Legislature(2019 - 2020)BARNES 124
02/27/2020 10:15 AM House ENERGY
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Petroleum Fiscal Regime Planning | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ENERGY
February 27, 2020
10:16 a.m.
MEMBERS PRESENT
Representative Grier Hopkins, Chair
Representative Ivy Spohnholz, Vice Chair
Representative John Lincoln
Representative Zack Fields
Representative Tiffany Zulkosky
Representative Mike Prax
MEMBERS ABSENT
Representative George Rauscher
OTHER LEGISLATORS PRESENT
Representative Mel Gillis
COMMITTEE CALENDAR
PRESENTATION: PETROLEUM FISCAL REGIME PLANNING
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
CHRISTINA RUGGIERO
IN3NERGY
Houston, Texas
POSITION STATEMENT: Presented a PowerPoint on Petroleum Fiscal
Regime Planning.
RICH RUGGIERO
IN3NERGY
Houston, Texas
POSITION STATEMENT: Presented a PowerPoint on Petroleum Fiscal
Regime Planning.
ACTION NARRATIVE
10:16:26 AM
CHAIR GRIER HOPKINS called the House Special Committee on Energy
meeting to order at 10:16 a.m. Representatives Hopkins, Prax,
and Lincoln were present at the call to order. Representatives
Spohnholz, Zulkosky, and Fields arrived as the meeting was in
progress. Also in attendance was Representative Gillis.
^Presentation: Petroleum Fiscal Regime Planning
Presentation: Petroleum Fiscal Regime Planning
10:16:56 AM
CHAIR HOPKINS announced that the only order of business would be
a presentation on Petroleum Fiscal Regime Planning.
10:17:21 AM
CHRISTINA RUGGIERO, IN3NERGY, presented a PowerPoint on
Petroleum Fiscal Regime planning, directed attention to slide 3,
"Petroleum Policy & Scenarios," and stated the importance of
goal setting to understand the direction headed. She pointed
out that, as this was done by oil companies and other
industries, governments had to understand that "their field of
play is going to change, the market conditions are going to
change." When goals are set and met in the state, this would
encourage continued success. She reported that this discussion
would be for how the big energy companies ensured their success
in a changing world and how that could look in Alaska if the
same policy was adopted.
10:18:46 AM
RICH RUGGIERO, IN3NERGY, addressed slide 4, "Petroleum Policy &
Scenarios," which read in part:
Scenarios enable executives and other decision makers
to open their minds to previously inconceivable or
imperceptible developments.
MR. RUGGIERO added that scenario planning offered time for
people to determine how prepared they were should this happen.
MR. RUGGIERO pointed out that, in the past 40 years, a lot of
things had happened in the oil industry that were not expected.
MS. RUGGIERO moved on to slide 5, "Plan for or creating a
Future," which read:
Successful enterprises have clear, widely understood
goals and regularly monitor progress and make
implementation corrections as necessary
MS. RUGGIERO acknowledged that it was not known what the future
would bring and that known factors could change. However, it
was known where the state wanted to be and where it was headed,
with a plan in place that could withstand any changes between
now and the future. She shared a quote: "If you don't know
where you are going, any road will get you there."
MS. RUGGIERO shared slide 6, "Preventing Unexpected
Consequences," noting that it was necessary to be more pro-
active and anticipate the unexpected versus just being reactive.
She stated that a key to scenario planning and long-term
strategic planning was to allow yourself not to be in a position
that was constantly reactive to things that were not planned.
She offered examples of the results from the dramatic
fluctuation of oil prices and of the oil exploration credits,
difficult scenarios to which the state had to react. She
pointed to the benefit of scenario planning in preparing for
these.
10:22:53 AM
CHAIR HOPKINS asked whether the State of Alaska had used
scenario planning in past years during discussion of oil
revenue.
MR. RUGGIERO explained that everyone would "run ya lots of
numbers" and put up charts and lines for what would happen.
