HOUSE BILL NO. 411 "An Act relating to the oil and gas production tax, tax payments, and credits; and providing for an effective date." 1:34:30 PM RICHARD RUGGIERO, CONSULTANT, IN3ENERGY (via teleconference), introduced the PowerPoint presentation: "HB411: Tax Bracket Analysis, House Finance, April 16, 2018."(copy on file) 1:35:04 PM CHRISTINA RUGGIERO, IN3ENERGY, HOUSTON (via teleconference), turned to Slide 3: INDICATIVE RUNS HOW TO VIEW THE RESULTS The following plots showing indicative results from changes to the brackets for HB411 should be viewed to understand the approximate magnitude of any changes as well as the direction (positive or negative) from such changes. The absolute $ change in state take should not be used as an exact value. Ms. Ruggiero advanced to Slide 4, "HB 411 IN3NERGY MODEL": Per Barrel Model  ? Simplistic per barrel model, taking into account key fiscal structure metrics to reflect the direction and magnitude of results ? Can compare the Status Quo tax structure with HB411 (stepped progressivity) and ACES (continuous progressivity) ? The primary inputs assumptions below are taken from the DOR case presented to HFIN on April 10, 2018 Model Inputs:  Non-GVR Daily Production (mmbls/d) 526.6 GVR Daily Production (mmbbls/d) 50 Transport and Shipping ($/bbl) 8.87  Transportation & Shipping Multiplier 100% Capex ($/bbl) 9.21 Flat Opex ($/bbl) 14.13 Flat Cost Multiplier 100%  Tax Rate (Status Quo) 35% GVR Reduction 20%  GVR per Barrel Credit ($/bbl) 5 Royalty 12.50%  State Corp Income Tax 6.25% Federal Corp Income Tax 35% Yes Hard Floor No ? "Multiplier" fields are used to apply a fixed increase or decrease to costs at all prices ? Capex and Opex can be run either as flat cost values across all prices, or, if selected, then can be varied to move proportionally with price increase and decreases 1:37:40 PM Ms. Ruggiero continued to Slide 5, "Key Considerations": Scenario Analysis Simulating Reality  ? In the real world, Capex and Opex values per barrel increase and decrease with oil price ? For the purposes of this model, if cost Variance is selected, then: ? Price and costs change together ? Costs are assumed to change at 80% of the change in oil price (If the prices increases 100% then cost increase 80%) ? Costs can be further multiplied from the state wide average DOR values to simulate the large legacy fields (multiplier less than 100%) or potential new North Slope fields (multiplier greater than 100%) 1:38:12 PM Ms. Ruggiero reviewed Slide 6, "Scenario Analysis Cases": HB 411 With Varied Costs and Tax Brackets  ? There are 4 cases of different tax bracket setups, detailed in the tables below ? Each case has 4 runs labeled A-D ? A: Costs FLAT, Costs at 100% ? B: Costs VARIED, Costs at 100% ? C: Costs VARIED, Costs at 50% ? D: Costs VARIED, Costs at 150% Ms. Ruggiero explained that the bottom of the slide contained four cases of tax brackets. The first was HB 411 as written, the next three were created with varying tax bases and steps. She noted that cases 2 through 4 were intended to show variability and were not intended as recommendations. She explained that as the presentation went on, cases contained 4 runs labeled a through D. Ms. Ruggiero presented Slide 8, "Comparison of all case 1 runs" (Ms. Ruggiero clarified a typo in the title should read case 4, and not 1). She highlighted the case 4 brackets and runs A through D: A was the flat price, B was the varied price, C was a 50 percent reduction in cost, and D was a 150 percent increase in cost. She pointed out to the committee that case B reflected that at roughly $30 per barrel the minimum tax would start; case D showed $85 dollars per barrel. The same tax brackets could yield varying results under different cost parameters. Mr. Ruggiero added that at very high prices, depending on cost structure, a significant difference could be seen. He stressed the importance of showing the cost variability. 1:44:45 PM Representative Guttenberg asked whether there would be slides that showed the current tax regime as compared to HB 411. Mr. Ruggiero responded in the affirmative. Co-Chair Seaton expressed appreciation for the information surrounding variability based on cost. 1:46:25 PM Mr. Ruggiero scrolled to Slide 9, "1.A Status Quo v. HB411 as written." The slide contained Department of Revenue inputs, HB 411 brackets, costs flat, and costs 100 percent. The green bars represented the change in state take at varying per barrel prices. The two tables reflected gross value reduction (GVR) and non-GVR numbers. 1:48:36 PM Co-Chair Seaton asked Mr. Ruggiero to explain the green bars. He wondered about the effective tax rate. Mr. Ruggiero replied that the yellow and blue lines were the effective tax rates and were read off the percentages on the left of the table. The green bars were the change in state take and were read off the right scale in millions. 