00CS FOR HOUSE BILL NO. 325(FIN) am                                                                                       
01 "An Act relating to modification of royalty to encourage production from an                                             
02 oil pool containing heavy oil; and providing for an effective date."                                                    
03 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF ALASKA:                                                                
04    * Section 1.  AS 38.05.180 is amended by adding a new subsection to read:                                            
05  (dd)  Notwithstanding any other provision of this section or any provision in                                         
06 a lease, unit agreement, or other agreement between a lessee and the state that                                         
07 establishes an obligation to pay royalty on production, royalty is payable at a rate of                                 
08 two percent, under the conditions and to the extent described in this subsection, for the                               
09 production of heavy oil that is removed or sold from a lease or leases located north                                    
10 of the Umiat baseline,  as follows:                                                                                     
11   (1)  under this subsection, the reduction in payment of royalty applies                                              
12   (A)  only to the portion of the lessee's reported royalty, as may                                                   
13 be later adjusted, before any field cost deduction, as calculated for the month of                                      
14 production, for the first 450 barrels of daily production of heavy oil from the                                         

01 well that does not exceed $15 per barrel;                                                                               
02   (B)  only if the initial drilling of the well from which the heavy                                                  
03 oil is produced began on or after July 1, 1996, and before July 1, 2006; for                                            
04 purposes of this subparagraph, "actual initial drilling" does not include plug-                                         
05 backs of existing wells, sidetracks from existing wells, multi-lateral or dual completions of                           
06 existing wells, or sidetracks of redrilled wells;                                                                       
07   (C)  only to heavy oil produced during the first 1,825 days of well                                                 
08 operation after the initial production of oil from the well, as reported to the                                         
09 Alaska Oil and Gas Conservation Commission; for purposes of this                                                        
10 subparagraph, "initial production" means production following initial drilling;                                         
11   (D)  for a well only if the lessee                                                                                  
12   (i)  submits with its royalty report for the first month for                                                       
13 which the reduction in royalty payment under (A) - (C) of this paragraph                                                
14 is claimed and with subsequent royalty reports for so long as the                                                       
15 reduction continues, oil gravity test results performed during the period                                               
16 for which the royalty report is filed demonstrating that the oil tested is                                              
17 heavy oil; the oil gravity test must be in accordance with the standards                                                
18 for measurement and testing set out in the regulations of the Alaska Oil                                                
19 and Gas Conservation Commission; the oil gravity test must be conducted                                                 
20 at quarterly intervals except that, for oil that, when tested, has a weighted                                           
21 average of 19 degrees API gravity or greater, the oil gravity test must be                                              
22 conducted not less often than monthly; and                                                                              
23   (ii)  maintains, for a period of at least two years after the                                                      
24 last day of the royalty payment reduction authorized by this subsection,                                                
25 records of production that show the actual date that drilling of the well                                               
26 started, the daily production from the well, and the API degree gravity                                                 
27 data, and allows the department to inspect the records during regular                                                   
28 business hours; and                                                                                                     
29   (E) only to heavy oil production located at depths of less than                                                     
30 5,000 feet;                                                                                                             
31   (2)  by taking a reduction in the payment of royalty under this                                                      

01 subsection, the lessee waives any right that the lessee might otherwise have under its                                  
02 lease, unit agreement, or other agreement with the state to deduct, against royalty due                                 
03 the state, any field costs associated with the production of the heavy oil for which the                                
04 reduction is taken;                                                                                                     
05   (3)  when a reduction in payment of royalty is obtained on the                                                       
06 production of heavy oil under this subsection, for a period of 20 years after the last                                  
07 day on which a royalty payment reduction is allowed under this subsection, the lessee                                   
08 may not claim or obtain the benefit of an adjustment of royalty on the production of                                    
09 oil under contract or any other provision of law authorizing a royalty modification;                                    
10   (4)  for purposes of calculating the first 500 barrels per day of daily                                              
11 production of heavy oil from a well, the production from dual completions and other                                     
12 forms of multiple completions in a well is to be added together and counted as                                          
13 production from a single well;                                                                                          
14   (5)  in this subsection,                                                                                             
15   (A)  "field costs" includes the lease or unit expenses identified                                                   
16 in (f) of this section;                                                                                                 
17   (B)  "heavy oil" means oil having a weighted average equal to                                                       
18 or less than 20 degrees API gravity as the term "API gravity" is defined in                                             
19 AS 43.55.900.                                                                                                           
20    * Sec. 2.  This Act takes effect immediately under AS 01.10.070(c).