Legislature(2005 - 2006)HOUSE FINANCE 519

04/11/2005 01:30 PM FINANCE

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Heard & Held
Moved Out of Committee
Moved CSHB 219(FIN) Out of Committee
Heard & Held
Bills Previously Heard/Scheduled
Moved CSHB 123(FIN) Out of Committee
HOUSE BILL NO. 71                                                                                                             
     "An  Act relating  to a credit  for certain  exploration                                                                   
     expenses  against  oil  and  gas  properties  production                                                                   
     taxes on oil  and gas produced from a  lease or property                                                                   
     in  the state;  relating  to  the deadline  for  certain                                                                   
     exploration   expenditures  used   as  credits   against                                                                   
     production tax  on oil and gas produced from  a lease or                                                                   
     property  in the  Alaska Peninsula  competitive oil  and                                                                   
     gas areawide  lease sale  area after  July 1,  2004; and                                                                   
     providing for an effective date."                                                                                          
WILLIAM   CORBUS,   COMMISSIONER,  DEPARTMENT   OF   REVENUE,                                                                   
     House Bill 71 extends from  July 1, 2007 to July 1, 2010                                                                   
     the   deadline   for   making    qualified   exploration                                                                   
     expenditures under new AS  43.55.025 (passed in 2003) in                                                                   
     the  Bristol  Bay area.     Leases  in  the Bristol  Bay                                                                   
     (Alaska  Peninsula) Competitive Oil  and Gas  Lease Sale                                                                   
     are not  expected to  be issued prior  to the  spring of                                                                   
     2006.   Production  expenditures  on  these leases  thus                                                                   
     will most  likely be  made after July  1, 2007  and will                                                                   
     not qualify for tax credits under the current law.                                                                         
     House Bill  71 is intended to encourage  exploration and                                                                   
     development  of one of  the largest undeveloped  onshore                                                                   
     oil and  gas fields remaining  in Alaska outside  of the                                                                   
     North  Slope.    Development   of  this  field  has  the                                                                   
     potential to bring stable,  high paying, year round jobs                                                                   
     to an area which has traditionally  relied on a seasonal                                                                   
     commercial  fishing economy.   Gas  from this  field can                                                                   
     provide an  efficient relatively low cost  energy source                                                                   
     for  heating and  the production  of electricity  to the                                                                   
     Alaska  Peninsula area.    Oil and  gas development  can                                                                   
     provide  transportation  infrastructure  and  lower  the                                                                   
     cost  of  living in  this  area.   Local  residents  and                                                                   
     commercial interests,  including native  corporations in                                                                   
     the  Alaska Peninsula  area support  development of  the                                                                   
     gas and oil resources in  this area.  Under the terms of                                                                   
     the lease  sale, any  development of  oil and  gas under                                                                   
     state waters  within the three-mile limit  would have to                                                                   
     be done by directional drilling from onshore.                                                                              
     Three changes were made to  HB 71 in the House Resources                                                                   
     Committee substitute:                                                                                                      
     1. A  change to HB 71  was added in the  House Resources                                                                   
     Committee to extend the exploration  tax credit to wells                                                                   
     drilled in the Nenana Basin  through July 1, 2008.   The                                                                   
     Administration supports this amendment.                                                                                    
     2.  A second  change added  in  the Resources  Committee                                                                   
     substitute  eliminates the  exploration  tax credit  for                                                                   
     exploration in ANWR.                                                                                                       
     3. The third change added  in House Resources eliminates                                                                   
     the exploration tax credit  for certain wells that might                                                                   
     be considered  delineation wells under the  current law.                                                                   
     The  Administration  does  not support  this  change  to                                                                   
     existing tax policy.  The  idea behind the original bill                                                                   
     was if an  explorer was going to push  the boundaries of                                                                   
     the area under  production out 25 miles,  then the state                                                                   
     would  underwrite  the well  work associated  with  that                                                                   
     exploration,  even to  the  extent of  figuring out  how                                                                   
     much  production is  there.   All the  other limits  -of                                                                   
     kinds of expense and when  the work has to be done still                                                                   
     exist.  We think that was  good idea then, we think it's                                                                   
     a good idea  now and if explorers thought it  was a good                                                                   
     idea, we shouldn't change  the law now.  These companies                                                                   
     have made and  are making decisions based on  a law that                                                                   
     was to  be in effect from  July 1, 2004 to July  1, 2007                                                                   
     it would  be inappropriate to  make changes to  that law                                                                   
     at this time.                                                                                                              
2:04:20 PM                                                                                                                    
Representative  Hawker asked which  change was not  endorsed.                                                                   
Commissioner Corbus deferred to Dan Dickinson.                                                                                  
2:05:01 PM                                                                                                                    
DAN  DICKINSON,   DIRECTOR,  TAX   DIVISION,  DEPARTMENT   OF                                                                   
