterated that  the long-term  forecast is  $150 million  with a                                                               
90-percent  reduction  in  the  out-years  with  $15  million  of                                                               
middle-earth credits  and refinery  credits. He pointed  out that                                                               
"Total  Fiscal Impact"  is the  total of  both new  money in  the                                                               
treasury-the revenue  side, and  less to the  appropriated budget                                                               
He explained  that the  last three  lines in  the table  show the                                                               
cumulative value of  carried-forward-lease expenditures. He noted                                                               
that there  is a small  amount of carried-forward  losses because                                                               
of major  producers who  might have  had an  operating loss  in a                                                               
low-price year  that are  unable to  getting cash  credits; under                                                               
current law those  get carried forward and  are gradually getting                                                               
used up by  the producers: $14 million for FY2018  and $0 beyond.                                                               
He  detailed that  the next  line is  the same  concept with  the                                                               
passage of  the bill  where producers are  not get  cash credits,                                                               
but everyone  is accumulating  carried-forward-lease expenditures                                                               
that grows to $225 million in  FY2020 and $640 million in FY2027.                                                               
He specified that  the carried-forward lease expenditure  is a 25                                                               
percent tax;  e.g., $900 million worth  of carried-forward losses                                                               
would be $225 million (FY2020)  and $2.5 billion worth of carried                                                               
forward losses would be $640 million (FY2027).                                                                                  
2:49:26 PM                                                                                                                    
SENATOR  WIELECHOWSKI asked  what the  cost is  to run  a net-tax                                                               
system in  terms of  state employees and  total dollars  versus a                                                               
gross-tax  system. He  noted that  Alaska has  been told  that it                                                               
operates one of the most complex tax structures in the world.                                                                   
MR. ALPER recounted  that the state's oil and  gas production tax                                                               
division  has  been around  since  the  1970s and  experienced  a                                                               
ramping up  of staff  with the switch  to a net  tax in  the late                                                               
2000s. He  noted that  industry-experienced "audit  masters" were                                                               
added and  paid higher  than the  traditional state-pay  scale to                                                               
provide  technical advice  to help  orchestrate the  more complex                                                               
net-profits  tax  process. He  summarized  that  the division  is                                                               
comprised of five  to seven employees and accounts  for less than                                                               
$1 million to the state.                                                                                                        
SENATOR WIELECHOWSKI asked  if the division has  enough people to                                                               
do the audits and what needs to be done.                                                                                        
MR. ALPER replied that the oil  and gas group is proud of staying                                                               
ahead of the  statute of limitations. He noted  that the division                                                               
will  ultimately be  reviewing  fewer credits,  primarily due  to                                                               
Cook Inlet  cashable credits falling  out of the work  pool where                                                               
the  staff  will be  freed  up  to  assist  with tax  audits.  He                                                               
disclosed that  added staff will occur  with corporate-income-tax                                                               
auditors, but  additional staff has  not been sought in  the oil-                                                               
and-gas production group.                                                                                                       
2:52:37 PM                                                                                                                    
He  addressed  slide 31,  "Fiscal  Analysis:  Fiscal Note  Table-                                                               
Impact at Range  of Prices." He explained that  the graphic slide                                                               
shows what  happens from  FY2018 to  FY2027 if  the price  of oil                                                               
varies from the Fall 2016  Revenue Forecast, (FC). He pointed out                                                               
that at the $60/$80/$100 oil-price  ranges show the impact from a                                                               
relatively dramatic  25 percent  net tax overlaying  the previous                                                               
tax which  nets out  to an  annual $200  million to  $400 million                                                               
increase  in revenue.  He  said  at the  lower  oil price  range,                                                               
$20/$40, the  graph shows more  credit obligation for  cash where                                                               
nearly everyone  on the  North Slope starts  operating at  a loss                                                               
and many of  the companies are eligible for cash  credits and the                                                               
state  would have  a  large cash  obligation  as companies  start                                                               
running up  multi-hundred-million-dollar losses  with eligibility                                                               
for a 35  percent NOL credit under status quo  law. He noted that                                                               
lower oil  prices equate to a  budget impact and higher  prices a                                                               
tax  impact. He  pointed  out  that at  the  $120  oil price  the                                                               
"curves" crossover  each other  that results  in a  more revenue-                                                               
neutral bill at $120 and higher prices.                                                                                         
SENATOR WIELECHOWSKI recalled that  the committee heard testimony                                                               
the previous  day from  a producer  that claimed  the bill  was a                                                               
100-percent increase  in taxes at  $60-barrel oil.  He calculated                                                               
that the  tax increase was  approximately $150 million.  He asked                                                               
what  the total  government  take was  when royalties,  corporate                                                               
income taxes and property taxes were considered.                                                                                
MR.  ALPER replied  that  he  appreciated Senator  Wielechowski's                                                               
inquiry  to compare  apples-to-apples.  He pointed  out that  the                                                               
state  does  receive  revenue  when   oil  prices  are  low  from                                                               
royalties, property  taxes and corporate incomes  taxes. He added                                                               
that doubling the state's production  tax is just an increment on                                                               
top of one component in  addition to the previously noted revenue                                                               
sources. He  summarized that  the state's  approximate production                                                               
take in  the near-term  years is  $1.5 billion;  at $60  oil, the                                                               
state is looking  at $150 million to $200 million  increase, or a                                                               
10 to 15 percent increase in total oil and gas from the change.                                                                 
2:56:32 PM                                                                                                                    
At ease                                                                                                                         
2:57:20 PM                                                                                                                    
RICH  RUGGIERO,  Managing  Partner,  Castle  Gap  Advisors,  LLC,                                                               
Houston, Texas,  addressed his overview titled  "Petroleum Fiscal                                                               
Design CSHB 111."                                                                                                               
CHRISTINA RUGGIERO,  Advisor, Castle Gap Advisors,  LLC, Houston,                                                               
Texas, introduced herself but did not provide testimony.                                                                        
MR. RUGGIERO commended the committee  members for keeping up with                                                               
the bill's  iterations and noted  that he  had one major  flaw in                                                               
his analysis  due to  inadvertently using  an interim  version of                                                               
the bill.                                                                                                                       
He  noted  that  the  committee  had asked  him  for  some  final                                                               
observations  and analogized  that  the Legislature's  committees                                                               
responsible for  oil and gas acts  as the board of  directors for                                                               
the state's  oil interest. He  opined that the  committee members                                                               
should not be expected to  know the intricacies of the day-to-day                                                               
operations,  but to  be advised  on a  routine basis  of the  key                                                               
aspects that represent  the bulk of the revenues  and profits. He                                                               
said  he was  saddened to  see  at the  end of  the session  that                                                               
legislators acting  as the  "board of  directors" were  having to                                                               
ask  basic questions  about what  is going  on with  the business                                                               
that is the  "engine of the state." He  asserted that information                                                               
should  be  made  available  early and  regularly  so  that  when                                                               
committee  members are  talking  about making  decisions on  what                                                               
represents 70  to 80 percent  of what  drives the state  that the                                                               
best  information  is available  ahead  of  time for  members  to                                                               
better  formulate  their  questions,  to  better  understand  how                                                               
things are  going, and to better  know how to make  the decisions                                                               
that must be made.                                                                                                              
CHAIR GIESSEL  asked if Mr.  Ruggiero could specify  exactly what                                                               
information he was referring to.                                                                                                
MR.  RUGGIERO  addressed  slide 4,  "Alaska's  Priorities  -  The                                                               
Current   Challenge."  He   noted  that   his  observations   and                                                               
suggestions  will   come  from   a  "30000-foot  view"   and  not                                                               
necessarily  down to  the fiscal-type  numbers that  Commissioner                                                               
Hoffbeck and Mr. Alper previously provided.                                                                                     
He  asserted that  the state  has  drivers that  it is  currently                                                               
dealing  with: money  into  the state  and  the looming  cashable                                                               
credit issue,  and making  sure whatever the  state does  that it                                                               
does not  in any way  significantly damage the  long-term ability                                                               
to fill the Trans Alaska Pipeline System (TAPS) with more oil.                                                                  
3:01:17 PM                                                                                                                    
SENATOR  WIELECHOWSKI   remarked  that  Mr.  Ruggiero   said  two                                                               
different  things: revenue  to the  state, and  filling TAPS.  He                                                               
said the state can give the  oil away and probably fill TAPS, but                                                               
that does not  fulfill the state's need to get  revenue. He asked                                                               
Mr.  Ruggiero if  he agreed  that a  balance is  required between                                                               
revenue  and giving  huge tax  breaks to  get more  oil into  the                                                               
MR. RUGGIERO  replied that when  he made his statement  the state                                                               
has a short-term driver due to  the cashable credits and the long                                                               
term to  fill TAPS.  He asserted that  in no way  did he  want to                                                               
imply  that the  state  should fill  TAPS just  for  the sake  of                                                               
filling TAPS.  He specified that the  state has an asset  that it                                                               
has licensed  out to  others to  develop and  the state  needs to                                                               
receive some value  for that. He said the  constant challenge the                                                               
Legislature has is  determining the state's fair  share over time                                                               
as opposed to  how much the state leaves the  producers for their                                                               
development  effort and  risk taken.  He set  forth that  TAPS is                                                               
going  to  be  filled  where  it  makes  sense  for  all  parties                                                               
MR.  RUGGIERO  referenced  slide   5,  "Observations  from  Prior                                                               
Testimony" as follows:                                                                                                          
   · We see a common understanding of the overarching strategic                                                                 
        o More oil to fill TAPS.                                                                                                
        o State cannot afford to pay cashable credits.                                                                          
        o Some go further to see the need for increased state                                                                   
          revenues today.                                                                                                       
   · Cashable credits:                                                                                                          
        o Our experience in other regimes is that the producers                                                                 
          have mechanisms that allow full recovery of their                                                                     
        o Industry in their testimony all agree that they need                                                                  
          the right to fully recover their costs.                                                                               
        o All mentioned that the current system, which includes                                                                 
          per-barrel credits and a  gross-minimum tax, results in                                                               
          carry-forward NOLs  not producing  the same  tax saving                                                               
          benefit  as  the  cashable  credits;  i.e.,  the  "Lost                                                               
He explained that there comes a  time and level in TAPS where the                                                               
producers cannot operate  the pipeline any further,  and what the                                                               
state does  not want  to do  is push the  producers too  close to                                                               
that level  and find  out that the  operational level  was higher                                                               
than what was  previously thought. He said the  state should want                                                               
to take steps now and always to  make sure it is doing the things                                                               
to put more  oil into TAPS and with that  whatever is the state's                                                               
fair share in doing so.                                                                                                         
He  addressed cashable  credits,  disclosing that  he has  worked                                                               
