Legislature(2005 - 2006)CAPITOL 124

02/17/2005 05:00 PM OIL & GAS

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05:04:55 PM Start
05:05:08 PM HB71
05:34:08 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Bills Previously Heard/Scheduled
HB 71 - AK PENINSULA OIL & GAS LEASE SALE; TAXES                                                                              
5:05:08 PM                                                                                                                    
CHAIR KOHRING announced that the  only order of business would be                                                               
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."                                                                                     
5:05:30 PM                                                                                                                    
Jerry Burnett, Special Assistant  to the Commissioner of Revenue,                                                               
Alaska  Department   of  Revenue,   explained  that  HB   71  was                                                               
introduced  by   the  governor  and  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.   He  commented that 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.   He said, "Gas  from this field can  provide an                                                               
efficient,  relatively low-cost  energy  source  for heating  and                                                               
production of electricity to the  Alaska Peninsula area.  And oil                                                               
and gas  development can provide  infrastructure [and]  lower the                                                               
cost of living  in the area."  He pointed  out that the committee                                                               
information  packets  contained  letters of  support  from  local                                                               
governments and  Native corporations who support  the development                                                               
of oil and gas resources in this area.                                                                                          
5:06:41 PM                                                                                                                    
MR. BURNETT  stated that today  the Alaska Department  of Revenue                                                               
issued its first  oil and gas exploration  tax credit certificate                                                               
under  the existing  legislation for  a well  on the  North Slope                                                               
drilled by Kerr-McGee Oil and Gas Corp.                                                                                         
CHAIR KOHRING  asked if this  was the  result of Senate  Bill 185                                                               
from two years ago.                                                                                                             
MR. BURNETT replied that it was.                                                                                                
CHAIR KOHRING asked:                                                                                                            
     Are they  about to  lose their tax  credit availability                                                                    
     on  the Slope?   Because  this bill's  germane to  just                                                                    
     Bristol Bay for providing a  tax credit extension, if I                                                                    
     understand. ...  I ask that because  I'm just wondering                                                                    
     if we  ought to  expand the  scope of  this legislation                                                                    
     and carry it outside of just Bristol Bay.                                                                                  
MR.  BURNETT replied  that  at this  point,  the exploration  tax                                                               
credit is  in effect  for work done  through 2007  statewide; the                                                               
Bristol Bay  extension was being  done because the lease  sale in                                                               
the Bristol Bay area will not be done until the spring of 2006.                                                                 
5:08:54 PM                                                                                                                    
MR. BURNETT mentioned  that the [House Special  Committee on Ways                                                               
and Means]  had a committee substitute  for HB 71 in  which there                                                               
were  technical drafting  changes,  but  no substantive  changes.                                                               
Reviewing AS 43.44.025 on the  Alaska Oil and Gas Exploration Tax                                                               
Credits, he explained:                                                                                                          
     [Under] 43.55.025(a)(1) companies  are qualified for 20                                                                    
     percent of  exploration expenditures  for a  well three                                                                    
     miles  from   an  existing  well,  or   20  percent  of                                                                    
     exploration expenditures for a  well 25 miles outside a                                                                    
     unit,  or both.   So  it's up  to 40  percent of  their                                                                    
     exploration  expenditures for  a  well  that is  [both]                                                                    
     three  miles  from  an  existing   well  and  25  miles                                                                    
     [outside a unit].   And they ... may qualify  for up to                                                                    
     40 percent  credit for  their seismic  expenditures not                                                                    
     associated  with a  well.   That  credit  can be  taken                                                                    
     against  tax on  production that's  done after  July 1,                                                                    
     2004. ...  Current law, statewide between  July 1, 2003                                                                    
     and July  1, 2007,  you could take  the credits.   With                                                                    
     the passage  of HB  71 it would  extend the  credits on                                                                    
     the Alaska  Peninsula for the  sale which  is described                                                                    
     in the bill for a time  period between July 1, 2003 and                                                                    
     July 1, 2010.                                                                                                              
5:11:04 PM                                                                                                                    
MR.  BURNETT explained  which types  of exploration  expenditures                                                               
