00CS FOR HOUSE BILL NO. 325(FIN)                                                                                          
01 "An Act authorizing exemption from payment of royalty for initial production                                            
02 of a portion of the heavy oil produced from wells on the Arctic Slope; and                                              
03 providing for an effective date."                                                                                       
04 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA:                                                                
05    * Section 1.  AS 38.05.180 is amended by adding a new subsection to read:                                            
06  (dd)  Notwithstanding any other provision of this section or any provision in                                         
07 a lease, unit agreement, or other agreement between a lessee and the state that                                         
08 establishes an obligation to pay royalty on production, royalty is not payable, under the                               
09 conditions and to the extent described in this subsection, for the production of heavy                                  
10 oil that is removed or sold from a lease or leases located north of the Umiat baseline,                                 
11 as follows:                                                                                                             
12   (1)  under this subsection, the exemption from payment of royalty applies                                            
13   (A)  only to the portion of the lessee's reported royalty, as may                                                   
14 be later adjusted, before any field cost deduction, as calculated for the month of                                      

01 production, for the first 500 barrels of daily production of heavy oil from the                                         
02 well, that, for the period beginning on                                                                                 
03   (i)  the effective date of this section and until                                                                  
04 December 31, 1996, does not exceed $15 per barrel; and                                                                  
05   (ii)  the first day of the calendar year during each calendar                                                      
06 year beginning January 1, 1997, does not exceed the amount specified                                                    
07 under (i) of this subparagraph as adjusted for inflation or deflation; in                                               
08 making the adjustment, the department shall, not later than February 15                                                 
09 of each calendar year, calculate and apply to the amount set out in (i) of                                              
10 this subparagraph a change in the dollar amount to the extent of the                                                    
11 change in the producer price index for industrial commodities compiled                                                  
12 by the United States Department of Labor; the index for January 1996 is                                                 
13 the reference base index;                                                                                               
14   (B)  only if the initial drilling of the well from which the heavy                                                  
15 oil is produced began on or after July 1, 1996, and before July 1, 2006; for                                            
16 purposes of this subparagraph, "actual initial drilling" does not include plug-                                         
17 backs of existing wells, sidetracks from existing wells, multi-lateral or dual completions of                           
18 existing wells, or sidetracks of redrilled wells;                                                                       
19   (C)  only to heavy oil produced during the first 1,825 days of well                                                 
20 operation after the initial production of oil from the well, as reported to the                                         
21 Alaska Oil and Gas Conservation Commission; for purposes of this                                                        
22 subparagraph, "initial production" means production following initial drilling;                                         
23 and                                                                                                                     
24   (D)  for a well only if the lessee                                                                                  
25   (i)  submits with its royalty report for the first month for                                                       
26 which the exemption from royalty payment under (A) - (C) of this                                                        
27 paragraph is claimed and with subsequent royalty reports for so long as                                                 
28 the exemption continues, oil gravity test results performed during the                                                  
29 period for which the royalty report is filed demonstrating that the oil                                                 
30 tested is heavy oil; the royalty report must be in accordance with the                                                  
31 standards for measurement and testing set out in the regulations of the                                                 

01 Alaska Oil and Gas Conservation Commission; the royalty report must be                                                  
02 prepared at quarterly intervals except that, for oil that, when tested, has                                             
03 a weighted average of 19 degrees API gravity or greater, the royalty                                                    
04 report must be prepared not less often than monthly; and                                                                
05   (ii)  maintains, for a period of at least two years after the                                                      
06 last day of the royalty payment exemption authorized by this subsection,                                                
07 records of production that show the actual date that drilling of the well                                               
08 started, the daily production from the well, and the API degree gravity                                                 
09 data, and allows the department to inspect the records during regular                                                   
10 business hours;                                                                                                         
11   (2)  by taking an exemption from the payment of royalty under this                                                   
12 subsection, the lessee waives any right that the lessee might otherwise have under its                                  
13 lease, unit agreement, or other agreement with the state to deduct, against royalty due                                 
14 the state, any field costs associated with the production of the heavy oil for which the                                
15 exemption is taken;                                                                                                     
16   (3)  when an exemption from payment of royalty is obtained on the                                                    
17 production of heavy oil under this subsection, for a period of 20 years after the last                                  
18 day on which a royalty payment exemption is allowed under this subsection, the lessee                                   
19 may not claim or obtain the benefit of an adjustment of royalty on the production of                                    
20 oil under contract or any other provision of law authorizing a royalty modification;                                    
21   (4)  for purposes of calculating the first 500 barrels per day of daily                                              
22 production of heavy oil from a well, the production from dual completions and other                                     
23 forms of multiple completions in a well is to be added together and counted as                                          
24 production from a single well;                                                                                          
25   (5)  in this subsection,                                                                                             
26   (A)  "field costs" includes the lease or unit expenses identified                                                   
27 in (f) of this section;                                                                                                 
28   (B)  "heavy oil" means oil having a weighted average equal to                                                       
29 or less than 20 degrees API gravity as the term "API gravity" is defined in                                             
30 AS 43.55.900.                                                                                                           
31    * Sec. 2.  This Act takes effect immediately under AS 01.10.070(c).