with over  two-dozen oil  regimes and noted  that everyone  has a                                                               
mechanism that allows  the producer to fully  recover their costs                                                               
and to do  so in a way  that allows them to  achieve the expected                                                               
tax benefit.  He analogized that  if he is allowed  deductions on                                                               
his personal income tax that he  gets the value of the deductions                                                               
without an  alternative minimum tax  (AMT) sneaking in.  He noted                                                               
that the AMT on one's personal  taxes takes away the value of the                                                               
deductions; in a way, the  state's per-barrel credits and minimum                                                               
gross tax acts  like an AMT to the producers  where the producers                                                               
do not end up getting  what they thought because their deductions                                                               
and  credits are  taken  away. He  said his  AMT  analogy puts  a                                                               
picture to  what might happen  when producers do  their economics                                                               
on getting full  value for deducting loses as  they move forward,                                                               
likening  the change  to the  cashable  credits to  the "loss  or                                                               
wasted NOL"  in that  producers are not  getting what  they might                                                               
expect to be the same value  or tax savings from having spent the                                                               
money and then being able to deduct the cost of that money.                                                                     
3:05:10 PM                                                                                                                    
MR. RUGGIERO  referenced slide 7, "Observations  and Suggestions:                                                               
Overall" as follows:                                                                                                            
   · Alaska has an overall complex system for administering                                                                     
     energy taxation:                                                                                                           
       o This has likely led to the frequency of change.                                                                        
        o Functional interdependencies make even a small fix                                                                    
          difficult at best.                                                                                                    
   · Too many items tied to price versus profitability or unit                                                                  
        o The ever-changing world of energy and the resultant                                                                   
          price and cost structures will ensure the original                                                                    
          intent can't be maintained for very long.                                                                             
        o Need to try and make things as self-correcting as                                                                     
   · Over the last decade the hundreds of billions spent in                                                                     
     countries  and states  with  higher  non-producer take  than                                                               
     Alaska should  cause a greater  focus on aspects  other than                                                               
     the  rate to  make  Alaska as  competitive  as possible  for                                                               
     investment capital.                                                                                                        
   · Coming up with a simple system to generate the expected                                                                    
     state revenues is not that difficult, but dealing with all                                                                 
     the nuances will take time to make sure all constituencies                                                                 
     are heard, and all issues addressed.                                                                                       
He opined  that Alaska has one  of the most complex  systems that                                                               
he has  ever dealt which  he believes  leads to the  frequency of                                                               
change due  to many functional interdependencies  that make small                                                               
changes difficult.  He explained  that either  there are  so many                                                               
interconnected  levers  that  trying   to  change  one  leads  to                                                               
changing others,  or an unintended consequence  impacts something                                                               
that is thought to not need change.                                                                                             
He added  that part  of the  frequency of change  is also  due to                                                               
having   a  lot   of  mechanisms   tied  to   price  instead   of                                                               
profitability. He noted that in  a previous meeting he questioned                                                               
how and why the  state had a zero-gross tax at  $15 and 4 percent                                                               
at $25; at  the time, the costs were at  $15 total-all-in and the                                                               
state likely was putting in a  gross-minimum tax at zero when the                                                               
producers did  not have  any profit in  moving forward.  He added                                                               
that  there  were  probably  fewer players  and  fewer  units  in                                                               
different divisible property interests;  however, he asked if the                                                               
oil tax  is doing what the  Legislature intended it to  do at the                                                               
time SB 21 passed and is the state getting the intended value.                                                                  
MR. RUGGIERO noted  that the state also has barrel  credits if it                                                               
so chooses  to keep them  that are  tied to prices;  however, the                                                               
intent  in doing  barrel credits  was  an expected  profitability                                                               
level at each of those prices  at the time the Legislature did SB
21. He said  the one thing that  we know is cost  will change and                                                               
will  change often  at  the  price of  oil  changes, which  means                                                               
whatever was the philosophy or  the intent behind the Legislature                                                               
putting in  the per-barrel credit tied  to oil prices is  not the                                                               
situation today  or in the  future. He  added that much  like the                                                               
minimum-gross tax when initially set,  the state now has negative                                                               
progressivity in its system and  is not realizing exactly what it                                                               
intended when the tax was passed.                                                                                               
He emphasized  that tying a  lot of  things to fixed  things like                                                               
price does  not in any  way inform as to  what that means  to the                                                               
company, how  profitable they are, or  what they need to  do with                                                               
their business in  time. He said there are a  lot of things going                                                               
on that  are going  to bring  the state's  oil prices  and issues                                                               
associated with it back to  the Legislature to again make another                                                               
3:08:24 PM                                                                                                                    
He remarked that  he is not surprised, but  a little disappointed                                                               
that  in  the ten  years  of  showing  the Legislature  that  the                                                               
marginal-tax rate  is not informative  as to where  people invest                                                               
their money  and the discussion  continues today. He  said people                                                               
continue to come  before the Legislature saying  either the state                                                               
is  or  is  not  competitive  based  on  the  marginal-tax  rate,                                                               
something that is  not true because an investment  call cannot be                                                               
made  based solely  off marginal-tax  rate. He  pointed out  that                                                               
hundreds of billions have been  spent in countries with marginal-                                                               
tax  rates that  are  worse than  Alaska,  something that  should                                                               
inform the  Legislature that tax  rate did not make  the decision                                                               
for the companies  where to invest, that there  must be something                                                               
else, a point  that gets into the totality of  the state's fiscal                                                               
system. He emphasized that, "It's not just the rate."                                                                           
He  said when  asked  if increasing  the tax  rate  is better  or                                                               
worse,  he is  going  to say  it  depends, not  because  he is  a                                                               
consultant, but  that changing the  tax rate really  does depend.                                                               
He addressed  what other regimes  are doing and  referenced North                                                               
Dakota (ND).  He disclosed that ND  took away tax credits  on new                                                               
wells in  addition to 18-month and  24-month exemptions; however,                                                               
their  tax rate  did not  change. He  said people  will insinuate                                                               
that  ND did  not  increase or  reduce their  taxes,  but ND  did                                                               
increase their taxes. He detailed as follows:                                                                                   
     They actually did increase their  taxes in the last two                                                                    
     years,  quite  considerably;  but,  you  won't  see  it                                                                    
     because it doesn't show up  in the headline rate and it                                                                    
     won't  move  their  position  on  that  relative  curve                                                                    
     because  they still  have severance,  and they  have ad                                                                    
     valorem property  tax when added  to the  royalty. When                                                                    
     added to  the royalty it's  going to plot out  the same                                                                    
     as government take.                                                                                                        
MR. RUGGIERO  said the Legislature  must dig deep.  He emphasized                                                               
that his intent is to  provide information and bring an education                                                               
so that  committee members  can ask tougher  questions as  to why                                                               
hundreds of billion get spent  in the other countries. He pointed                                                               
out that  committee members  can look at  the annual  reports for                                                               
the state's three  biggest producers and see  the countries where                                                               
they  will be  spending their  money in  the next  three to  five                                                               
years. He pointed  out that a lot of the  countries listed in the                                                               
producers' annual reports have worse  marginal-tax rates than the                                                               
purported rate in Alaska. He summarized as follows:                                                                             
     That's  one message  you can  tell that  I'm passionate                                                                    
     about and that  we really make sure you get  all of the                                                                    
     information you need to make your decision.                                                                                
3:11:20 PM                                                                                                                    
He asserted that the state can  come up with a simpler system. He                                                               
opined that  the Legislature  cannot handle  all the  nuances and                                                               
things that  come up in a  short period of time;  however, coming                                                               
up  with a  system  that at  the macro  level  delivers the  same                                                               
revenue at the same oil prices can easily be done.                                                                              
SENATOR  COGHILL  remarked  that  he  tends  to  agree  with  Mr.                                                               
Ruggiero  on  the  marginal-tax  rate;  however,  he  noted  that                                                               
producers have  said there are  variables that they have  to deal                                                               
with that  includes the tax  rate, effects  of the tax  rate, and                                                               
the  credits.  He   said  the  producers  make   their  point  on                                                               
investment strategy  because of Alaska's place  in geography, the                                                               
state's  service   industry  that   can  help   them,  permitting                                                               
challenges, and time to production.  He opined that producers see                                                               
their win on the effective tax  rate as the key element for their                                                               
decision point. He asked Mr.  Ruggiero to expound on his emphasis                                                               
that there is more than the tax rate.                                                                                           
MR. RUGGIERO agreed  that there is more to it  than the tax rate.                                                               
He pointed  out that  people have come  before the  committee and                                                               
said the  tax rate  is the  issue, but  suggested that  where the                                                               
producers  are  spending their  capital  should  be examined.  He                                                               
remarked  that if  tax  rate  was the  issue  then the  producers                                                               
should not be investing in those countries that have marginal-                                                                  
tax  rates  worse  than Alaska's.  He  explained  that  companies                                                               
consider  a "locational  premium" due  geopolitical issues,  cost                                                               
probabilities based on prior project  difficulties, and all sorts                                                               
of variables  in deciding; however,  he conceded that  if nothing                                                               
else changes  and the  state raises its  tax rate,  the economics                                                               
run by  the companies will get  worse for Alaska. He  pointed out                                                               
that the constant  in the oil industry is change  and very rarely                                                               
does one walk into a situation where all things stay equal.                                                                     
SENATOR COGHILL explained that the  state has a range of economic                                                               
realities for producers  to work in and the intent  in the gross-                                                               
to-net  tax regime  was  to diversify  the  investment field.  He                                                               
conceded  that the  Legislature went  a  little too  far in  cash                                                               
because the  state now is  in a place  where it cannot  afford to                                                               
invest as  previously advertised, which means  the Legislature is                                                               
going to have  to "shift gears." He pointed out  that the current                                                               
tax  regime did  have an  impact on  having a  diversified field;                                                               
however, it  also brought  its own  problem with  it and  a whole                                                               
different  set of  economics that  hit the  state's very  complex                                                               
system. He concurred that previous  testimony has emphasized that                                                               
the state's  economics "will go  south fast"  if the tax  rate is                                                               
3:16:11 PM                                                                                                                    