qualify for  the tax credits: seismic  or geophysical exploration                                                               
not connected to a well;  and exploration wells, specifically the                                                               
reasonably  required costs  for goods,  services, and  rentals to                                                               
prepare and drill,  and the costs associated  with abandonment of                                                               
dry holes within  18 months.  He pointed out  that overhead costs                                                               
are not allowed to be used toward tax credits.                                                                                  
MR.  BURNETT, in  response to  Representative Samuels,  clarified                                                               
that  roads and  airfields  on  site would  count,  but not  "the                                                               
expenditures  back at  the head  office  that are  in support  of                                                               
5:12:40 PM                                                                                                                    
GARY ROGERS, Revenue Auditor, Tax  Division, Alaska Department of                                                               
Revenue  stated   that  he  worked  on   the  exploration  credit                                                               
regulations  that were  drafted as  a result  of Senate  Bill 185                                                               
last year,  and he  is responsible  for auditing  the exploration                                                               
tax credits.                                                                                                                    
CHAIR KOHRING  commented that  he hasn't  heard industry  ask for                                                               
this  bill, and  he asked  Mr. Burnett  to explain  why the  bill                                                               
should be passed and how time sensitive the bill is.                                                                            
MR. BURNETT deferred to Mark  Myers, the director of the Division                                                               
of  the  Oil and  Gas.    [Mr. Myers  was  unable  to attend  the                                                               
5:14:49 PM                                                                                                                    
PAT  GALVIN, Petroleum  Land Manager,  Division of  Oil and  Gas,                                                               
Department of Natural Resources, explained:                                                                                     
     The legislation  is needed  to facilitate  a successful                                                                    
     initial  lease  sale for  the  Alaska  Peninsula.   The                                                                    
     incentive credits  [are] an opportunity that  we see to                                                                    
     encourage  companies to  look  at this  new lease  sale                                                                    
     that we're potentially going to  offer in October.  And                                                                    
     what we recognize  is that while we can  go through the                                                                    
     Best   Interest  Finding   process   and  develop   the                                                                    
     environmental safeguards  to hold  the lease  sales and                                                                    
     have  it  be  successful  in  the  eyes  of  the  local                                                                    
     governments, we need industry to  feel that there is an                                                                    
     opportunity  for  them  to  go   out  and  have  it  be                                                                    
     successful for  them economically.   And  the incentive                                                                    
     credits  were  put  in   place  to  foster  exploration                                                                    
     throughout the state, and to  have them present for the                                                                    
     initial  sale  is  something that  we  feel  is  really                                                                    
     important to really foster a successful first sale.                                                                        
5:15:57 PM                                                                                                                    
CHAIR KOHRING  asked, "How much  does the industry  actually want                                                               
this?  ... Is  this something  that would  spur them  to actually                                                               
start sinking wells?"                                                                                                           
MR. GALVIN responded:                                                                                                           
     With any  new lease  sale, the companies  are generally                                                                    
     going to  be somewhat  reserved in their  discussion of                                                                    
     their  interest in  the  lease  sale because,  frankly,                                                                    
     they  don't  want  to  give   any  sort  of  commercial                                                                    
     advantage or  indication of their interest  in order to                                                                    
     ... create a competitive  situation where there may not                                                                    
     be  one  if  they  were   to  keep  quiet  about  their                                                                    
     interests.   So one of  the reasons why we  do areawide                                                                    
     lease  sales is  because companies  are, just  by their                                                                    
     nature, reluctant  to provide [an] indication  of a lot                                                                    
     of interest  in particular areas or  particular tracts.                                                                    
     And so  with [a]  new lease sale,  we would  not expect                                                                    
     any particular company  to come out and  say, ... "With                                                                    
     this incentive credit, we will bid on tracts."                                                                             
5:17:30 PM                                                                                                                    
CHAIR KOHRING commented, "Well, if nothing else this can serve                                                                  
as a starting point; if it doesn't work we can readjust it next                                                                 
MR. GALVIN replied:                                                                                                             