However, it was necessary to change the cost structure when
running these numbers. He offered an example for an unchanging
cost structure, noting that it was necessary to compare oil
price and profit per barrel. He shared that these were too
often used interchangeably even though "they're nowhere near the
same thing." He shared the memory of a moment near the end of
the Alaska's Clear and Equitable Share (ACES) special session
when there were very diverse opinions for what should be done.
At that time, they had listed five goals and then utilized the
ACES structure for how it would fit to each of these. He
allowed that the state as a sovereign could choose whatever
strategy it desired, even as each could carry a different fiscal
policy with its inherent pros and cons. From this point, the
state would then create a fiscal policy to make this happen as
best as possible.
10:27:04 AM
REPRESENTATIVE SPOHNHOLZ asked about the difference on impact
between carry forward credits and carry forward losses.
MR. RUGGIERO offered an example using a 35 percent flat tax and
a carry forward loss of $100. Using either the loss of $100 or
the $35 tax credit would have the same net effect on taxes in
the year they were carried forward. However, when the system
created the credits at the 35 percent rate, there were per
barrel credits that offered an effective tax rate well below 35
percent. With this system, when carrying forward credits at 35
percent, as the tax rate may not be 35 percent in the future,
this would shield more income from tax than if the loss was
carried forward. He offered his belief that this was the reason
the carry forward tax credits were changed to carry forward
losses.
REPRESENTATIVE SPOHNHOLZ asked whether the per barrel tax credit
distorted the way the credits worked.
MR. RUGGIERO replied that this was an unintended consequence, as
there was a reason for the per barrel tax credits. He pointed
out that with a multi-faceted tax system, such as the Alaska oil
and gas tax system, making a change in one area could have an
unintended consequence in another area.
10:29:50 AM
REPRESENTATIVE PRAX shared his observations during the Alaska's
Clear and Equitable Share (ACES) debate, noting that it appeared
that "a lot of people were looking in the rearview mirror as
they were trying to go forward."
MS. RUGGIERO explained that costs varied in a base case pricing
structure when price and demand increase, as the utilization of
the resources would become constrained. When the price drops,
the producers would tell the service companies that they did not
have the margins to pay. Although there was a lag, the prices
and costs would grow and change together.
MR. RUGGIERO shared slide 7, "Constant Challenge: What is Fair
Share," and reported that fiscal policy had a lot of factors to
consider, including geo-political risk, weather, government
events, supplies, market factors of pricing, and resources in
the jurisdiction. She declared that there was no way to define
an exact number for fair share, much less how that would apply
over decades. She explained that a fair share was a holistic
view of several components or factors in a system and then
asking whether that share met the state goals and still allowed
the oil companies to make enough profit to maintain a
competitive environment.
MR. RUGGIERO read from slide 7, "What once applied, or was once
believed, likely can no longer be relied upon." He shared that
the Prudhoe Bay reserves were initially one third of U.S.
reserves, which this percentage had been maintained for another
two decades. However, at the end of 2018, these reserves only
accounted for about 5 percent of U.S. reserves and he opined
that this could drop to about 3 percent by the end of 2019.
Specifically, for North American reserves, Prudhoe Bay reserves
had dropped from 20 percent to less than 1 percent. He pointed
out that, as huge resources were being discovered in many
places, Alaska's resources percentage had dwindled, and Alaska
no longer had so much to offer. He emphasized that it was
necessary to put the competition and the external factors in
context, directing attention to the effects from the shale
revolution, in order to determine what was fair share and what
direction Alaska should pursue.
10:36:45 AM
MS. RUGGIERO introduced slide 9, "Global Energy Industry,"
stating that the energy industry was constantly changing in
terms of technology and opportunities for investment and that
the playing field was very open across the globe. She declared
that it was necessary to devise fiscal systems that could
withstand these changes.