SENATOR WIELECHOWSKI  noted that at a  previous committee meeting                                                               
he  asked  producers to  suggest  the  economics that  the  state                                                               
should look at;  for example, net present value  or internal rate                                                               
of return. He said  he did not get an answer,  but noted that one                                                               
producer suggested to,  "Look at the results and  you've got more                                                               
oil." He asked if  more oil is a metric that  should be looked at                                                               
or if not, what are the metrics  that the state should look at in                                                               
determining whether  a system  is going  to put  more oil  in the                                                               
pipeline and provide a fair amount of revenue to the state.                                                                     
MR.  RUGGIERO   explained  that  companies  will   restate  their                                                               
strategy  during  down-price  times  that includes  the  type  of                                                               
projects  they  are looking  for  to,  "Put  into the  hopper  of                                                               
consideration." He said,  "Once you get projects  in that hopper,                                                               
it's just standard  economics." He pointed out  that each company                                                               
has their "little twist" on how  they look at a project's upside,                                                               
downside  and   sensitivities.  He  said  companies   have  their                                                               
corporate   price-deck   and   inflation-deck,   which   is   not                                                               
necessarily the  prices and  inflation that is  going to  be used                                                               
even  if DOR  comes back  with  a full-life-cycle  model for  the                                                               
committee.  He  emphasized  that  during  his  40  years  in  the                                                               
industry that what  companies look at are going  to be different,                                                               
but  what  has not  changed  is  they  all  look at  a  project's                                                               
economics.  He said  what  he  has seen  grow  more important  in                                                               
making projects  more likely is  identifying where are  the risks                                                               
and what tools are within a regime to mitigate those risks.                                                                     
SENATOR WIELECHOWSKI  asked if Mr.  Ruggiero has models  that can                                                               
compute the  internal rates of  return and net present  value for                                                               
hypothetical projects in Prudhoe Bay or Kuparuk.                                                                                
MR. RUGGIERO  replied yes, that  standard-project-economic models                                                               
are easy  and have been  done for many  regimes. He said  all the                                                               
different nuances within the Alaska system can be modeled.                                                                      
SENATOR WIELECHOWSKI asked  if Mr. Ruggiero can  share his models                                                               
with the committee.                                                                                                             
MR. RUGGIERO  disclosed that he  had shared some models  with the                                                               
other  body;  however,  they complained  that  his  results  were                                                               
wrong, but he  found out that changes were made  to his model. He                                                               
said he  would work with the  Senate in providing models  for the                                                               
Legislative Budget and Audit Committee.                                                                                         
3:19:58 PM                                                                                                                    
SENATOR MEYER  agreed that  tax rate alone  is not  a determining                                                               
factor on  whether a producer  invests in Alaska  versus projects                                                               
elsewhere. He  expressed that  Alaska has a  lot of  factors that                                                               
work against  the state  that must  be factored  in as  well; for                                                               
example,  transportation costs,  supplier  costs, climate  costs,                                                               
permitting costs, potential lawsuit delays,  lack of roads on the                                                               
North Slope, etc.  He asked to confirm that the  state's tax rate                                                               
has to be less when its regional factors are considered.                                                                        
MR.  RUGGIERO reiterated  to look  at the  countries that  have a                                                               
worse   marginal-tax  rate   than  Alaska;   many  have   extreme                                                               
logistical  issues   as  far  as   distance  for   market,  tough                                                               
geopolitical regimes,  and higher  cost associated  with offshore                                                               
development that are upfront as opposed  to ND where costs can be                                                               
spread out over  ten years with gradual drilling.  He pointed out                                                               
that a  lot of things that  Senator Meyer brought up  are present                                                               
in much the same level of  costs in other regimes that have worse                                                               
rates  than Alaska  that big  companies invest  in. He  explained                                                               
that  project  analysis  uses  costs  for  a  specific  location,                                                               
expected costs, economics based  off expectations, the inflation,                                                               
and a company's  price-deck; after that is when  risk factors are                                                               
considered.  He added  that  how  good a  company's  group is  at                                                               
estimating  cost is  considered, what  has been  their estimation                                                               
track record  that results in  either a plus/minus of  10 percent                                                               
or  50 percent  possibility.  He  remarked that  if  he has  been                                                               
somewhere and operated  for 40 years that he would  have a pretty                                                               
good handle  on what the  costs are going  to be. He  pointed out                                                               
that the locations with worse tax  rates are new entries for some                                                               
companies  whereas Alaska  has companies  that have  been in  the                                                               
state  for  a long  time  and  ought to  have  a  good handle  on                                                               
permitting and their economics versus investment somewhere else.                                                                
3:23:22 PM                                                                                                                    
SENATOR MEYER addressed testimony  during a previous meeting that                                                               
changing the state's  production-tax code 7 times in  the last 12                                                               
years makes it  hard to be accurate. He opined  that whatever the                                                               
Legislature does that  the production-tax code be  done right and                                                               
left alone.                                                                                                                     
MR. RUGGIERO  replied that changing  the tax code  multiple times                                                               
does not  change the  amount of time  to get a  permit or  what a                                                               
company's cost structure  is. He surmised that  Senator Meyer was                                                               
intimating that  the items he  brought up made it  more difficult                                                               
to decide  on Alaska;  however, those items  are not  impacted by                                                               
the changes in  the tax. He guessed that Senator  Meyer wanted to                                                               
bring  up Alaska's  tax change  impact on  the overall  economics                                                               
presented to  a company's management regarding  what they thought                                                               
they were  going to get  and then  what they were  actually being                                                               
delivered,  something that  he agreed  changes  and is  something                                                               
that  the state  has to  deal with  as in  any other  regime that                                                               
makes multiple  changes to their  tax; however, in no  way should                                                               
that change a company's confidence level  in the time it takes to                                                               
get something  done and the cost  that it takes to  get something                                                               
CHAIR  GIESSEL  noted  that the  state's  appropriation  for  its                                                               
cashable-credit program has  been vetoed for the  last two years,                                                               
something that she remarked as  kind of unpredictable or unstable                                                               
that would change  a company's perception in terms  of risks. She                                                               
disclosed  that many  companies with  discoveries have  said they                                                               
lost  potential  partners due  to  Alaska's  35 percent  tax  and                                                               
complex tax structure.  She asked to verify that  Mr. Ruggiero is                                                               
saying that the level of tax  does not matter, and that Alaska is                                                               
more  attractive than  regimes  with higher  taxes. She  remarked                                                               
that she is not quite sure what Mr. Ruggiero is saying.                                                                         
3:25:41 PM                                                                                                                    
MR. RUGGIERO specified  that his point was a  matter of education                                                               
where a  lot of people draw  a bright line with  "competitive" on                                                               
one side and "noncompetitive" on  the other, a pronouncement that                                                               
he  believes  cannot be  made  by  someone  in the  industry  who                                                               
understands the  intricacies on how  the different  regimes work.                                                               
He asserted  that if analysis  was that  easy then all  the money                                                               
would go to  where it says "competitive" and no  money would have                                                               
gone to  the "noncompetitive;" that's  not how it works.  He said                                                               
his point was  not to rely on the one  metric of "competitive" or                                                               
"noncompetitive." He expressed that  what Chair Giessel addressed                                                               
are  the  things  that  Senator  Meyer was  trying  to  bring  up                                                               
regarding  the unpredictable  nature of  what Alaska's  economics                                                               
are  going  to  be.  He   noted  that  he  responded  to  Senator                                                               
Wielechowski  that investment  decisions are  based on  economics                                                               
plus  the  risk  profile.  He  explained  that  if  a  regime  is                                                               
unpredictable as  to what  a company  is going  to pay  then that                                                               
adds  a level  of risk  that will  likely find  some form  within                                                               
their  economics  to  put  that  risk  in.  He  noted  that  some                                                               
companies will  put a locational  risk premium that  compares net                                                               
present value  at higher  levels as well.  He concurred  that the                                                               
things  Chair  Giessel  brought   up  will  negatively  impact  a                                                               
project's  risk;  however,  it  is a  matter  of  how  individual                                                               
companies put  that risk into  their decision making  in deciding                                                               
how much that risk really impacts projects going forward or not.                                                                
3:28:11 PM                                                                                                                    
He referenced  slide 8,  "Observations and  Suggestions: Overall"                                                               
as follows:                                                                                                                     
   · As a Legislature, if you want to be able to make changes                                                                   
     that are most responsive to achieving goals and to be                                                                      
     durable over time you need real and timely data.                                                                           
   · The "Flaw of Averages" would suggest that working with                                                                     
     estimates or averages will likely continue to result in a                                                                  
     less than effective structure for all parties.                                                                             
   · Complexity in Alaska is further exasperated by the common                                                                  
     ownerships of  wells, fields,  plants, pipers,  ships, etc.;                                                               
     given some  of those are  regulated entities and  subject of                                                               
     numerous past  litigations, it will  be difficult  for parts                                                               
     of industry to come forward.                                                                                               
  · Need to find a mechanism to get good data and information.                                                                  
He  addressed the  first bullet  point on  slide 8  that to  make                                                               
responsive changes the Legislature has  got to have the real data                                                               
and the  best data with the  best prediction of not  only what is                                                               
happening now, but what has happened  over the few years and what                                                               
is anticipated to happen over the next few that follow.                                                                         
MR. RUGGIERO  explained that  what the  committee gets  from DOR,                                                               
people  like himself  and others  is noted  in the  second bullet                                                               
point regarding "The  Flaw of Averages" where  everything is done                                                               
"average;"  however,   when  running   averages,  as   Mr.  Alper                                                               
mentioned  earlier,  it is  very  easy  to get  highly  different                                                               
economic  results  from  multiple  profiles. He  noted  that  his                                                               
models  encompass:   three,  five  or  seven-year   lead-ins;  if                                                               
applicable,  big expiration  spikes;  an appraisal  in the  early                                                               
years and then study; and accelerated/non-accelerated recovery.                                                                 
He summarized that  to be able to give the  committee an informed                                                               
opinion  the state  should base  its knowledge  that it  only has                                                               
three or  four major  things that  can come on  in the  next five                                                               
years and to  build around those with the knowledge  of what they                                                               
are and not to some generalities.                                                                                               
3:30:08 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  how Alaska would compare  on the risk                                                               
profile   to   countries   with  higher   government-tax   rates,                                                               
nationalized  assets, and  civil  strife  like Libya,  Venezuela,                                                               
Russia, Iraq, and Iran.                                                                                                         
MR. RUGGIERO replied that he  cannot say whether Alaska is better                                                               
or worse. He  explained that regimes are ranked  based on various                                                               