     At  this  point, we  really  don't  know what  kind  of                                                                    
     interest  we're going  to  get with  this  sale.   It's                                                                    
     really going to be a  matter of making it available and                                                                    
     seeing who comes.   And the incentive  credits are just                                                                    
     one thing  to make the  offer a bit more  attractive to                                                                    
     the  companies   that  are  looking  at   exploring  an                                                                    
     otherwise new area.                                                                                                        
5:17:56 PM                                                                                                                    
REPRESENTATIVE GARDNER asked if the existing tax credits have                                                                   
created any new exploration.                                                                                                    
MR. BURNETT reiterated that Kerr-McGee Oil and Gas Corporation                                                                  
has been issued the first tax credit.  He said:                                                                                 
     There are  a number  of other  companies who  are doing                                                                    
     it.     We  can't   speak  about  them   without  their                                                                    
     permission,  for   the  most   part,  so   it's  really                                                                    
     difficult  to publicly  quantify  ...  and to  quantify                                                                    
     this ... program that's only  been in place for a short                                                                    
     period of time.   It does appear to be  working at this                                                                    
CHAIR  KOHRING  commented  that perhaps  the  legislature  should                                                               
extend  the tax  credits more  comprehensively and  not focus  it                                                               
only on Bristol Bay.                                                                                                            
5:19:24 PM                                                                                                                    
REPRESENTATIVE ROKEBERG  stated that  he would  like to  know who                                                               
has applied  for exploration expenditure  tax credits  since they                                                               
went  into effect.    He  asked if  the  Kerr-McGee  Oil and  Gas                                                               
Corporation was  receiving production  tax incentive  credits for                                                               
activities in the National Petroleum Reserve, Alaska (NPRA).                                                                    
MR. BURNETT replied that he didn't know.                                                                                        
REPRESENTATIVE  ROKEBERG   responded  that   he  would   be  very                                                               
disturbed if  that was the case,  "given the fact that  we hardly                                                               
receive a dime from money expended on exploration in NPRA."                                                                     
5:20:33 PM                                                                                                                    
MR. GALVIN  pointed out  that the Kerr-McGee  wells are  on state                                                               
land; they're both offshore and onshore North Slope.                                                                            
REPRESENTATIVE  ROKEBERG asked,  "Do these  credits that  are now                                                               
currently existing apply to exploration in NPRA?"                                                                               
MR.  GALVIN responded  affirmatively  and said  that the  credits                                                               
apply to exploration throughout the  state.  He stated that there                                                               
are three wells in NPRA that have qualified for the tax credit.                                                                 
5:21:37 PM                                                                                                                    
CHAIR KOHRING  commented that he  is concerned that the  state is                                                               
giving a tax  credit and a financial break to  companies that the                                                               
state is not realizing a benefit from.                                                                                          
MR. GALVIN pointed  out that the state does receive  a benefit on                                                               
NPRA;  there  is   a  royalty  sharing.    He   said,  "When  the                                                               
legislation was first passed, there  were discussions with regard                                                               
to limiting it  to merely state lands, but the  decision was made                                                               
to  make it  statewide and  not to  distinguish between  the land                                                               
5:22:19 PM                                                                                                                    
REPRESENTATIVE  KERTTULA  asked  if  the  tax  credits  apply  to                                                               
federal leases.                                                                                                                 
MR. GALVIN replied  affirmatively, that it applies  whether it is                                                               
a   state,  federal,   or  private   lease.     In  response   to                                                               
Representative  Rokeberg,  he  said, "When  the  legislation  was                                                               
first written,  it was  not made specific  to state  lands, which                                                               
meant that it was applicable to all lands."                                                                                     
CHAIR KOHRING commented, "That one's a  bit of a loophole, if you                                                               
ask me."                                                                                                                        
5:23:19 PM                                                                                                                    
CHAIR  KOHRING   asked  if  there  has   been  any  environmental                                                               
opposition to [HB 71].                                                                                                          
MR. BURNETT responded, "We're not aware of any."                                                                                