1:49:28 PM Mr. Ruggiero detailed Slide 10, "1.B Status Quo v. HB411 as written." The slide contained Department of Revenue inputs, HB 411 brackets, Costs varied, costs 100 percent. He explained that the difference on this slide form Slide 9 was the varied cost with the change in oil price. He pointed out that a lower tax take occurred at higher costs, as represented by the green bars in each table. He stated that the slide reflected the varying the cost using state averages. 1:51:34 PM Co-Chair Seaton queried the language "cost varies at 100 percent". He understood that this meant if the price of oil went up 10 percent, then the cost went up 10 percent, and if the price of oil doubled then the costs would double. Mr. Ruggiero referred to Slide 5. He noted that historically the equation changed the cost 80 percent of the oil price. Starting at a base rate of $60 per barrel, if the price of oil went up to $120, a 100 percent increase, costs would increase 80 percent. If oil prices went down to $30 per barrel, the costs would go down 40 percent. The costs move 80 percent of whatever the movement was in the oil price. 1:53:01 PM Ms. Ruggiero added that the label where it said "cost 100 percent" meant that the base case was the same as DOR and where the label at the end of the subtitles on each slide indicating "cost 50 percent" or "cost 100 percent" meant that the base case had decreased by 50 percent or increased to 150 percent. Co-Chair Seaton understood that in all cases the cost variation was 80 percent of the price change. Ms. Ruggiero responded in the affirmative. Representative Ortiz asked about the factors surrounding cost going up as the price per barrel went up. Mr. Ruggiero responded that that was the way it had always happened. He said that as labor rose with inflation, when oil priced plummeted labor costs decreased. He said that when energy costs rose, things became more expensive. He provided the example that steel became more expensive to make and deliver. He relayed that high prices contributed to long wait times for fracking units to frack shale wells. He related that energy itself played into a lot of the materials needed in the oil patch, when those prices went up it disrupted the supply and demand of services and equipment. This resulted in service prices and the cost of doing business rising with a 3 to 6-month lag, with a 30- day delay when the oil price decreased. He said that these factors were not related to taxes or progressivity. 1:56:04 PM Mr. Ruggiero returned to Slide 10. He noted that the table in the upper left represented the standard rates in HB 411. He also pointed to where the non-GVR curve fell widened at the peak. He said that at the upper end the numbers fell beneath the current status quo, resulting in a loss at upper prices. 1:56:55 PM Mr. Ruggiero moved to Slide 11: "1C. Status Quo v. HB411 as Written." The slide reflected DOR inputs, HB 411 brackets, costs varied, and costs 50 percent. He explained that the model reflected a dramatic difference at all prices up to $120 per barrel. He said that the state would see more revenue from HB 411 than from the status quo because of the lower cost structure. The higher PTV per barrel, starting off at a 25 percent tax, as compared to the 5 or 6 percent under the status quo, would generate additional tax revenue to the state and tax liability to industry. 1:58:52 PM Mr. Ruggiero continued to Slide 12: "1D. Status Quo v. HB411 as written." The slide showed DOR inputs, HB 411 brackets, costs varies, and cost 150 percent." He pointed out the $64 total cost base at the $63 per barrel price. He said that any price below the $60 per barrel price, producers were paying the 4 percent gross minimum tax out of pocket. He stated that the crossover point did not occur until $110 per barrel. At 80 percent of the growth in the oil price, upper tax brackets remained flat until $140 per barrel. Costs moved up as the price moved up but the PTV did not move as quickly. He said that the additional charts in the presentation (Slides 13 through 24) included the same four charts of cases A, B, C, D, against the different representative sets of brackets. He relayed that when cost was considered in accordance to what was actually happening in the oil patch, the representation of what a specific bill would do was different that what had been observed in the past. 2:02:31 PM Representative Grenn asked Mr. Ruggiero whether had been asked to create all the scenarios. Mr. Ruggiero responded that the models had been generated independently by IN3NERGY, without any preconceptions and for informational purposed only. 2:03:31 PM Co-Chair Seaton also provide an answer to Representative Grenn's earlier question surrounding problems in HB 411 and changes that could be made to appeal to industry. He said that a previous presentation had suggested that the state should tax at a lower rate, at the low end of prices, then increase the percentage take at the higher end. He noted that the models had been requested by the committee for informational purposes. 