items that change over time such  as the government in place, the                                                               
need  of  national  oil  company,  or  the  size  of  a  regime's                                                               
petroleum  fund.  He  said  a   company  looks  at  a  series  of                                                               
parameters, what to mitigate, and  portfolio mix regarding living                                                               
with  higher risk  in a  region  relative to  long-term-strategic                                                               
goals. He  admitted that  he cannot rank  all countries  and say,                                                               
"Alaska sits  here," because then he  would be just as  guilty as                                                               
someone picking a  marginal-tax rate and telling  Alaska where it                                                               
SENATOR HUGHES  asked if Alaska's  risk has increased due  to the                                                               
state  making 7  changes in  12  years and  the governor  vetoing                                                               
cashable credits the last 2 years.                                                                                              
MR. RUGGIERO answered that if one  of the goals is to attract new                                                               
players and new  oil to the pipeline, then  the state's perceived                                                               
risk has probably increased.                                                                                                    
He addressed  the third and fourth  bullet points in slide  8. He                                                               
explained that there  are a small number of  overall players that                                                               
are  involved  throughout the  "value  chain"  in the  gathering,                                                               
processing plants,  pipelines, and  in the  ships; some  of those                                                               
are regulated  entities and  care must be  taken in  dealing with                                                               
regulated entities  for litigious  reasons. He remarked  that the                                                               
"intertwining"  in  Alaska  and  the  state's  complex  tax  code                                                               
creates one  of the most  complex workings along  the value-chain                                                               
where  the limited  players worry  about how  certain information                                                               
can be used  against them. He said the Legislature  must think as                                                               
the "board of directors" how  to get the needed information while                                                               
understanding the complexities that exist in the system.                                                                        
3:34:41 PM                                                                                                                    
MR. RUGGIERO referenced slide 9,  "HB 111 Review and Comments" as                                                               
   · HB 111 perceptions, understandings, and dialogue have all                                                                  
     changed immensely since we began advising the Legislature.                                                                 
   · Effective Tax Rate graphs:                                                                                                 
        o CSHB 111(RES),                                                                                                        
        o CSHB 111(FIN).                                                                                                        
He addressed the  graph on CSHB 111(RES) versus  the "status quo"                                                               
and  noted that  small  changes occur  around  $70/$80 when  per-                                                               
barrel credits  start at  a different, lower  rate and  the major                                                               
change  occurrs at  $120 when  the per-barrel  credits disappear;                                                               
however, the graph shows no  difference between the two curves at                                                               
He pointed  out that  the graph depicting  CSHB 111(FIN)  shows a                                                               
substantial  tax and  revenue increase  in the  $70/$80 a  barrel                                                               
price range  with the plus/minus  around the "zero line"  and the                                                               
curves  do equate  as the  oil  prices increase  further out.  He                                                               
disclosed that  the numbers  he used in  the graphs  were rounded                                                               
with the assumption  that all oil was at one  cost structure, one                                                               
royalty structure, etc.                                                                                                         
3:37:05 PM                                                                                                                    
SENATOR MEYER concurred  that CSHB 111(FIN) is  a substantial tax                                                               
increase with  the tax  flattening out with  the current  code as                                                               
prices get higher.  He opined that CSHB  111(FIN) seems backwards                                                               
where taxes  are raised  on oil companies  where they  are making                                                               
less money,  but not raised when  the oil companies are  making a                                                               
lot of money.                                                                                                                   
MR. RUGGIERO pointed  out that governments are  entities that are                                                               
highly dependent on their oi revenue  to run their state or their                                                               
government  and there  will always  be discussion  on how  to get                                                               
more when prices are down. He said  he has seen a lot of entities                                                               
that are oil revenue dependent do  things that would appear to be                                                               
counter intuitive at low prices  because regimes that do not have                                                               
a large  reserve to  call upon  have to get  revenue in  the low-                                                               
price environment.  He remarked that whether  CSHB 111(FIN) makes                                                               
sense is up to the Legislature  to decide. He agreed that the tax                                                               
increase in CSHB  111(FIN) is substantial and  the committee must                                                               
decide whether the increase is the right or wrong thing to do.                                                                  
SENATOR MEYER  remarked that the  oil industry is  often referred                                                               
to as  "our partner" and "sticking  it to your partner"  does not                                                               
seem right  when times  are tough.  He said  the state  is highly                                                               
dependent on the  one industry and raising the tax  rate when the                                                               
industry is making less money  would discourage investment in the                                                               
state and new investors or  new producers will consider investing                                                               
elsewhere like  Texas, a state  with a more  diversified economy.                                                               
He asked Mr. Ruggiero if his statement is correct to say.                                                                       
MR. RUGGIERO  replied that  the increased  tax rate  would factor                                                               
into  a company's  risk assessment.  He surmised  that a  company                                                               
would consider whether to work  somewhere where oil represents 75                                                               
to 80 percent  of a government's income or 5  percent, a scenario                                                               
that  would indicate  what to  expect  in the  coming years  with                                                               
taxes when oil prices go way up or down.                                                                                        
SENATOR  MEYER  remarked  that Alaska's  dependence  on  the  oil                                                               
industry adds another higher-risk factor to the state.                                                                          
MR. RUGGIERO concurred.                                                                                                         
3:40:21 PM                                                                                                                    
He referenced slide 10, "Ring-Fencing" as follows:                                                                              
   · State Concern:                                                                                                             
        o Paying, through tax savings or credits, without actual                                                                
          new hydrocarbons flowing to market.                                                                                   
   · Operator Concern:                                                                                                          
        o The need to separate costs:                                                                                           
             1. Between various projects using common facilities.                                                               
             2. Possibility between oil and gas.                                                                                
   · Suggested Solution:                                                                                                        
        o For an existing unit or field on production business                                                                  
          as usual with any NOL created being used to offset                                                                    
          future segment taxable income.                                                                                        
        o For a new field or unit, direct cost associated with a                                                                
          potential new development will be calculated and held                                                                 
          until commercial production is established; one that                                                                  
          occurs then all NOLs for that new entity will be                                                                      
          available to be used in the taxpayer's segment return.                                                                
MR. RUGGIERO  said two  concerns have  been brought  up regarding                                                               
ring-fencing and  both are equally  valid. He specified  that the                                                               
credits offered by  the state, the cashable aspect  and the rest,                                                               
accomplished its goal  by attracting new players.  He pointed out                                                               
that this  year there  are names  of possibly  new fields  of the                                                               
size that  were never talked  about 6 to  10 years ago.  He noted                                                               
that the  state's concern regarding  the idea of  ring-fencing is                                                               
that the state  would be paying either through the  credits or in                                                               
an  oil mechanism  for no  barrels associated  with the  money, a                                                               
valid concern. He explained that  from the operator's perspective                                                               
the  belief is  ring-fencing  immediately  creates an  accounting                                                               
nightmare that triples the complexity  for the audit process five                                                               
or six years down-the-road due  to oil field and possible common-                                                               
facility separation.                                                                                                            
He  opined that  ring-fencing is  one  of those  things that  the                                                               
concerns from both sides be addressed  and then ask, "Do I have a                                                               
mechanism  that can  solve that?"  He suggested  for an  existing                                                               
unit or field that when prices fall,  or costs are high that in a                                                               
year they, "Have it in the well,  it is getting used right now on                                                               
costs, it  spreads across whatever  that segment tax  return that                                                               
they  are doing."  He recommended  that  if the  state is  really                                                               
concerned about not  getting new hydrocarbons for a  new field or                                                               
unit to only  deal with the direct cost before  there is a barrel                                                               
of production  so there  is no worry  about joint  facilities and                                                               
separation, and  to allow  all those to  be deducted  against the                                                               
current  operations wherever  they  are at  because  if they  are                                                               
joint, that  means they  are already being  used and  are already                                                               
being deducted somewhere.  He asserted that he  dismisses all the                                                               
ring-fencing noise  about having to separating  all the different                                                               
costs into different categories and  just say costs are allocated                                                               
until commercial production is established  and the [NOLs] can be                                                               
used  by  whichever taxpayer  has  them  for their  consolidated-                                                               
segment return. He noted that  new players will obviously have to                                                               
wait until they  have revenues for carried-forward  NOLS, etc. He                                                               
added  that an  existing  player  that farmed  into  the unit  or                                                               
bought into  the unit get  to use  the credits in  their returns,                                                               
but not until there is  commercial production. He summarized that                                                               
there are  some simple things that  can be done that  he believes                                                               
satisfies  the concerns  on both  sides  and does  not create  an                                                               
administrative or cost accounting burden.                                                                                       
3:43:33 PM                                                                                                                    
SENATOR VON  IMHOF asked to  confirm that HB 111(FIN)  puts ring-                                                               
fencing on a  new field where any cost associated  with the field                                                               
must remain with  that field. She noted that  Director Alper said                                                               
earlier that one  of the fears is  to have a company  come in and                                                               
purchase the new  field's well and apply the  new field's credits                                                               
somewhere  else,   a  fear  that  was   behind  the  ring-fencing                                                               
MR. RUGGIERO  replied that  Senator von  Imhof's characterization                                                               
is right  in stating the  state's concern. He concurred  that the                                                               
state  does not  want to  pay for  cost that  does not  result in                                                               
placing more  hydrocarbons into the pipeline.  He reiterated that                                                               
there  are simple  ways  to  address all  the  concerns and  then                                                               
constructing something that matches all those concerns.                                                                         
SENATOR  VON  IMHOF expressed  her  worry  that the  ring-fencing                                                               
provision  may  have  unintended  consequences;  for  example,  a                                                               
company that spends several years  trying to develop a particular                                                               
well, cannot sell  to another company who  could possibly utilize                                                               
the wells  loses and  fund further  development from  their other                                                               
producing wells. She continued as follows:                                                                                      
     What I  worry is  that it is  a business  concept, your                                                                    
     basic economic  business concept.  I think that  we are                                                                    
     looking at  one hat, we  are looking at the  revenue to                                                                    
     the state-hat  and we  are not  looking at  the greater                                                                    
     economic impact-hat;  that's what I worry.  So, I guess                                                                    
     I  wonder  if  we  can have  a  conversation  about  if                                                                    
     there's other  mechanisms that could address  the fears                                                                    