REVENUE, (via  teleconference) responded that the  tax policy                                                                   
change   made  in   the  House   Resources   CS,  which   the                                                                   
Administration  is not  endorsing,  changed the  requirements                                                                   
and limitations  on which  wells might  or might not  qualify                                                                   
for the last two years of the  four years from which this tax                                                                   
credit can apply.                                                                                                               
Representative   Hawker  asked   for  clarification   on  the                                                                   
language at issue.                                                                                                              
Mr. Dickinson  replied the  language is  found in Section  1,                                                                   
lines 7-10  (new subsection  3), Section 3,  4 and 5.   Under                                                                   
the current legislation, a 20  percent credit is set up if an                                                                   
exploration  well  is  drilled  more  than 3  miles  from  an                                                                   
existing  well.   There is  also a  20 percent  credit if  an                                                                   
exploration well is more than  25 miles from a unit boundary,                                                                   
as  it existed  on  the  date  in the  bill.   If  a  company                                                                   
qualifies  for both  credits,  then a  40  percent credit  is                                                                   
possible.   The  CS does not allow for credit  for wells that                                                                   
are less  than 3 miles  from a prior  well, but more  than 25                                                                   
miles from a leased boundary.  He gave an example.                                                                              
2:09:30 PM                                                                                                                    
Representative Hawker inquired  about the rational behind the                                                                   
change.   Mr. Dickinson replied  that once hydrocarbons  have                                                                   
been  found,  the  thought  is that  the  state  should  stop                                                                   
subsidizing and  not allow any  more dollars for  the credit.                                                                   
If the boundaries are pushed out,  the credit is then earned.                                                                   
The  issue is  how far  the boundaries  can  be extended  and                                                                   
still qualify for credit.                                                                                                       
Representative  Hawker asked  if there  could be  one or  two                                                                   
wells  in proximity  to  each  other as  part  of an  initial                                                                   
exploratory find, or if that is prohibited.                                                                                     
Mr. Dickinson  replied that the  new language  would prohibit                                                                   
that situation.   HB 61  created a credit  in the  income tax                                                                   
for  certain exploration  and  development work  in the  Cook                                                                   
Inlet.    It  is appropriate   at times  to  issue  a  credit                                                                   
pertinent   to  the   activity  needed   to  get   additional                                                                   
production, which  is the goal.  Representative  Hawker noted                                                                   
that  the  line  is clear  in  this  CS  between  exploration                                                                   
drilling and development drilling.                                                                                              
Co-Chair   Meyer  asked   if   Mr.  Dickinson   agreed   with                                                                   
Representative Hawker.   He replied that the  definitions are                                                                   
based on the location of the well.                                                                                              
2:13:13 PM                                                                                                                    
Representative Weyhrauch noted  on page 2, line 6, in Version                                                                   
S, the  word "or"  appears.   He recalled  that the  Ways and                                                                   
Means version  had the  word "and".   He asked  if this  is a                                                                   
change.  Mr. Dickinson thought  the wording should say "and".                                                                   
He  clarified  that  the  Resource  Committee  set  up  three                                                                   
situations in subsections 1, 2, and 3.                                                                                          
2:16:26 PM                                                                                                                    
Representative  Weyhrauch  referred to  Section  4 and  asked                                                                   
whether  outer boundaries  that have not  been delineated  by                                                                   
the required date  might prevent eligibility.   Mr. Dickinson                                                                   
explained  that  the lack  of  a  unit boundary  would  still                                                                   
qualify a new well in the Bristol  Bay extension area for the                                                                   
20  percent  credit.  Mr.  Dickinson  recalled  that  if  the                                                                   
boundary had not been delineated, you did not qualify.                                                                          
REPRESENTATIVE RALPH SAMUELS explained  that is a policy call                                                                   
about the  second well.   In response  to the question  about                                                                   
"and" and  "or", he  explained that  the Resources  Committee                                                                   
switched from  "and" to  "or" because  it didn't want  anyone                                                                   
receiving an 80  percent credit.  He opined  that the wording                                                                   
still  needs  clarification.    He  shared  discussions  that                                                                   
happened in the Resources Committee Meeting.                                                                                    
2:21:26 PM                                                                                                                    
Representative  Holm  asked  about  the  rationale  for  only                                                                   
allowing one well.                                                                                                              
Representative  Samuels  explained  the thinking  behind  the                                                                   
decision.   The idea was not  to give credit  for exploration                                                                   
on a known property.                                                                                                            
Mr. Dickinson strongly  urged that the committee  adopt HB 71                                                                   
be adopted with the additional conceptual language changes.                                                                     