MS. RUGGIERO directed attention to slide 10, "Two Decades of
Price Volatility," which depicted countries that had made a
change in fiscal policy to increase the government take and
which countries had offered fiscal incentives. She shared that
there were reasons why each jurisdiction chose to put forward
incentives or increase government take. She pointed out that in
areas where prices increased, the government take also
increased; whereas, in areas where prices decreased, governments
increased their incentives. She declared that change itself was
not necessarily bad, as change happens all over the world, even
in countries viewed as very stable investments. She pointed out
that changes in the direction of the market created a more
stable investment climate and was helpful for both the producers
and the investment climate jurisdiction.
MR. RUGGIERO, in response to Representative Fields, explained
that the [vertical] axis was the price of oil.
CHAIR HOPKINS noted that Alaska had changed its oil fiscal
regime seven time. He asked if the points on the graph were
smaller tweaks that reacted more nimbly to the market.
MR. RUGGIERO shared that the one country which had changed its
fiscal system more than any other was the United Kingdom.
However, in rankings for the most stable place to do business,
the United Kingdom was never lower than number 3. He stated
that the United Kingdom always moved quickly and in the same
direction as the market. As the market fell, they would "get
rid of royalty, they would get rid of their production tax, they
would put in drilling incentives, they'd do everything." As the
prices ramped back up, they would return all of these to the
system as this was an opportunity to take their share. He
pointed out that the United Kingdom was aware "that energy was
key to keeping their economy going and to keep the country
going, and they liked the idea of being able to develop and
produce as much domestic energy as they could so therefore they
had a very quick and responsive policy."
CHAIR HOPKINS asked whether there was an underlying tax that
allowed for that nimble response.
MR. RUGGIERO explained that the basic pieces were income tax, a
production tax, spending incentives, and royalties. "They just
played with those four levers, predominantly."
10:43:01 AM
MR. RUGGIERO spoke about slide 11, "There is no single Ideal
Structure," and stated that the optimum fiscal system did not
exist. He reported that governments would design contracts
under production sharing arrangements or legislation under a tax
and royalty regime even as there would still be changes and the
search for "a sweet spot." He stated that there was not a lot
of consistency for how to produce the reservoirs as the
government needs and philosophies varied. He emphasized that
the ideal structure did not exist to meet these varied needs.
He shared that it was necessary to work with a government to
find out what was wanted, and then review potential scenarios
for help with the design of a fiscal system that fit those
goals.
MR. RUGGIERO paraphrased from slide 12, "Testing Policies and
Goals," which listed the different decisions that a state needed
to review, and read:
Fiscal design should start with a set of agreed
policies or goals
? Some typical drivers of government fiscal policy
design include:
? Fill short term revenue needs
? Build multi-generational wealth
? Short on reserves emphasize drilling
? Long on reserves - bring in industry, bring on
production
? Provide affordable/discounted domestic energy supply
? Grow associated industries (e.g. Petrochemical,
Power)
? Create long term jobs
? Create a national oil company, build self
sufficiency
10:45:45 AM
MS. RUGGIERO shared slide 14, "Historical Scenarios," which
read:
? With 2020 hindsight we can generally describe the
main drivers of change to the energy industry in the
past 5 decades
? 1970s The emergence of OPEC, tight oil supplies,
deregulation of government pricing controls
? 1980s - Unbridled activity, resulting supply
surplus, end of cold war, surviving $20 oil prices
? 1990s - Liberalization, globalization and massive
opening of previously closed countries to outside
investment
? 2000s - Talk of climate change, dash for gas,
private equity financing, oil/gas price parity
disconnect
? 2010s - Environmental focus and the shale revolution
10:47:42 AM
REPRESENTATIVE FIELDS asked about the impact talk of climate
change or an environmental focus had on exploration, production,
or prices. He asked whether the small, regional greenhouse gas
marketplaces were sufficiently large enough to impact the price.
MR. RUGGIERO reflected that the impact of climate change on the
oil and gas industry, with movement of the various credit
markets, was a much larger discussion. He stated that it was
necessary to consider this environment when moving forward with
a policy, declaring:
the real conundrum of everyone who's in this business
of scenario planning and whatnot today is it's a
growing market for the next decade at a rate that's
pretty substantial while at the same time everyone's
planning because the grassroots movement on the green
is growing stronger and stronger and the fear is that
when the day comes when the green takes over from the
growth it's gonna fall off the cliff pretty fast.