     that have been presented by Director Alper.                                                                                
MR. RUGGIERO commented that what  Senator von Imhof brought up is                                                               
why CSHB  111(RES) had  what was called  the dry-hole  credit. He                                                               
pointed out that  Senator von Imhof presented  two scenarios, the                                                               
first  one was  people legitimately  trying to  explore with  the                                                               
intent of finding  something and developing it,  spend money, but                                                               
do not  find anything  that could  be commercially  developed; in                                                               
that  case,  CSHB 111(RES)  said  if  the  company paid  all  its                                                               
service  companies and  has given  back its  lease to  the state,                                                               
then the company's  credits will be paid back.  He explained that                                                               
the second  scenario is where  someone else  can buy a  new field                                                               
under development, get  the NOLs and use the NOLs  when the first                                                               
barrel of commercial oil starts coming up.                                                                                      
CHAIR GIESSEL asked if the dry-hole credit has worked elsewhere.                                                                
MR. RUGGIERO  explained that a  company usually suffers  the cost                                                               
of  a dry  hole  and  moves on,  it's  the  cost of  exploration;                                                               
however, Alaska created  a credit program to  attract new players                                                               
and additional exploration.                                                                                                     
CHAIR GIESSEL  said one of the  things that she wrestles  with is                                                               
how much  should the state  be supporting companies that  come to                                                               
Alaska where  "wildcatters" drill a  dry hole and the  state pays                                                               
them.  She  affirmed that  the  state  wrestles with  paying  for                                                               
drilling dry holes, especially in  the fiscal time that Alaska is                                                               
MR. RUGGIERO  speculated that a  lot of exploration  and drilling                                                               
activity  that took  place would  not have  happened without  the                                                               
credits. He  said there was  a lot  of discussion on  what Alaska                                                               
can do  to overcome the  exact things that Senator  Meyer brought                                                               
up as the  "givens" for Alaska. He conceded  that the Legislature                                                               
can talk  about making decisions  on a one-of-item basis,  but he                                                               
asserted that the state must look at its tax code, "as a whole."                                                                
CHAIR  GIESSEL pointed  out  that  there is  also  a question  of                                                               
picking winners  and losers,  and inviting  companies up  that do                                                               
not  have the  competencies  to develop  in  the state's  complex                                                               
environment. She  added that the  state also has  seismic credits                                                               
and noted that seismic data  is foundational for choosing whether                                                               
to buy  a lease  or not.  She admitted  that there  are a  lot of                                                               
factors that come into play.                                                                                                    
SENATOR VON IMHOF remarked that she has a big issue with ring-                                                                  
fencing.  She  expressed  that   she  understood  Mr.  Ruggiero's                                                               
explanation,  but explained  that she  looked at  ring-fencing in                                                               
the economic  sense that businesses  or companies need  to recoup                                                               
the dry holes utilizing their  whole business model to stick with                                                               
it  and  keep  drilling  until  they  find  the  glory-hole.  She                                                               
asserted that not  allowing the costs to be  recouped will result                                                               
in  the dry  holes sitting  abandoned. She  set forth  that ring-                                                               
fencing will not allow the  state to get the intended consequence                                                               
which is more  development. She summarized that  for an economic-                                                               
hat, ring-fencing is  not the answer because it is  too narrow of                                                               
a parameter.                                                                                                                    
3:51:53 PM                                                                                                                    
MR. RUGGIERO disclosed that one  of the first things many regimes                                                               
do in  a license round  is to  put in a  prequalification process                                                               
for bidding.  He noted that during  his time in the  oil industry                                                               
that more  effort was put  into the qualification  process versus                                                               
the  bid  process;  however,  he   noted  that  there  are  great                                                               
explorers  that  are  not  operators  and  placing  a  qualifying                                                               
condition  might  discourage  true  explorers who  are  great  at                                                               
finding  oil,  but are  not  interested  in oil  development.  He                                                               
suggested that  legislators not  act too  quickly in  excluding a                                                               
subset  of companies  from the  state  that can  work on  various                                                               
MR. RUGGIERO referenced slide 11, "Transparency" as follows:                                                                    
   · Oil and Gas Industry:                                                                                                      
        o Royalty and taxes paid towards Alaska's economic                                                                      
        o Issues related to oil and gas should be top priority                                                                  
          for the Legislature.                                                                                                  
   · Key data and information not readily supplied to each                                                                      
   · Suggested Actions:                                                                                                         
        o Alaska Oil and Gas Statistics Book:                                                                                   
             ƒPhysical and online "book."                                                                                      
             ƒGas statistics should be published and reviewed                                                                  
               by DNR and Alaska Oil and Gas Conservation                                                                       
               Commission (AOGCC) no later than the first week                                                                  
               of the legislative session.                                                                                      
             ƒContains historical and projected curves or                                                                      
               charts of production, spending, projects, jobs,                                                                  
              wells, seismic, license rounds, etc.                                                                              
             ƒInformation should be broken down to the lowest                                                                  
               level of granularity as possible.                                                                                
        o Pre-session Workshop:                                                                                                 
             ƒGo over the current state of the global energy                                                                   
               picture with multiple views on:                                                                                  
                   · Supply,                                                                                                    
                   · Demand,                                                                                                    
                   · Pricing,                                                                                                   
                   · Emerging Technology,                                                                                       
                   · Industry Disrupters,                                                                                       
                   · LNG Market,                                                                                                
                   · Impact all might have on activity in                                                                       
                    Alaska's energy sector.                                                                                     
He addressed  "transparency" and  suggested that  the Legislature                                                               
needs  to  have  both  a  physical and  online  book  that  every                                                               
legislator gets at  the beginning of the  legislative session. He                                                               
pointed out  that oil  represents the  bulk of  Alaska's economic                                                               
engine and  legislators need to  be up  to date with  the "latest                                                               
and the greatest" of whatever is  going on, what has happened and                                                               
what  is   planned  in  the   near-future.  He   emphasized  that                                                               
legislators need  to see the  book before the session  starts. He                                                               
suggested  early  in the  session  that  the  DNR and  AOGCC  the                                                               
provide  informative  data to  the  Legislature  rather than  the                                                               
Department  of Revenue  due to  confidentiality issues.  He added                                                               
that  those new  to the  Legislature or  individuals that  want a                                                               
deep-dive into  oil should  have a  pre-session workshop  on non-                                                               
Alaska  topics  that  address   competitive  curves,  what  other                                                               
regimes are doing, current and  future oil prices, the supply and                                                               
demand  picture, and  technologies  emerging  that might  disrupt                                                               
crude oil. He asserted that the  book and a briefing from DNR and                                                               
AOGCC will bring the entire  legislative body, Alaska's "board of                                                               
directors for oil," up to  speed and current with everything that                                                               
is going on so that legislators  are not asking for basic data on                                                               
the state's business during the session's last weeks.                                                                           
CHAIR GIESSEL  pointed out that  the Legislature has the  Oil and                                                               
Gas Competitiveness  Review Board (O&G CRB)  that was established                                                               
as part  of SB  21. She  disclosed that  the Legislature  did not                                                               
fund O&G  CRB, which creates  a challenge. She revealed  that the                                                               
Cook Inlet's tax regime was  changed, and their annual report was                                                               
due  at the  beginning  of  the session,  but  the  task was  not                                                               
accomplished on time. She asserted  that the Legislature needs to                                                               
fund O&G  CRB, but noted  that Mr. Ruggiero's  recommendation was                                                               
MR.  RUGGIERO disclosed  that  he had  reviewed  the 2015  report                                                               
which   provided    extensive   background    information   about                                                               
prospectivity,  but   suggested  that  receiving  two   or  three                                                               
different views as  to what is going  on in the world  of oil and                                                               
gas is always useful. He  reiterated that the diverse dialog will                                                               
provide legislators  with a good  sense of  what the state  is up                                                               
against  rather than  talking about  billions of  dollars at  the                                                               
last minute.                                                                                                                    
He  referenced  slide  12,  "Gross   Value  Reduction  (GVR)"  as                                                               
   · The GVR can be viewed as an uplift to current costs as it                                                                  
     serves to reduce the Production Tax Value just as current                                                                  
     cost do.                                                                                                                   
   · Uplift graph.                                                                                                              
   · This is a progressive-tax-reduction tool that grows with                                                                   
   · Do not see why the extra 10 percent is needed to bring a                                                                   
     project on stream. The availability of the 20-percent. GVR                                                                 
     with royalty-relief should be sufficient.                                                                                  
MR.  RUGGIERO  explained  that  CSHB  111(FIN)  talks  about  the                                                               
elimination  of the  extra  10 percent  of the  GVR,  one of  two                                                               
things  that  he will  provide  a  different perspective  on.  He                                                               
detailed  that he  explained GVR  in  terms of  operating-expense                                                               
uplift because  the GVR  reduction comes in  as a  subtraction in                                                               
the  same place  as the  operating  and capital  expense, so  the                                                               
state's   per-barrel-expense   deduction.   He   said   his   GVR                                                               
perspective  was  done  because  the  discussion  with  committee                                                               
members  has  addressed NOLs  and  uplifts  in the  eight-percent                                                               
He  addressed the  "GVR Uplift  of Operating  Expense (OPEX)  and                                                               
Capital Expenditure  (CAPEX)" graph on  slide 12. He  pointed out                                                               
that at $60  Alaska North Slope West Coast (ANSWC)  Oil Price per                                                               
barrel with  the 20 percent GVR  would be the equivalent  of a 30                                                               
percent uplift on the OPEX, which  means without the GVR the same                                                               
tax would  be paid with a  30 percent higher OPEX.  He noted that                                                               
the 30 percent line showed at  $60 per barrel the uplift would be                                                               
nearly 50 percent.                                                                                                              
He remarked  that his perspective is  interesting because "gross"                                                               
is usually thought of as a  regressive tax where it gets worse as                                                               
the price  goes down;  however, from  the state's  perspective it                                                               
gets worse as the price goes up  because as the price goes up the                                                               
gross value  of the  point of  production goes  up and  the value                                                               
continues to  grow. He  pointed out  that the  graph on  slide 12                                                               
shows that  around $110 and  $120 per  barrel that the  impact of                                                               
the 30-percent GVR  is the same as if the  producers could deduct                                                               
their expenses  twice over. He  said given the deduction  that is                                                               
allowed from  just the 20 percent  that he does not  see the need                                                               
for  the extra  10  percent  to be  successful  and economic.  He                                                               