MR.  GALVIN replied  that [the  Department  of Natural  Resources                                                               
(DNR)]  just released  a preliminary  Best  Interest Finding  two                                                               
days ago for  public comment.  He said that  DNR has been working                                                               
closely with  the local governments  and Native  organizations to                                                               
ensure  that  it  has  addressed  the  concerns  of  the  fishing                                                               
industry  as well  as protected  the sensitive  habitats.   While                                                               
offshore acreage  is available  in the lease  sale, he  noted, no                                                               
offshore drilling  would be allowed;  the offshore  acreage would                                                               
have  to   be  explored  and  developed   from  onshore  drilling                                                               
facilities using directional drilling techniques.                                                                               
5:24:23 PM                                                                                                                    
CHAIR KOHRING  noted that there was  a two mile boundary  off the                                                               
shoreline  on  the map  he  was  viewing.    He asked  what  this                                                               
boundary represented, and if it  meant that a company could drill                                                               
offshore directionally, potentially as far out as two miles.                                                                    
MR. GALVIN  answered that the boundary  on the map is  the three-                                                               
mile jurisdictional boundary  of the state.   He explained, "What                                                               
it means  is that, while  that state submerged land  is available                                                               
to the  lease sale,  the only development  that could  take place                                                               
...  would  be drilled  directionally  from  an onshore  drilling                                                               
CHAIR KOHRING asked what the potential is in Bristol Bay.                                                                       
MR. GALVIN deferred to Jim Cowan.                                                                                               
5:25:56 PM                                                                                                                    
JIM COWAN, Resource  Evaluation, Division of Oil  and Gas, Alaska                                                               
Department of Natural Resources  commented, "We really don't have                                                               
a  good  fix on  this  one.   There  has  been  no good  resource                                                               
assessment done ...  on the offshore part of this  basin.  But it                                                               
looks like it might be from  35 million to 200 million barrels of                                                               
oil and ... several tcf of gas."                                                                                                
MR. COWAN, in response to Chair Kohring, stated:                                                                                
     There  has  been  very  little  seismic  work  onshore;                                                                    
     there's  been a  lot of  seismic work  adjacent to  the                                                                    
     state  lands,  offshore  on   the  federal  OCS  [Outer                                                                    
     Continental  Shelf]  acreage.  ... There  have  however                                                                    
     been  about 13  wells drilled  along that  side of  the                                                                    
     peninsula dating  back to  as far  as 1903,  I believe,                                                                    
     but the  last one  was drilled in  1985. ...  They have                                                                    
     oil and  gas shows, almost  all of  them. ... We  had a                                                                    
     field  party out  there  for almost  a  month, ...  two                                                                    
     sessions last summer with the  Division of Oil and Gas,                                                                    
     and the  DGGS [Division  of Geological  and Geophysical                                                                    
     Surveys]  in Fairbanks.  ... Lot  of oil  seeps.   They                                                                    
     came  back ...  pretty encouraged  about the  reservoir                                                                    
     potential. ... There were field  parties out there this                                                                    
     summer from two major oil companies also.                                                                                  
CHAIR  KOHRING  commented,  "With such  limited  information  out                                                               
there and little or no seismic  work done, other than test wells,                                                               
...  I'm kind  of  curious as  to why  there's  such a  concerted                                                               
effort here to  proceed. ... It seems like we're  giving a lot of                                                               
emphasis to Bristol  Bay based on really nothing that  we have so                                                               
5:28:06 PM                                                                                                                    
MR. COWAN replied  that it's been dormant out there  for about 20                                                               
years.   He said,  "There was  some activity  out there  about 25                                                               
years  ago,  20 years  ago,  but  [due  to the]  moratorium,  the                                                               
concerns about  the fishing and  the environment, it's  just been                                                               
put aside until just most recently."                                                                                            
REPRESENTATIVE MCGUIRE commented:                                                                                               
     Part  of the  reason there  isn't any  seismic data  is                                                                    
     just  what  was eluded  to;  this  was a  controversial                                                                    
     issue 20 years  ago.  There was  extensive seismic that                                                                    
     was  done  and  a  lot of  interest,  and  frankly  the                                                                    
     stakeholders  could not  come to  an agreement  at that                                                                    