2:23:43 PM                                                                                                                    
MITCH  USIBELLI, MANAGER,  USIBELLI  ENERGY, NENANA,  related                                                                   
that his  company is involved  in two projects,  Nenana Basin                                                                   
and Healy  Basin.   He referred to  handouts on each  project                                                                   
(copy on  file.)  He shared  the history of the  Nenana Basin                                                                   
project and  explained the  maps in the  handout.   He termed                                                                   
this   project   an   exciting,    yet   high-risk   frontier                                                                   
exploration.     He   highlighted   the   summary  sheet   of                                                                   
Exploration  Incentive Credit  Programs.   He noted  that the                                                                   
sunset date on the project is 2007.                                                                                             
2:30:33 PM                                                                                                                    
Mr. Usibelli  described  the history of  the second  project,                                                                   
the proposed  Healy Basin exploration  license.  He  spoke of                                                                   
projects delays.   He described  the maps in the handout.  He                                                                   
noted that  this project is  a gas-only project,  for coalbed                                                                   
methane  and shallow gas  exploration.   The coalbed  methane                                                                   
industry  has grown rapidly  and the  Department of  Energy's                                                                   
forecast  is for the  production of  non-conventional  gas to                                                                   
increase.     He  reviewed   the  summary   sheet  on   Healy                                                                   
Exploration  License Application  and  discussed the  current                                                                   
2:35:40 PM                                                                                                                    
In response to  a question from Co-Chair Meyer,  Mr. Usibelli                                                                   
replied that he thinks that this tax system works.                                                                              
Representative  Holm  asked  how  long before  data  will  be                                                                   
available  on the projects.   Mr.  Usibelli replied  that his                                                                   
company is processing  that data now and will  know more over                                                                   
next two to three months, by mid-summer.                                                                                        
In  response to  a question  from  Representative Kelly,  Mr.                                                                   
Usibelli replied  that both areas' wells would  be outside of                                                                   
the 25-mile  and 3-mile  limits.   He added  that if  well is                                                                   
over the 30 years old the limit does not apply.                                                                                 
2:39:05 PM                                                                                                                    
Co-Chair Chenault  asked how this  tax incentive is  going to                                                                   
affect  his  company's  coalbed  methane, and  oil  and  gas,                                                                   
exploration.   Mr. Usibelli replied that  initial exploration                                                                   
work would  qualify for this  tax credit.  Co-Chair  Chenault                                                                   
referred  to the  Healy Basin  and  asked about  its size  in                                                                   
relation to the  tax incentive.  Mr. Usibelli said  it is his                                                                   
understanding  that the  area  falls outside  of the  25-mile                                                                   
limit.  He explained that there  is plenty of opportunity for                                                                   
exploration there.                                                                                                              
2:41:55 PM                                                                                                                    
Co-Chair   Meyer  suggested   that  a   new  CS  be   written                                                                   
incorporating   potential   amendments.      He   asked   for                                                                   
information  about  Cook  Inlet   drilling.    Mr.  Dickinson                                                                   
reported  that  AS  43.55.025.  applies  to any  gas  or  oil                                                                   
exploration  drilling in  the state and  creates a  four-year                                                                   
window.  This  bill expands the window for  specific areas at                                                                   
the request of the Governor.                                                                                                    
2:44:25 PM                                                                                                                    
Representative Kelly suggested  finding middle ground between                                                                   
the  extremes of  opinion surrounding  this bill.   He  noted                                                                   
that he feels  under-informed about the bill.   Mr. Dickinson                                                                   
offered to provide  additional information.   He related that                                                                   
Representative Samuels summed it up earlier.                                                                                    
Co-Chair  Chenault noted  that  the mile  limits  need to  be                                                                   
addressed and that he would be offering amendments.                                                                             
2:48:56 PM                                                                                                                    
Mr.  Dickinson summarized  that  the intent  is  to push  the                                                                   
boundaries  of exploration.   The  Cook Inlet  would only  be                                                                   
able to  move south.   A  lot of activity  would be  excluded                                                                   
that would otherwise qualify.                                                                                                   
2:50:12 PM                                                                                                                    
Representative   Kelly  asked   for   clarification  on   the                                                                   
department's  position.  Mr. Dickinson  observed  that  there                                                                   
were  several changes  made. The  department  has no  problem                                                                   
with the  extension to  the Nenana Basin.  There is  only one                                                                   
aspect that the department objects to.                                                                                          
HB 71 was HELD in Committee for further consideration.                                                                          
2:51:19 PM                                                                                                                    
At ease.                                                                                                                        
3:03:56 PM                                                                                                                    

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