remarked that the extra 10 percent  is an expensive aspect of the                                                               
tax code.                                                                                                                       
SENATOR  STEDMAN asked  Mr. Ruggiero's  if  his use  of the  word                                                               
"expensive" was from the viewpoint of the state.                                                                                
MR. RUGGIERO answered yes.                                                                                                      
SENATOR STEDMAN  remarked that GVR  has been looked at  and noted                                                               
that some  members have voiced  their concerns while  others have                                                               
like  it a  lot. He  said Mr.  Ruggiero's GVR  perspective is  an                                                               
interesting way of  presenting GVR in a different  context and is                                                               
easier to understand  its impact versus running a  math model. He                                                               
opined as follows:                                                                                                              
     Conceptually when you take a gross value and throw it                                                                      
         against a net, you have a big impact. Just by                                                                          
     definition it is scary.                                                                                                    
MR. RUGGIERO replied as follows:                                                                                                
     You will also see I've  put the per-barrel credits in a                                                                    
     different aspect.  When you keep  talking about  $5 and                                                                    
     $8-per-barrel  it   seems  like  a  really   small  and                                                                    
     innocuous  number,  but we'll  see  later  on what  the                                                                    
     impact of that is as well.                                                                                                 
4:01:42 PM                                                                                                                    
He  referenced slide  13, "Tax  Rate and  Per Barrel  Credits" as                                                               
   · To create a durable structure, a simplified system needs to                                                                
     be put in place when time allows.                                                                                          
   · As previously recommended, Castle Gap would go with a                                                                      
     stepped or bracketed-net system that would have the various                                                                
     steps based on unit profitability:                                                                                         
        o Low initial rate to mimic low taxes for Cook Inlet and                                                                
          other projects like heavy oil.                                                                                        
        o Can progressively go higher as unit profitability                                                                     
        o Self   corrects    for   changing   price    and   cost                                                               
He noted  that CSHB 111(FIN)  lowers the tax rate  and eliminates                                                               
the per  barrel credits. He  reiterated that Castle  Gap Advisors                                                               
recommends that  the state  can create  a simplified  system that                                                               
gets rid of  a lot of the different moving  parts and lessens the                                                               
chance of  unintended consequences. He  pointed out that  the tax                                                               
can  be based  on  many things  including  profitability or  unit                                                               
profitability,  which  means  the   tax  self  corrects  and  the                                                               
Legislature would not  have to come back and fix  it as often. He                                                               
conceded  that  nuances  must  be  considered  to  make  sure  an                                                               
operator or operation is not  singled out unnecessarily for a tax                                                               
that is onerous from an economic standpoint.                                                                                    
4:02:40 PM                                                                                                                    
He referenced slide  14, "Put the Barrel  Credits in Perspective"                                                               
as follows:                                                                                                                     
   · Table assumption: 500000 Barrels a Day (BOPD), $10                                                                         
     Transportation and Shipping (T&S), $30 Costs:                                                                              
        o $55, $65, $75 per-barrel-market price.                                                                                
        o All values rounded and in $Billion:                                                                                   
                                    $55       $65       $75                                                         
          Market Value             10.0      11.9      13.7                                                                     
          T&S                       1.8       1.8       1.8                                                                     
          Royalty                   1.0       1.3       1.5                                                                     
          Costs                     5.5       5.5       5.5                                                                     
          Tax Value                 1.7       3.3       4.9                                                                     
          Tax @ 35 pct.             0.6       1.2       1.7                                                                     
          Per Barrel Credits        1.4       1.4       1.4                                                                     
          Gross Minimum Tax         0.3       0.4       0.5                                                                     
   · Alaska is in a gross-minimum tax world until somewhere                                                                     
     around $75-per-barrel and even this may move higher as                                                                     
     costs rise with the rise in the price of oil.                                                                              
MR.  RUGGIERO   said  slide  14   puts  per  barrel   credits  in                                                               
perspective as he had previously done  with GVR. He noted that at                                                               
$55-per-barrel, the  taxable value  to producers is  $1.7 billion                                                               
at  the  current 35  percent  tax  rate  the  tax would  be  $600                                                               
million; however, rather  than seeing the per-barrel  credit on a                                                               
per-barrel basis at $8, the  table shows the per-barrel credit at                                                               
$1.4 billion. He explained that  his intent was to show committee                                                               
members the  comparison between taxable  value and the  tax owed.                                                               
He pointed  out that at $55,  $65 and $75 per  barrel, with costs                                                               
being held constant,  that the per barrel credits and  the use of                                                               
the  gross-minimum tax  are greater  than the  tax that  would be                                                               
owed. He noted  that his last bullet point says  that even if oil                                                               
prices start  to come up the  cost structure is going  to come up                                                               
as well and at the  current barrel-credits structure the state is                                                               
likely going to stay in  a minimum-tax-controlled world for quite                                                               
some time.  He summarized that the  table on slide 14  shows that                                                               
the  state being  in  a  minimum-tax world  for  a  long time  is                                                               
significant  and remarked  that he  was not  sure that  everybody                                                               
knows how large the numbers are.                                                                                                
4:05:16 PM                                                                                                                    
SENATOR STEDMAN commented as follows:                                                                                           
     I  think in  the  current fiscal  year  the per  barrel                                                                    
     credit  total  is  somewhere around  $1.2  billion,  so                                                                    
     these  numbers aren't  quite  that wacky  as  far as  a                                                                    
     general reference  as far  as where we  are at  in this                                                                    
     fiscal year, so it's a sizable amount of money.                                                                            
     These credits don't roll forward  if they are not used,                                                                    
     they drop away, but they  have a huge impact of holding                                                                    
     us in this minimum tax  range which goes to the earlier                                                                    
     questions that I've asked as  far as at what production                                                                    
     tax value  or how  big is  the size  of the  profit oil                                                                    
     before we  are out  of the  minimum tax  structure that                                                                    
     these per barrels  hold in them, I'm  expecting that to                                                                    
     be north of $4 billion.                                                                                                    
SENATOR  VON  IMHOF  thanked Mr.  Ruggiero  for  the  information                                                               
provided on  slide 14. She  pointed out that "royalty"  was noted                                                               
on the table,  something that she had not seen  before. She asked                                                               
if "royalty" was included when determining the taxable value.                                                                   
MR. RUGGIERO explained his calculation as follows:                                                                              
     I've  had  this discussion  15  times  since I've  been                                                                    
     here, in the  end you pay your tax  on taxable barrels.                                                                    
     I happen to use "royalty" in  a way that says, "If I am                                                                    
     looking at the  market, the market is  the market value                                                                    
     of all the  barrels if you actually  do the subtraction                                                                    
     the way I've got."                                                                                                         
He said  everyone tells  him that  he has it  wrong, but  when he                                                               
does  the math  the actual  dollars come  out the  same, but  the                                                               
taxable value he  gets is the taxable value  everybody else gets,                                                               
a mathematical perspective that is a little different.                                                                          
4:07:50 PM                                                                                                                    
He  referenced slide  15,  "Review: Timing  of  Cost Recovery  is                                                               
Critical" as follows:                                                                                                           
   · Presented on Saturday, four different recovery scenarios                                                                   
     that yielded significantly different economic results,                                                                     
     [Internal Rate of Return (IRR), Net Present Value (NPV),                                                                   
     Net Operating Loss (NOL)]:                                                                                                 
        o Accelerated:        20-pct. IRR          $27-NPV(10)                                                                  
        o Depreciated:        14 pct.              $14                                                                          
        o Cashable:           27 pct.              $46                                                                          
        o 50 pct. reduction:  6 pct.              -$12                                                                          
   · In this simple example there is considerable difference in                                                                 
     economics between the "accelerated" and the "cashable"                                                                     
   · Our modeling for a new North Slope field shows a gap of                                                                    
     three percent to four-percent IRR difference between                                                                       
     "cashable" credits, (assuming being paid when earned),                                                                     
     versus any form of CF NOL recovery.                                                                                        
MR. RUGGIERO  summarized that there was  a substantial difference                                                               
in economics  between even the "accelerated"  and the "cashable."                                                               
He said  a thought was  to apply  some uplift to  the "cashables"                                                               
and allow them to be recovered  on an accelerated basis to bridge                                                               
the  gap; however,  Castle  Gap's modeling  shows  that there  is                                                               
about a three or four-percent IRR  gap at various prices. He said                                                               
a tighter  modeling field was  run at flat, nominal  pricing that                                                               
exhibited  the  gap. He  said  slide  16 continues  the  modeling                                                               
He  referenced slide  16,  "Created a  Full  Lifecycle Model"  as                                                               
   · Model ran on a possible North Slope new field:                                                                             
        o $10 billion total CAPEX, roughly $6 billion before                                                                    
          first production.                                                                                                     
        o $9 billion in total OPEX.                                                                                             
        o 40-year project life.                                                                                                 
        o 1-billion barrels produced.                                                                                           
        o Average 12.5 percent royalty.                                                                                         
   · Run with 35-percent tax and credits as well as 25-percent                                                                  
     tax and no credits.                                                                                                        
4:09:07 PM                                                                                                                    
He referenced slide 17, "Cashable Credits" as follows:                                                                          
   · New and existing producers were encouraged by the                                                                          
     possibility of receiving early cash return for their                                                                       
     investments   toward   bringing    new   hydrocarbons   into                                                               
   · [Current practice is to pay a maximum of $70 million per                                                                   
     taxpayer per year, CSHB 111(FIN) to pay a maximum of $35                                                                   
     million per taxpayer per year.]                                                                                            
   · For a new, large North Slope field that has a maximum CF                                                                   
     NOL of $5 billion:                                                                                                         
        o If converted to credits at 35 percent would take 50                                                                   
          years to get paid back.                                                                                               
        o If converted to credits at 25 percent would take 35                                                                   
          years to get paid back.                                                                                               
        o Both options would suffer from significant lost time                                                                  
          value of money.                                                                                                       
MR. RUGGIERO  explained that slide  17 erroneously showed  in the                                                               
second bullet point  that "current practice" is to  pay a maximum                                                               
of $35 million,  but the correct amount is $70  million per year.                                                               
