Legislature(2005 - 2006)CAPITOL 124

03/15/2005 05:00 PM OIL & GAS

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved Out of Committee
Moved Out of Committee
Moved CSHB 71(O&G) Out of Committee
Bills 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                                                                    
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                                                               
     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, [2007], 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                                                                    
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                                                                    
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                                                                    
6:24:55 PM                                                                                                                    
REPRESENTATIVE ROKEBERG asked what would happen if the                                                                          
subsurface estate was owned by a Native corporation or a private                                                                
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                                                                   
REPRESENTATIVE ROKEBERG asked:                                                                                                  
     What   would  be   the  impact   of  ...   the  current                                                                    
     legislation  that expires  in  [2007] if  ... the  ANWR                                                                    
     resolution were to  pass to the Congress  this year and                                                                    
     be  implemented in  the  federal  [2006] budget,  which                                                                    
     would put out  the bonus lease sale ...  before July 1,                                                                    
     [2007], 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,                                                                    
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                                                                    
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                                                               

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