Legislature(2005 - 2006)CAPITOL 124
03/15/2005 05:00 PM OIL & GAS
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* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 71-AK PENINSULA OIL & GAS LEASE SALE; TAXES 6:01:33 PM CHAIR KOHRING announced that the final 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." [Before the committee was CSHB 71(W&M).] 6:02:06 PM MARK MYERS, Director, Central Office, Division of Oil and Gas, Alaska Department of Natural Resources (DNR), presented HB 71 to the committee. He explained: [The bill would] extend a tax credit for exploration wells that was approved under AS 43.55.025 for a period of time, specifically to the Alaska Peninsula area, and it would be the onshore and state waters portion of the Alaska Peninsula only. So it extends it from the 2007 sunset of this current tax credit to 2010. And essentially what the bill does is it allows a 20-40 percent tax credit for exploration wells. If they're less than 25 miles away from an oil and gas unit that existed at the time of the bill passage ... and three miles away from another well or more, they would get a 20 percent credit against severance taxes. ... If it's three miles away from other wells and more than 25 miles away from another oil and gas unit, [it would] get up to a 40 percent credit. Exploration seismic, shot outside of an existing unit area, would be eligible for a 40 percent tax credit. So those are the conditions currently under AS 43.55.025, and the thought is to extend those specifically for a limited period of time for the Alaska Peninsula only ... up through 2010. MR. MYERS continued: We believe these credits are important to the Alaska Peninsula because we're starting out with a basin with no infrastructure, and basically no modern well data or seismic data. So this credit would be a significant encouragement, and [by] having it in place before the Alaska Peninsula lease sale, we believe, oil companies would bid increased amount of dollars at the sale. ... There really is no modern data.... So it's really important for exploration success out here to get modern seismic and modern well data shot. So this credit would greatly encourage that by limiting it to a five year period after the sale; they would have to ... do the exploration work early in the primary terms of the leases, and we believe that would accelerate the exploration process. 6:05:01 PM MR. MYERS noted that if the bill were not passed, the credit would be of very little use; by the time a company acquired a lease and set a program up, it would basically have one season before the credit ran out in 2007. REPRESENTATIVE KERTTULA asked if a company could actually end up with an 80 percent credit. MR. MYERS responded that the credits are not additive and would be limited to a maximum of 40 percent credit. 6:07:21 PM REPRESENTATIVE GARDNER asked what the mechanism is by which the state receives data from exploration companies. MR. MYERS replied: One of the purposes of the legislation was recognizing that this particular legislation applied on state, federal, and Native lands, and there's two components for getting the data. One is ..., under current law, the state, for management purposes, only gets the data on state lands. And, for instance, the data on [National Petroleum Reserve-Alaska (NPRA)] it doesn't get until those wells are publicly released, which is normally after 25 months.... So we would get the data for internal use. On seismic data, either state or ... federal land, basically it's never released in the onshore basins. In the federal onshore it can be 25- 50 years before seismic data is released. So two components: one is the Division of Oil and Gas ... would receive the data if the credit is accepted. And so we would have that for internal use. And again, generally, if it was on state land already, through our lease rights, we would receive it anyway. But the second component is then that data has to be publicly released. And right now seismic data would not be released under normal purposes. So basically the applicant would have to provide the data to the state, and after 10 [years] ... they would have to publicly be able to release it, similar to [how] well log data is released now. The seismic data is never released, but under this program, if you accepted the credit, you'd have to release it no matter whose land it was on, whether it be private, state, or federal land. MR. MYERS continued: [Regarding] well data: ... under state law almost all wells are released after 25 months, however there are exceptions where extended confidentiality is granted. So even if that extended confidentiality was granted, it would still require the well to be released after 10 years. So there's additional public benefit. And so the other benefit is: the state itself, if the well is on private land or federal land, generally does not have the right to see the data until that 25 months would be expended, and then we'd be able to see the data immediately. And for instance, some of the wells have been granted credit in the NPRA; ... DNR has already received that data, and then in 10 years the well data will be automatically released through AOGCC. 6:10:27 PM DAN DICKINSON, Director, Central Office, Tax Division, Department of Revenue, in response to Representative Kerttula, stated that the oil companies would be limited to a maximum of a 40 percent credit. He pointed out that the 40 percent credit still exists in paragraphs 1 and 2 of Section 1(a). He explained: If you have an exploration well, there's certain costs associated with that and you can get a 40 percent credit for those. If you do seismic work, you can also get a 40 percent credit for that seismic work. [But] you'll never have an expense that both qualifies as a seismic expense and qualifies as well work. 6:13:34 PM CHAIR KOHRING commented: One of the concerns we talked about last month ... was what we thought to be a loophole in legislation from two years ago: SB 281, [a] tax credit bill. We were concerned that perhaps that bill had unintended consequences in the sense that it was comprehensive extending to private lands and to the NPRA and other federal lands. 