He noted that he used $35  million in his calculation where 35 to                                                               
50 years was  required to get it  back, at $70 million  it was 17                                                               
to 25  years just to recover  if the producers are  force convert                                                               
to credits that the  state is not going to buy  any more, and the                                                               
state waits  for the  producers to recover  them each  year going                                                               
forward. He  summarized that the  modeling shows in  both options                                                               
that there would  be a significant loss of value  due to the time                                                               
value of money to the people subject to it.                                                                                     
4:10:38 PM                                                                                                                    
He  referenced slide  18, "Bridging  the Gap  - Project  Internal                                                               
Rate of Return (IRR)" as follows:                                                                                               
   · Type project run to compare immediately cashable credits                                                                   
     "cashable" against  current structure with CF  NOL "wasted,"                                                               
     current structure with NOLs  100 percent effective "useful,"                                                               
     and cashable credits  recovered at a maximum  of $35 million                                                               
     per year (35 per year).                                                                                                    
   · Even with considerable uplift, the rate of return gap does                                                                 
     not close much at all; you can however, use uplift to                                                                      
     equate cash flows.                                                                                                         
   · ["Project IRR" graph shows: wasted, useful, cashable, 35                                                                   
     per year projections; the range on the left is 0 to 40                                                                     
     percent; oil prices on the bottom go from $50 to $160 per                                                                  
He detailed that the top line in  the graph is the rate of return                                                               
if there were  cashable credits where once a  producer incurs the                                                               
cost they  would file and get  paid the cashable credit  the next                                                               
He said the next two lines  in the graph identify: "wasted" blue-                                                               
line, and  "useful" red-line. He  explained that that  Castle Gap                                                               
too  a look  at  what they  called the  "wasted"  NOL version  as                                                               
     I used my NOLs to take my production tax value down to                                                                     
     zero, not withstanding that I may have barrel credits                                                                      
     or a minimum tax to be paid.                                                                                               
He explained that "wasted" NOL  goes to what Castle Gap presented                                                               
at  their presentation  on the  previous  Saturday. He  disclosed                                                               
that  Castle   Group  created  a  model   to  address  wasted-NOL                                                               
recovery. He noted  that the red line on the  graph is designated                                                               
as "useful"  and explained that  the line gets  marginally better                                                               
on rate  of return, but  the reason why  "useful" does not  get a                                                               
lot better and bridge the gap to  the "cashable" line is due to a                                                               
span from  year 7 to  year 27 for NOL  recover to make  them used                                                               
and useful.  He noted  that changes will  occur at  various price                                                               
levels, but  his focus was  on the $70 to  $90 a barrel  range, a                                                               
range forecasted for the foreseeable  future that pushes the NOLs                                                               
far  out that  even though  the  producers ultimately  do get  to                                                               
recover them  and gain  a big  benefit on  the cashflow  into the                                                               
project, the  producers get  very little benefit  to the  rate of                                                               
return or the  net present value discounted to  today because the                                                               
recovery and getting the full-tax benefit  is so far out into the                                                               
future that it does not impact present numbers.                                                                                 
MR. RUGGIERO  said the  line on  the bottom of  the graph  is the                                                               
current IRR situation  for only deducting $35 million  a year. He                                                               
said the  line gets  a little better  with an  annual $70-million                                                               
deduction,  but the  noticeable  gap exists.  He summarized  that                                                               
there is  not much  difference between  "used" and  "useful," 100                                                               
percent or some of  the loss. He noted that there  is a huge step                                                               
up to  the "cashable" and a  huge step down to,  "I defer payment                                                               
and  I only  pay so  much a  year." He  added that  if there  are                                                               
multiple partners  involved that receive multiple  payments, then                                                               
changes will occur and there will be some variations.                                                                           
He said  the other  aspect of  the Project IRR  model is  the top                                                               
line  could be  used as  a surrogate  for an  incumbent that  has                                                               
significant income for writing off  without ring-fencing, a noted                                                               
issue by Senator  von Imhof. He detailed that if  two players get                                                               
involved and  one is a new  player with no other  income, they at                                                               
best  do the  red-line or  blue-line in  the middle.  He said  an                                                               
existing  incumbent player  would  roughly realize  the top  line                                                               
because as soon as they incur it,  they would be able to write it                                                               
off  against current  income. He  explained  that the  two-player                                                               
scenario would  create in the  tight field  that he is  running a                                                               
three to  four-percent IRR  advantage to  people who  are current                                                               
producers with enough taxable income to write it off.                                                                           
4:14:24 PM                                                                                                                    
SENATOR  VON IMHOF  commented that  Mr. Ruggiero's  statement was                                                               
fair. She conceded  that the Legislature was making  the tax more                                                               
difficult and asked  if there could be a mechanism  that gets the                                                               
lines  closer together  as in  if a  legacy producer  purchased a                                                               
credit where  they could  use 80  percent as  a write  off versus                                                               
going into the actual field.                                                                                                    
MR.  RUGGIERO  replied  that  Castle  Gap  ran  their  model  and                                                               
detailed as follows:                                                                                                            
     My intuition before I actually  ran it was that there's                                                                    
     probably some amount of uplift  that I could bridge the                                                                    
     gap on the  return. I put up to 100  percent uplift and                                                                    
     I  can't  bridge  the  gap on  the  return  and  that's                                                                    
     because  I just  keep  moving whatever  NOLs there  are                                                                    
     further and  further into the  future. When you  use 10                                                                    
     or  15-percent  discounting  it's  not  worth  anything                                                                    
     today,  it makes  a huge  impact on  cashflow and  they                                                                    
     make a whole  lot of money, but they don't  make it for                                                                    
     20 or 30 years and the  state then would be giving that                                                                    
He said he did  not try any other mechanism to  see how to bridge                                                               
the gap, but asserted that it  comes down to a philosophy of what                                                               
the state is trying to keep  people whole on. He said his comment                                                               
goes back to the fundamental  question Senator Wielechowski asked                                                               
earlier  on  which metric  to  use  in  the decision  making.  He                                                               
continued as follows.                                                                                                           
     I  would almost  say  that both  IRRs and  net-present-                                                                    
     value  discounting  to  using  it,  what  carries  more                                                                    
     weight or  how would they look  at the fact that  I may                                                                    
     get 20  percent more  cashflow but I'm  going to  get 3                                                                    
     points less on the IRR than my partner.                                                                                    
He summarized that there are  many different things that could be                                                               
looked at, but  conceded that he had just finished  the model and                                                               
did  not run  all  the cases  without knowing  what  some of  the                                                               
issues are to tell committee  members what a recommended solution                                                               
would be.                                                                                                                       
4:16:53 PM                                                                                                                    
He referenced slide  19, "Project Rerun at 25 Percent  Tax and No                                                               
Credits" as follows:                                                                                                            
   · Note that the curves for NOLs and Optimized NOLs are almost                                                                
   · The only difference is the impact of the gross-minimum tax                                                                 
     in about four years.                                                                                                       
   · The gap between cash now and deduction later is still                                                                      
   · [Project IRR graph with the lines noted as on slide 18.]                                                                   
MR. RUGGIERO  detailed that  the plot  on slide  19 was  based on                                                               
CSHB 111(FIN)  and run at the  25-percent tax and no  credits. He                                                               
noted  that there  is  no influence  of  the per-barrel  credits,                                                               
causing  lost  NOLs. The  result  is  the "wasted"  and  "useful"                                                               
curves almost lie  on top of each other, the  gap to the slow-pay                                                               
credits  gets smaller,  but  the gap  to  the "cashable"  remains                                                               
quite large. He summarized as follows:                                                                                          
     Again, this  is back  to my simple  four-square example                                                                    
     of  different  ways  of cost  recovery,  this  is  just                                                                    
     because they  get it while they  are actually spending;                                                                    
     they are  actually getting value for  that spending and                                                                    
     it's in years one, two, three  and four that that is so                                                                    
     important   in  the   economics   that  is   overwhelms                                                                    
4:17:58 PM                                                                                                                    
He referenced slide 20, "Lost NOLs" as follows:                                                                                 
   · The large North Slope type field was run, across a range of                                                                
     flat nominal pricing, under the current structure (assuming                                                                
     CF of NOLs) and under the structure proposed by CSHB
     111(FIN), (25-percent tax rate with no credits).                                                                           
   · The removal of the per-barrel credits greatly reduces the                                                                  
     amount of "Lost NOLs."                                                                                                     
   · ["Lost NOLS under Current and CSHB 111(FIN)" graph                                                                         
     illustrated on slide 20 with lines plotted for "Hard Floor                                                                 
     Plus Per Barrel Credits" and "Hard Floor."]                                                                                
He reiterated  that his  intent is  to keep  putting things  in a                                                               
different perspective  and noted that slide  20 provides analysis                                                               
that is based  off runs from the two-previous  slides which shows                                                               
how much NOL is lost. He  explained that "lost NOL" means no tax-                                                               
savings benefit for the producer was generated.                                                                                 
He detailed that  the graph has two curves, the  top curve is the                                                               
"current"  run off  that has  the sliding  scale per  barrel, the                                                               
hard  floor, and  a 35  percent rate.  The bottom  curve is  CSHB
111(FIN) that has the 25 percent  rate and no per barrel credits.                                                               
He noted  that all were  run on a  non-GVR basis. He  provided an                                                               
overview of the existing structure as follows:                                                                                  
     Literally what  it is saying  is under the  existing at                                                                    
     $50  a barrel  "flat" for  the life  of the  project, I                                                                    
     spent  $6 billion  before first  production  and I  got                                                                    
     zero value for  my NOLs because there's so  much in the                                                                    
     per-barrel credits  and the minimum tax  that my write-                                                                    
     off of  my cost  changes my  tax to  zero. Then  as you                                                                    
     see,  as  the  price  goes up  you  get  a  compounding                                                                    
     effect,  you are  getting  more  revenue which  creates                                                                    
     more   taxable   value.   Then  as   the   price   goes                                                                    
     incrementally beyond  $80 the per barrel  credits start                                                                    
     coming down, so  that's why you see  an acceleration of                                                                    
     the slope of the curve as it goes up in price.                                                                             
MR. RUGGIERO  provided analysis under CSHB  111(FIN), adding that                                                               
a producer  would not do  a project in a  $50 world, but  ran the                                                               
plot across the price range and detailed as follows:                                                                            
     The  amount of  lost NOLs  falls by  two thirds,  falls                                                                    
     from $6  billion to  $2 billion,  and that  curve, it's                                                                    