MS. RUGGIERO added that the climate change discussion was here
to stay as it was no longer just about oil company production
but included who was the end user of that production. She said
that the discussion centered around where the demand was going
to come from and the supply mix of energy to meet global demand.
She pointed out that different sectors of the world were able to
move more quickly to alternative renewable energies because of
cost or government policies.
REPRESENTATIVE FIELDS asked about the Baker-Schultz presentation
in Anchorage which contended that, with relatively energy
efficient production in Alaska, the state may fare relatively
well in a carbon constrained environment.
MR. RUGGIERO said that he was not familiar with this.
CHAIR HOPKINS asked whether this had been the carbon dividend
discussion.
REPRESENTATIVE FIELDS added that Norway had declared itself to
have the lowest carbon footprint of the large oil development
areas.
MR. RUGGIERO shared that the real technological step change
achievements in the upstream always came when prices had fallen,
and survival was about innovation. He offered his belief that
both the upstream and the service sector were conducting a lot
of research to be prepared for when there were tighter controls
and restrictions.
CHAIR HOPKINS asked for more information.
MR. RUGGIERO reported that, as the leadership of British
Petroleum had proposed to be net zero by 2050, that organization
would gel around this proposal. He added that Baker-Hughes was
converting its fleets to compressed gas or LNG, for a 40 times
reduction of carbon emissions.
10:53:47 AM
MS. RUGGIERO paraphrased from slide 15, "Scenario Planning,"
which read:
? Scenario planning is used by businesses to test the
resilience of strategic plans against a range of
possible future outcomes
? Many energy companies use scenario planning to be
prepared for global developments that can drive energy
systems
? These scenarios are "stories of the future",
developed by taking into account analyses of many
factors:
? Market fundamentals
? Technology development
? Geopolitical policies
? Human resource availability
? Energy resource availability
? Changing consumer behavior
MS. RUGGIERO moved on to paraphrase slide 16, "Scenario
Planning," which read:
? Three prominent energy companies post their scenario
planning and thinking online
? BP
? Shell
? Equinor (previously Statoil)
? Depending on the entity, it is not uncommon to see
anywhere from 1 scenario with significant
sensitivities to as many as 4 scenarios considered
? Additionally, government agencies such as the EIA
and IEA publish their future industry scenarios on an
annual basis
? These detailed, well-researched, well documented
data-driven reports provide a window into the general
thinking of the industry
MR. RUGGIERO added that reviews had previously been static but
were now fully interactive for access to the data with tools to
plot the data.
MS. RUGGIERO shared slide 17, "Scenario Planning," which read:
? Although many companies and agencies publish annual
scenarios, there is a degree of commonality
? Currently, there is one main theme presenting the
biggest challenge to the industry and economies today
? On the one hand there is a global recognition of a
continually growing demand for more energy supply,
? While simultaneously faced with a global movement to
rapidly reduce carbon emissions
? The challenge: "decarbonizing while meeting
increased demand"
11:00:31 AM
MS. RUGGIERO moved on to slide 18, "Published Scenarios," which
depicted a publication by Shell Oil for various scenarios as
well as lenses on the future and future cities. She pointed out
that the Sky scenario included a video and addressed the various
technology innovations necessary to reach the climate goals
aggressively and on time.
MS. RUGGIERO pointed to slide 19 "Published Scenarios," and
spoke about the Exxon Mobil "Outlook for energy," which
addressed future demand and supply and was used for the Exxon
Mobil long term business strategies, research programs, and
investment plans.
MR. RUGGIERO added that, with a publicly listed company, it was
possible to combine these published scenarios with their analyst
presentations to get an insight for the direction of the
company.
MS. RUGGIERO addressed slides 20, 21, and 22, "Published
Scenarios," which focused on the British Petroleum (BP) annual
energy outlook. She shared that BP had a huge database that was
interactive and allowed for the creation of charts and analysis.