6:14:12 PM REPRESENTATIVE ROKEBERG moved to adopt Amendment 1, labeled 24- GH1040\G.2, Chenoweth, 3/16/05, which read: Page 1, line 10, following "gas only lease,": Insert "if the oil and gas lease or gas only lease was entered into by the state under AS 38.05.131 - 38.05.134, 38.05.177, or 38.05.180," REPRESENTATIVE SAMUELS objected for discussion purposes. REPRESENTATIVE ROKEBERG explained that the amendment would restrict the credits granted in current law and in the HB 71, and exclude private and federal lands to qualify for the credit. He commented that he was willing to work on the bill and the amendment with the administration and with the House Resources Standing Committee. He noted that AS 38.05.131-38.05.134 are the provisions for exploration licensing, AS 38.05.177 "is nonconventional gas leases," and AS 38.05.180 are the oil and gas leasing statutes. "The way this amendment has been drafted, it merely states that ... it's only on state lands that these credits are allowable, thereby excluding ... private and federal lands," he said. 6:19:41 PM REPRESENTATIVE ROKEBERG continued: [The amendment] would have an immediate effective date but it [would] only come into play for those applications for credits that occurred after the effective date. ... So this would not affect any activities currently underway that would qualify for the credits on private or federal lands ... so everything that's done and been committed qualifies. This would only apply to a two-year window remaining through July 1, , exclusive of Bristol Bay area or the Alaska Peninsula, and then apply only then to the Bristol Bay area. Frankly ... I think it might be up to the next committee of referral for the discussion on this; whether we want to even include that, whether that's appropriate. I'm not sure exactly how much, for example, privately held subsurface estate exists in the Alaska Peninsula right now. 6:20:58 PM REPRESENTATIVE GARDNER commented: I'm trying to understand, since we know now that the previous committee understood that the tax benefit was going to apply to federal and private lands as well, ... what the benefit would have been, why we would have done that. Obviously if we get the seismic data, that's one benefit to the state that they wouldn't otherwise have. If there's development that results in jobs, that's another benefit. ... Is there any other reason? REPRESENTATIVE SAMUELS answered that the state would still receive a royalty from development on private land. He removed his objection to the amendment. 6:22:13 PM MR. DICKINSON clarified: I can't speak for the committee, but I can certainly speak for the reasons why we included state, federal, and private lands. ... It's incorrect to think that ... automatically we'll get more revenue from state land than we will from nonstate land. The severance tax will apply to all production, whether it is from state land, federal land, or private land. In fact, if it's on private land, the severance tax will apply to 100 percent of the production, whereas if it is on state or federal land, we do not tax either our own royalty share or the federal royalty share. So the real determinant on how much a severance tax is going to be ... is going to be the Economic Limit Factor [ELF]. ... [If, for example,] we were to be drilling in [Arctic National Wildlife Refuge (ANWR)] and you found a very large field there, you would get a lot of revenue because you might have a very high [ELF]. Compare that to a ... well drilled in the Cook Inlet where the [ELF] is zero, so you get zero severance tax, even though it was on state land. Again, on income tax, we get income tax from the increased production that flows to the companies that drill, and again, if it's on private land, we will be taxing both the landowner and the working interest owners. Whereas if it's on state land, we don't tax ourselves, [and] on federal land, we don't tax the federal government. MR. DICKSON continued: [On] private land obviously we don't get no royalty share. On federal land it can be highly variable.... Significant royalties could be flowing to the state even though the drilling was on federal land. And finally, property taxes: ... assets that are employed in the use of oil and gas, whether they are on state, federal, or private land, all the property tax will flow either to the state or to the borough in which those assets are located. So for the four ... [major taxes on oil and gas], none of them can you say with certainty [that the state would] get more if it's on state land and less if it's on federal or private land. 6:24:55 PM REPRESENTATIVE ROKEBERG asked what would happen if the subsurface estate was owned by a Native corporation or a private holder. MR. DICKINSON replied, "The severance tax is on any production in the state less that owned by the federal or state governments." He confirmed that a severance tax could be charged on a private subsurface estate, but there would be no royalties. REPRESENTATIVE ROKEBERG asked: What would be the impact of ... the current legislation that expires in  if ... the ANWR resolution were to pass to the Congress this year and be implemented in the federal  budget, which would put out the bonus lease sale ... before July 1, , thereby creating bonuses ... of $2.6 billion to the state? What would be the impact of ... this credit if those bonuses were to come before July 1, 2007? 6:26:41 PM MR. DICKINSON deferred to Mr. Meyers. He commented, "I don't know, in the current budget bill, whether it's still the 90:10 split and whether that would apply to the bonus bill." REPRESENTATIVE ROKEBERG replied that it is a 50:50 split. 6:27:23 PM MR. MYERS responded: Because the expectations [for ANWR] are high, I'm not sure that extending this credit one way or the other would make a lot of difference. [In] an area like the Alaska Peninsula, where it doesn't have infrastructure [and] it's gas-prone, certainly the economic incentives and the bidding levels are going to be significantly lower. ... So we're looking at basins with very different prospectivity, and again I don't think extending this credit into ANWR would significantly change companies' bidding, because they would bid a lot of money for it anyway. ... If you look historically on the North Slope, much of the revenue stream coming from the royalties is typically higher than that for the severance tax component. ... Generally the federal government has offered incentives where they've need to on their lands as well. 6:30:18 PM REPRESENTATIVE SAMUELS commented that to him the point of the amendment is to "make sure we don't give away the farm at ANWR." REPRESENTATIVE ROKEBERG noted the importance of making sure that the intent of the bill is completely clear. REPRESENTATIVE KERTTULA commented that she would like to go over the grammar of the bill. 6:33:14 PM There being no objection, Amendment 1 was adopted. 6:33:22 PM REPRESENTATIVE DAHLSTROM moved to report CSHB 71(W&M) as amended out of committee with individual recommendations and the accompanying fiscal notes. There being no objection, CSHB 71(O&G) was reported from the House Special Committee on Oil and Gas.