     point  in time.   And  so  ... you  had various  Native                                                                    
     groups,  you had  various fishing  groups, and  the oil                                                                    
     and  gas industry  infighting, and  at the  end of  the                                                                    
     day, the  moratorium went into  effect, and so  here we                                                                    
     are now.   I remember  last year before  this committee                                                                    
     there was a  lot of discussion about  new seismic being                                                                    
     done and frankly  it's very expensive.  But  I think we                                                                    
     all  know  from  the  information we've  been  able  to                                                                    
     gather that  this is a  phenomenal resource  waiting to                                                                    
REPRESENTATIVE MCGUIRE continued:                                                                                               
     Let    me   clarify    something    that   I'm    maybe                                                                    
     misunderstanding here.   This bill does  not extend the                                                                    
     three-year  date to  the NPRA  areas, does  it?   Isn't                                                                    
     this just  expanding the production tax  credit to 2010                                                                    
     of July  1 for those  competitive oil and  gas areawide                                                                    
     ... leases that are on  the Alaska Peninsula?  I'm just                                                                    
     concerned.   I've heard  a lot  of referencing  of NPRA                                                                    
     and things  like that, but I  think we kind of  need to                                                                    
     stick back  to what this  bill is  doing.  We  may have                                                                    
     regrets  about  the  way  that  the  bill  itself  came                                                                    
     together  in  years  past,  but  this  particular  bill                                                                    
     really is  simply a recognition  of the fact  that many                                                                    
     of the  folks that  are interested in  this competitive                                                                    
     oil  and  gas areawide  lease  sale  ... may  not  have                                                                    
     things in  place by 2007.   And so we're  talking about                                                                    
     expanding it out three years.                                                                                              
5:30:27 PM                                                                                                                    
MR. BURNETT replied that this was exactly the purpose of the                                                                    
bill: to allow a very specific area to have an extension because                                                                
it has not been leased yet.                                                                                                     
CHAIR KOHRING asked why there is a timeline at all.                                                                             
MR. BURNETT responded that this was a policy decision.                                                                          
REPRESENTATIVE GARDNER commented that a time limit is important                                                                 
because otherwise it's not an incentive.                                                                                        
5:31:10 PM                                                                                                                    
REPRESENTATIVE  ROKEBERG  stated that  he  would  like to  see  a                                                               
report on the  initial bill's impact on  exploration activity and                                                               
investments, and  on those credits  that have been  granted under                                                               
this legislation.  He said:                                                                                                     
     While I agree with  Representative McGuire that we need                                                                    
     to focus ...  and I support the bill itself,  I am most                                                                    
     disturbed because  we have this  before us,  that there                                                                    
     was  controversy about  the language  and I  find it  a                                                                    
     little  bit  disturbing  ...  that  the  administration                                                                    
     would interpret language  ... without legislative input                                                                    
     to   apply   to   federal   leases,   particularly   in                                                                    
     consideration  of   the  fact  that  we   have  limited                                                                    
     revenues  from  those  area.   In  other  words,  we're                                                                    
     subsidizing; we're  giving out more money  than we even                                                                    
     take in. ... I'm not  going to support moving this bill                                                                    
     until  we get  some answers  on  this and  that can  be                                                                    
5:32:53 PM                                                                                                                    
CHAIR KOHRING declared:                                                                                                         
     I pledge  we will follow up  on that; we will  get some                                                                    
     information from  DNR including a written  report as to                                                                    
     the effect  of [Senate  Bill 185] and  so forth,  and a                                                                    
     clarification as to why they  interpret the law to read                                                                    
     that  we can  expand this  to places  like NPRA,  which                                                                    
     really wasn't our intent.                                                                                                  
CHAIR KOHRING opened the meeting to public testimony.  [No one                                                                  
wished to testify.  HB 71 was held over.]                                                                                       

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