She reported that the base case scenario was "Evolving
Transition." She shared that the scenarios addressed countries
which were raising their standard of living and would need more
energy, as well as other tangents to address issues in the
future. She spoke about a global single-use plastics ban and
its effect on oil demand and any disruption to the market. She
added that a global health crisis could affect globalization,
change supply and demand, and impact trade.
MS. RUGGIERO spoke about the different approach by Equinor for
its three annual scenarios, slide 23, "Published Scenarios."
She added that Equinor would tweak these three scenarios for
renewal, rivalry, and reform. She explained that the reform
scenario was more of a status quo, with a slower advancement of
technology, whereas the rivalry scenario reflected geo-political
issues and events. She stated that the renewal scenario was the
"big, go green."
MS. RUGGIERO shared slides 24 - 25, "Published Scenarios,"
stating that these scenarios were released annually in a report
titled, "Energy Perspectives." She paraphrased slide 24, which
read:
? Equinor releases the scenarios in an annual report
called "Energy Perspectives"
It includes extensive background analysis and
support, all of which is published free to the public
? This report is recognized globally, and used in many
conferences and global forums to discuss the future of
energy and the global economy
11:06:47 AM
MR. RUGGIERO introduced slide 27, "Published Scenarios
Comparison," and stated "this is sort of where the scenario
rubber meets the road." He explained that Equinor plotted
reform, renewal, and rivalry along with global oil and gas
demand for each scenario. Equinor also used other company
projections for its graph plots of the future demands for oil
and gas. He pointed out that the projection for gas continued
to grow even under a "green" scenario. He suggested that Shell
Oil was very robust in its projections for gas demand with a
conversion under the "green" scenario because the emissions
reductions were quite significant.
11:08:54 AM
REPRESENTATIVE FIELDS asked for the percentage of oil used for
the transportation sector.
MR. RUGGIERO reported that if this included airplanes,
locomotives and everything, it was about half.
11:09:23 AM
REPRESENTATIVE LINCOLN asked whether Equinor had applied
probabilities to the various scenarios.
MR. RUGGIERO replied that he did not know how they arrived at
the scenarios. He shared an anecdote for how he applied the
metrics into his analysis and stated that he did build in some
probabilities.
11:10:17 AM
REPRESENTATIVE PRAX asked how often companies reviewed the
changes in the market.
MR. RUGGIERO replied that this was dependent on the company. He
shared his personal experience for a quarterly review of the
goals and directions taken and how well these were working.
REPRESENTATIVE PRAX asked how often a North Slope producer
should review its position in the market.
MR. RUGGIERO explained that Alaska had a long lead time, and he
referenced the hockey stick of investment. In Alaska, most of
the money was spent prior to extracting the first barrel of oil.
He shared that the opportunity for an "off ramp" was reviewed
often.
11:12:31 AM
REPRESENTATIVE SPOHNHOLZ asked about the intersection of cost
and demand in order to maximize the value of the resource.
MR. RUGGIERO replied that this was not about prices, but about
the profit for Alaska. He shared that he was a supporter for
net taxation over gross taxation, as gross taxation did not
reflect the wealth created. He declared that wealth was not the
value in the marketplace, or the gross revenue, but by financial
definition it was the income or profit created.
REPRESENTATIVE SPOHNHOLZ offered her belief that the use of a
net profit approach could lead to inflated cost deductions by
the producers which reduces the overall take by the state.
MR. RUGGIERO stated that there was not a tax system in the world
that smart people could not find a way to maximize, pointing out
that tax systems had designs which allowed for maximizations.
He declared that the simpler the system, the less chance for
unintended consequences. He said there would always be an
argument in net taxation for whether a cost was justified. He
reported that compensation was always based on how well the cost
line was managed.
REPRESENTATIVE SPOHNHOLZ asked about a way to ensure maximum
value while attracting development. She asked about a system
with the simplicity to reduce the amount of gamesmanship and
reach the intended outcome.