     fairly shallow as you go out,  and what you get is it's                                                                    
     just this  gross minimum that  you keep hitting  as you                                                                    
     go forward  with this to  how much  NOL is lost  as you                                                                    
     move on.                                                                                                                   
He summarized as follows:                                                                                                       
     Again,  just trying  to put  into perspective  when you                                                                    
     are looking at  some of the issues with  respect to the                                                                    
     various  mechanisms  that  are being  suggested  to  be                                                                    
     changed  in [CSHB  111(FIN)] is  how this  is impacting                                                                    
     other aspects  of the operation  and the value  both to                                                                    
     the producer and cost or value to the state.                                                                               
4:21:12 PM                                                                                                                    
SENATOR VON IMHOF noted that  different colors where used for the                                                               
lines  in slides  18,  19 and  20. She  asked  that Mr.  Ruggiero                                                               
clarify the line-color comparison between the three graphs.                                                                     
MR. RUGGIERO specified as follows:                                                                                              
     The best way  to say this is these two  curves on slide                                                                    
     20  represent  the  "blue"  or  the  "wasted"  scenario                                                                    
     because what I  wanted to do is I want  to see how much                                                                    
     of the  NOL is wasted  with the per-barrel  credits and                                                                    
     without  the per-barrel  credits,  both  with the  hard                                                                    
He added that  the tax rate changes at higher  prices and the tax                                                               
amount becomes  equal around  $120 to $130,  the point  where DOR                                                               
just showed the  committee where CSHB 111(FIN) tends  to have the                                                               
same marginal tax rate at  the state's current structure once oil                                                               
gets to higher prices.                                                                                                          
SENATOR VON IMHOF remarked that one would look at slide 20 and                                                                  
say, "Well, with the lower tax rate and no credits, NOLs are                                                                    
more useful, with the gray line."                                                                                               
MR. RUGGIERO answered exactly.                                                                                                  
SENATOR VON IMHOF replied that the problem the committee has                                                                    
heard is making the NOLs useful. She commented as follows:                                                                      
     Is there a way to change  the NOL structure and make it                                                                    
     to some degree  net-neutral within a range  to both the                                                                    
     state and to the oil producers?                                                                                            
MR. RUGGIERO replied that he understood Senator von Imhof's                                                                     
concern. He said to keep the "whole" in mind and detailed as                                                                    
     What I  was trying to  do was  to point out  you've got                                                                    
     all these pieces  and if you look at  them in isolation                                                                    
     is just  understand how much  impact they can  have. We                                                                    
     then talked  about the  the interdependencies  and this                                                                    
     whole concept  of the lost NOLs,  the interdependencies                                                                    
     of  different  aspects  that you  may  try  and  change                                                                    
     something;  for  example,  this committee  may  suggest                                                                    
     something that  lowers the peak  in that  bottom curve,                                                                    
     but then  what does it  do to other aspects?  What does                                                                    
     it  do to  current production  for the  legacy-players?                                                                    
     What  does it  do to  new projects  coming on?  Does it                                                                    
     help one and impede the  other? I'm just trying to make                                                                    
     sure you stay aware that  as you change these different                                                                    
     pieces we  keep the  whole in mind  and always  look at                                                                    
     the  whole and  then test  the little  different things                                                                    
     that we  can do in  each of these different  aspects of                                                                    
     the code.                                                                                                                  
     But  you are  exactly right,  you can't  concentrate on                                                                    
     just one area and ignore what  it does in the other; in                                                                    
     fact, you just  made my point that I've  been trying to                                                                    
     make is changing the NOLs  and fixing that, "Well, that                                                                    
     just exasperated  the tax  or if I  change the  tax, it                                                                    
     may  not keep  new players  whole." You  may never  get                                                                    
     those new projects and now  you have just violated your                                                                    
     first goals which is get more oil into the pipeline.                                                                       
     So, it  all has to be  looked at as a  whole and that's                                                                    
     why  it makes  it more  important that  what we  use as                                                                    
     examples  are  more  closely related  to  the  type  of                                                                    
     projects and things that you  could have coming on then                                                                    
     the  averages that  even I'm  using,  because I'm  just                                                                    
     using  rounded,  average,  typical  type  projects  and                                                                    
     numbers because  I don't have anything  that looks like                                                                    
     the profiles  of what you  have as a  possibility right                                                                    
4:27:14 PM                                                                                                                    
CHAIR GIESSEL addressed slide 20 and inquired if there were more                                                                
lost NOLs because the per-barrel credits must be taken first.                                                                   
MR. RUGGIERO explained that his  understanding is the credits are                                                               
taken after the NOLs and the  obligation is to use the NOLs until                                                               
a zero-tax  value is created,  which then the  per-barrel credits                                                               
would themselves have taken it.                                                                                                 
He referenced slide 14 to exemplify the issue as follows:                                                                       
     I  would have  to subtract  it if  the tax  section, to                                                                    
     come  down  to  the  tax, and  that  would  reduce  the                                                                    
     taxable value  and you see the  tax as it is  right now                                                                    
     comes to 0.6,  so I would reduce that to  zero and yet,                                                                    
     I had  the per-barrel credits which  could have covered                                                                    
     anything that I was owed.  So, that meant any NOLs that                                                                    
     I would  use in this  example, the $0.6 billion  that I                                                                    
     would use would be  lost because the per-barrel credits                                                                    
     were big enough  to have wiped out my tax.  Again, I go                                                                    
     to the next year, my  tax would have been $1.2 billion,                                                                    
     so if I use my NOLs to  drop that down to zero, I would                                                                    
     have covered it  with my per barrel credits.  So, it is                                                                    
     a bit of the sequencing because  I have to use the NOLs                                                                    
     first to go down to a zero-production-tax value.                                                                           
4:29:04 PM                                                                                                                    
He referenced slide 21, "Optimizing Model Results" as follows:                                                                  
   · Indicative profiles of timing of investment and production                                                                 
     are necessary to understand the impact of your fiscal                                                                      
     system (and proposed changes) on state revenue and producer                                                                
He detailed that slide 21 timely emphasizes what he just said.                                                                  
He noted that Chair Giessel asked the question about what is                                                                    
really the impact and how does it work. He explained as follows:                                                                
     This goes back to my whole  thing of you really need to                                                                    
     understand how what  you are looking to  do will impact                                                                    
     the key things which are  those major projects you have                                                                    
     on the  horizon which  could bring,  as I've  heard, "A                                                                    
     couple hundred  thousand extra barrels a  day" into the                                                                    
     pipeline and would keep it  going for another couple of                                                                    
     decades beyond where it might  not go if it doesn't get                                                                    
     this extra production.                                                                                                     
     Again,  if you're  going to  start  looking at  exactly                                                                    
     what happens to NOLs, exactly  how some of these people                                                                    
     are  impacted, and  when  I say  exactly  I mean  close                                                                    
     enough in  the ballpark  then us sitting  here guessing                                                                    
     as to  what the size of  something is or how  much time                                                                    
     it  is going  to take,  or what  is the  oil production                                                                    
     curve  really going  to look  like, is  actually having                                                                    
     enough information  to get it close  enough not because                                                                    
     I'm going to  say, "I can get you screwed  down to here                                                                    
     to exactly a 15  IRR or a NPV 10 of  a billion ought to                                                                    
     be enough value  coming in," it's not to  do that, it's                                                                    
     to  make  sure  that  the  shape  of  things  that  the                                                                    
     mechanism that you  choose to put into  place or change                                                                    
     or not  change are responsive to  what's actually going                                                                    
     to  come.  You're not  a  state  that's got  a  hundred                                                                    
     different  things that  can happen  over the  next five                                                                    
     years,  you're a  state that's  only got  a handful  of                                                                    
     things that can happen over the next five years.                                                                           
CHAIR  GIESSEL   stated  that  she  appreciated   Mr.  Ruggiero's                                                               
emphasis on new projects and  pointed out that "new projects" was                                                               
the focus of  SB 21. She noted that new  projects take many years                                                               
and  emphasized that  there must  be  a balance  with the  legacy                                                               
players who are currently keeping the pipeline functioning.                                                                     
MR. RUGGIERO explained that there  are two sides, the mathematics                                                               
and the  practical. He said  in a practical  sense you do  not do                                                               
things for  "new" that hurt the  "legacy," the intent is  to find                                                               
something  that  helps everybody  in  the  business; however,  if                                                               
there is  some suffering that  "legacy" has  to do, they  have to                                                               
realize  that  when the  "new"  comes  on,  as  he noted  in  the                                                               
previous  Saturday's  meeting,  there   is  anywhere  between  $5                                                               
billion to $50  billion more for the state and  a like number for                                                               
producers to keep the fields going.                                                                                             
SENATOR  WIELECHOWSKI  opined  that  there  is  a  need  for  two                                                               
separate  tax structures  or something  that recognizes  the very                                                               
high cost  for the new  fields because  the new producers  are so                                                               
much  more economically  challenged  than the  legacy fields.  He                                                               
said moving  forward he would  urge committee members  to keeping                                                               
the legacy fields  profitable with incentives focused  on the new                                                               
producers and the new fields.                                                                                                   
SENATOR VON IMHOF asked  if there is a way to  just stop short of                                                               
production-value  tax by  taking  an NOL  and  allowing the  per-                                                               
barrel  credit to  "take that  last  bit" to  make it  zero so  a                                                               
little bit of the NOL is left on the table and allow the per-                                                                   
barrel credit  to that "last  bite" to  help salvage some  of the                                                               
MR.  RUGGIERO replied  that  slides  18 and  19  is exactly  what                                                               
Senator  von Imhof's  query  addresses  regarding the  difference                                                               
between the "wasted"  and the "useful" curves.  He explained that                                                               
he had written within his routine  that says, "Only use enough of                                                               
the NOL that  when I then apply the per-barrel  credits it equals                                                               
out the minimum tax." He noted  that when he originally built his                                                               
model that  he questioned  from a  practical standpoint  why NOLs                                                               
should be  used that do  not have to  be used. He  disclosed that                                                               
the model had to be modified to  take all the NOLS to get the PTV                                                               
to zero.                                                                                                                        

Document Name Date/Time Subjects
AGENDA - 4 - 18 -17.pdf SRES 4/18/2017 2:00:00 PM
HB111 - DOR Presentation - 4.14.17.pdf SRES 4/18/2017 2:00:00 PM
HB 111
HB 111- Castle Gap Evaluation of Fiscal Impacts - 4 - 17 - 17.pdf SRES 4/18/2017 2:00:00 PM
HB 111