2:05:10 PM Representative Wilson thought industry testifiers had thought the tax was a bad idea. She wondered whether any of the scenarios would entice production. Mr. Ruggiero responded that some of the scenarios with low base rates could serve to help the economics with earlier cashflow to a new project. He felt that the particulars of each project would need to be examined in order to make that determination. Representative Wilson asked whether HB 411 contained scenarios that would please industry. Mr. Ruggiero requested clarification in the question. Representative Wilson tried again. She relayed that Mr. Ruggiero had stated that a couple of scenarios would incentivize industry. She wondered which scenarios under HB 411 would incentivize industry. Mr. Ruggiero referred to Slide 6. He pointed to cases 1 through 4 on the bottom half of the slide. He relayed that the first showed HB 411 as it stood, starting with a 25 percent base. He moved to case 3, which he said would potentially generate more income for the operator of a more expensive, new field. He said that case 3 would be more favorable than case 1. 2:08:14 PM Representative Wilson asked how 3 compared to the current oil regime. Co-Chair Seaton directed members to refer to Slide 17. Mr. Ruggiero added that Slide 18 reflected usable information as well. He said that there were several things that came into play, but if an operator way paying a lower tax rate in the early years of a project, it would benefit the company in the long run. 2:10:27 PM Representative Wilson pointed to the blue line on Slides 17 and 18 and surmised that under HB 411 the state would be would be taking more and not less. Mr. Ruggiero agreed. He referred to Slide 20. Representative Wilson asked to stay on Slides 17 and 18 and repeated her question. Mr. Ruggiero thought her original question pertained to the status quo on HB 411, and not the status quo under SB 21. He said that HB 411, relative to the status quo, when the blue line was above the yellow line, and the green bars above zero, HB 411 took more tax than the current tax structure. 2:13:00 PM Representative Wilson restated her question. She asked how taking more money would incentivize more production. Mr. Ruggiero replied that the question was rhetorical. He reiterated that the intent of the information he provided had been to show a way do structure things differently to help oil flow down the pipeline. He felt that staring at a 5 percent base was better than starting at a 25 percent base. Representative Wilson understood he was saying HB 411 was bad and that the scenario on Slide 19 was less bad but that neither incentivized production. Mr. Ruggiero responded that HB 411, as proposed, would cause a tax increase for industry. Representative Wilson surmised that the bill would not incentivize production. Mr. Ruggiero responded, "Likely not." Representative Ortiz asked for clarification on the acronyms CAPEX and OPEX. Mr. Ruggiero explained that CAPEX was short for capital expenditures and OPEX was short for operating expenditures. He added that in Alaska system, for petroleum tax purposes, they were treated indifferently in that they both could be expensed and deducted as spent. Other systems operated differently. Representative Guttenberg asked whether the state built in CAPEX and OPEX or if there were qualifying exams for those expenses. Mr. Ruggiero replied that Alaska had rules with respect to which costs could be deducted. He said that the first step was to identify whether the cost could be deducted, and the second step was to determine how. Alaska had a series of tests to determine which costs could be deducted and which could not. Representative Guttenberg asked whether there were any existing regimes that had a tax structure void of a consideration for CAPEX or OPEX. Mr. Ruggiero responded that anyone that had a gross tax- based system were indifferent to OPEX and CAPEX, a net system always incorporated those expenses. 2:17:41 PM Co-Chair Seaton thanked Mr. Ruggiero for the presentation. Co-Chair Seaton relayed that the amendments to HB 411 were due Thursday, April 19, 2018 at 5:00 PM. HB 411 was HEARD and HELD in committee for further consideration. 2:18:50 PM AT EASE 2:26:03 PM RECONVENED