MR. RUGGIERO replied that there were pros and cons for the use
of both net taxation and gross taxation. He reminded the
committee that this depended on the goal. He offered examples
for the results of different goals and directed attention to
slide 32, "Defining the Goal." He paraphrased the slide, which
read:
? Seems to be consensus that gas demand will continue
to grow considerably over the next decade plus
? Because of lead time, Alaska would need to act now
? Need to capture dedicated market
? Significant upfront capital costs
? Economics driven by early cash flows
? 30 to 50 years of robust cash flow
? What "policies" could be put in place?
? Use as anchor to keep North Slope going for decades
to come
? Minimal government take in first 10 years or so
? High government share of profits next 30 to 40 years
? Job creation and increased slope activity
? This is just one example of how a state goal matches
up with consensus scenario and a plan to get it done
MR. RUGGIERO suggested that this approach for keeping the North
Slope alive and maintaining aggressive gas growth because of the
movement from liquids to natural gas would mean the state still
has a huge, known, readily produced gas supply. He suggested a
policy to take no tax for 10 years while it was being built, but
with a huge tax on the backend. This would bring the jobs and
create additional revenues to help pay for the fixed costs on
the North Slope, as the liquid natural gas (LNG) projects
usually lasted for several decades. He pointed out that
although the state would be a contributor and not get revenue in
the beginning, it would get all this revenue back in the future
as one of the goals was multi-generational wealth. He
acknowledged that although there was only so much of the
resource, it was still necessary to get it out of the ground in
order to get value.
11:23:17 AM
REPRESENTATIVE FIELDS asked about the internal rates of return
that were publicly available for the continued use of the legacy
fields versus shale oil in West Texas.
MR. RUGGIERO explained that the true rate of return was
determined from the beginning by reviewing all the costs and all
the revenue generated. He offered examples for different
purchase prices, equipment costs, and royalties.
REPRESENTATIVE FIELDS asked to compare the investment costs
today for rates of return.
MR. RUGGIERO explained that the spending going forward would be
considered, and then the incremental economics for rate of
return would be determined.
REPRESENTATIVE FIELDS asked about a comparison for the North
Slope versus the other opportunities around the world.
MR. RUGGIERO relayed that he did not know the other
opportunities. He spoke about the access costs to get in, which
could vary widely across the globe. He expressed admiration for
some companies which purchased leases from other companies when
the market was in decline. He pointed out that the risk
analysis came before the economics. Before the pursuit of a
lease and development, it was necessary to have a sign off for
the risk analysis which determined the ability to control costs
in that environment and the chances that the government remained
stable, among other risks. He reported that most companies had
a risk matrix to address and discuss prior to approval for
financing the opportunity.
REPRESENTATIVE FIELDS asked if there was a chart showing a
worldwide spectrum of risk.
MR. RUGGIERO replied that this evaluation was company specific,
as some companies were more comfortable with certain risks in
certain regions.
11:28:35 AM
CHAIR HOPKINS reflected that the three example companies had
used crowd source for information and scenarios. He asked about
any governments which did scenario planning and whether any of
these were available to the public.
MR. RUGGIERO shared that, although there were governments
conducting scenario planning, he did not know whether these were
published. He reported that there were bits and pieces
published, often on a government oil ministry site, that offered
some indications.
CHAIR HOPKINS asked what governments were similar to Alaska.
MR. RUGGIERO offered his belief that the question regarding
other governments should be about the "journey to get where
they're at." He offered an example of the journey by Australia
from internal production to offshore LNG and gas. He pointed
out that, as the global environment had morphed, so had
Australia changed moving forward. He shared an anecdote about
his company's representation of Iraq immediately after the war.
MR. RUGGIERO stated that the oil companies tried to imagine a
future with a lot of different moving parts and directed
attention to slide 28, "Published Scenarios," which read:
The US EIA (Energy Information Administration) designs
a "Reference Case" each year as a future forecast
? They then take into account a number of factors to
determine their "side cases". For 2020, some factors
included are:
? High and low price
? High and low supply
? High and low economic growth
? High and low renewables costs
? It includes extensive background analysis and
support, all of which is published free to the public
? The information is published annually through their
"Annual Energy Outlook"
MR. RUGGIERO moved on to slide 29, "Published Scenarios," and
stated that there was a wealth of free knowledge that had been
compiled from millions of dollars' worth of consulting.
MR. RUGGIERO declared that that it was necessary to define the
goal for the state in order to determine a fair share and he
paraphrased slide 31, "Alaska Goal Setting," which read:
? Let's circle back What is Alaska's fair share? It
depends
? Alaska's fair share is the maximum amount it can
take while achieving it goals
? It depends what are the State's goals?
? Budget defined revenue generation?
Keeping TAPS full?
? Bring NS discoveries online?
? Continued exploration?
? Harvest the slope?
? Promote unconventional shale and heavy oil?
? Attract new operators?
? Fuel new industry and commerce?
? Monetize North Slope gas?
? One or more of the above (or others not listed)
could be combined to set the State's strategic
direction
REPRESENTATIVE SPOHNHOLZ clarified that she had not specifically
asked about the fair share for Alaska but was, instead, defining
the natural tension.
11:35:33 AM
CHAIR HOPKINS asked whether there were other global places with
a similar older oil field situation as Alaska and, if so, what
scenarios, goals, and planning were being discussed.
MR. RUGGIERO offered examples of North Dakota, New Mexico, and
Texas as places of early oil production in the U.S. in the
1930s, 1940s, and 1950s. He pointed out that these states were
currently at the heart of revitalization with all the shale oil
production, "a combination of the old and the new." He noted
that these states had a combination of private royalty and state
severance taxes, predominantly on a gross basis. He pointed out
that Norwegian oil production was offshore and there was
continuous oil drilling, whereas Alaska oil production was
onshore, and the oil drilling window was less than 90 days each
year. Norway could lay a pipeline on the seabed, whereas Alaska
had to anchor stanchions through the permafrost to support the
pipeline and then keep the pipes warm. He emphasized that,
although there was not a comparison, Norway did have mature oil
fields first developed in the early 1980s, similar to Alaska.
He reported that the Norwegian fiscal system had no royalty,
with a combination of a corporate tax and a special petroleum
tax. He pointed out that Norway specifically allowed and
encouraged new exploration by allowing an immediate write off
for exploration against the existing production or by paying for
the exploration if there was not existing production. He added
that there were uplifts as credit toward production tax for
certain spending. Even though the marginal tax rate was 78
percent, there were a lot of incentives to bring upfront cash to
the producers to help enhance the project economics.
CHAIR HOPKINS referenced the slide depicting the ranking of
government take with most of the capital going to places similar
to Norway for exactly these reasons.
MR. RUGGIERO shared an anecdote for the high division of revenue
percentage until certain economic metrics were met. He
reiterated that it was necessary to ask why all the investment
money was going there, pointing out that the headline tax rate
was only a small piece, as the timing of take was more important
for attracting producers than the rate of take.
CHAIR HOPKINS shared an example of the constant changes to the
United Kingdom taxation. He acknowledged that, although the
State of Alaska had changed its taxation often over the last few
years, the important key factor was for credits and incentives.
He declared that moving forward it was necessary to remember
that "taxes are never bumper sticker statements."
11:41:11 AM
MS. RUGGIERO added that it would be good for the State of Alaska
to speak with Hilcorp Energy Company for information on what was
being done elsewhere, as Hilcorp had recently committed to
business investment in Alaska. She offered her belief that
Hilcorp would be a great resource to speak with for potential
and what was necessary for new things to be done in Alaska.
11:42:41 AM
MR. RUGGIERO shared slide 32, "Defining the Goal," and said that
this was an example for a strategic goal to monetize the gas on
the North Slope which could create a decades long cash flow for
the state.
MR. RUGGIERO directed attention to slide 34, "Alaska Example
Scenarios," and suggested to stress test any new tax policy on
oil and gas against any of these scenarios, which read:
1. Slow uptake on climate change. Current price will
slow shale development, once overhang works prices
rise $10 to $20 but stay sub $100 for a decade
2. Geopolitical uncertainty and volatility, energy
security, patchy climate policies, prices rise to +/-
$100
3. Aggressive targets for the reduction of fossil
fuels, support companies refuse to conduct business in
the arctic, North Slope into harvest mode
If we were to go with the above type scenarios based
on pretty wide industry consensus, then the challenge
is to design a fiscal system that promotes growth
(Scenario 1 & 2) but at the same time ensures a fair
share in harvest mode (Scenario 3)
11:44:40 AM
REPRESENTATIVE FIELDS asked for an explanation to the first
scenario that "once overhang works prices rise $10 to $20."
MR. RUGGIERO explained that this had happened several times when
oil was priced at $80 to $90 per barrel, and there was a rush of
shale oil development. He pointed out that this rush slowed
down when the price per barrel was about $60, and when it stayed
down at this level, there was a supply "overhang" or more supply
than demand. He declared that shale oil wells "fall off pretty
fast" as about 80 percent of the reserves were produced in the
first few years and without continual drilling the production
would decrease toward the demand.
CHAIR HOPKINS asked for the definition to "overhang."
MR. RUGGIERO stated that overhang was more supply than demand.
CHAIR HOPKINS noted that the window for drilling in Alaska was
dwindling because of climate change and the corresponding
ability to have ice roads. He asked if the window would widen
if Hilcorp did not do more exploration and instead used the
existing infrastructure.
MR. RUGGIERO said that he did not know.
REPRESENTATIVE FIELDS offered his belief that oil was
sufficiently profitable at $60 barrel and companies would
continue exploration and production.
MR. RUGGIERO said that it depends, for shale, on the acreage
proximity to the "sweet spot." He added that pipeline
transportation could be tight to move from certain places in
Texas to the Gulf Coast refineries, and whether a company had
confirmed space in the pipeline. He reported that robotic
drilling allowed for rails to be set up for additional drilling
in each direction. He added that it also depended on access to
the rigs, access to the service companies, and export of the oil
from that area.
11:48:35 AM
REPRESENTATIVE PRAX reflected that there was the world oil
market versus each individual current situation which made it
difficult to discuss in "bumper sticker terms."
MR. RUGGIERO reiterated that it was necessary to understand the
source of the headlines. He pointed to the greater variability
of the cost to operate in the Lower 48 versus that cost among
operators in Alaska.
MR. RUGGIERO shared that the systems that stayed engaged were
the ones that set their goals and then developed their policy to
achieve those goals.
11:50:22 AM
REPRESENTATIVE FIELDS asked about the profitability of the cost
to transport oil versus the profitability for the remainder of
oil.
MR. RUGGIERO said that he did not know.
REPRESENTATIVE FIELDS suggested there was high profitability for
the transport of a barrel of oil, while the rest of the profit
for a barrel of oil was sold closer to the cost of production.
He suggested that the cost of transport was driving the market.
MR. RUGGIERO suggested to review the different products from a
barrel of oil even though this would have to be compared against
the cost.
CHAIR HOPKINS reflected on the climate change impacts for fossil
fuel energy demand and asked what percentage of a barrel of oil
went to power production globally.
MR. RUGGIERO said that every country that could was moving away
from liquid fuels for power generation, even as some could not.
He estimated that the global percentage was very small.
11:52:49 AM
REPRESENTATIVE FIELDS asked what percentage of gas demand was
driven by electricity generation versus fuel for vehicles. He
asked about the anticipated growth for vehicle fuel.
MR. RUGGIERO shared an anecdote about his work on a project in
the 1980s studying natural gas for fleet vehicles and the
resulting natural gas shortage.
11:55:18 AM
MS. RUGGIERO offered to research any unanswered questions from
the committee.
11:56:33 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Energy meeting was adjourned at 11:57 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2020-02-27 - Fiscal Scenarios Modeling.pdf |
HENE 2/27/2020 10:15:00 AM |
Petroleum Policy & Scenarios - Presentation by In3nergy Consultants |