Legislature(2009 - 2010)BARNES 124
03/15/2010 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB229 | |
| HB280 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 229 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 280 | TELECONFERENCED | |
HB 229-GAS EXPLORATION\DEVELOPMENT TAX CREDIT
1:03:02 PM
CO-CHAIR JOHNSON announced that the first order of business is
HOUSE BILL NO. 229, "An Act amending and extending the
exploration and development incentive tax credit under the
Alaska Net Income Tax Act for operators and working interest
owners directly engaged in the exploration for and development
of gas for delivery and sale from a lease or property in the
state; providing for an effective date by amending the effective
date for sec. 2, ch. 61, SLA 2003; and providing for an
effective date."
CO-CHAIR NEUMAN moved to adopt the proposed committee substitute
(CS) for HB 229, Version 26-LS0900\E, Bullock, 2/18/10, as a
work draft.
CO-CHAIR JOHNSON objected for discussion purposes.
1:03:58 PM
REPRESENTATIVE MIKE CHENAULT, Alaska State Legislature, prime
sponsor of HB 229, paraphrased from the following written
sponsor statement [original punctuation provided]:
House Bill 229 amends and extends the exploration and
development incentive tax credit that was originally
enacted in the 23rd legislature in 2003 as [House
Bill] 61. This tax credit continues to apply under
the Alaska Net Income Tax Act for operators and
working interest owners directly engaged in the
exploration for and development of natural gas
primarily in the Cook Inlet area.
To more strongly encourage companies to invest
additional capital in exploring for and developing new
natural gas reserves, this legislation makes the
following changes to current law:
1. Increasing the amount of the credit from 10% to
25% of the amount of qualified capital investment
and qualified services spending.
2. Removes the 50% limitation on the amount of
credits that can apply in a single year
increasing the "time-value of money" for the
credits.
3. Removes the "successful efforts" requirement that
disallows the credit for wells that are drilled,
with all the same costs, but end up being non-
productive.
4. Clarifies that the credits can be taken on a
current tax return, on a timely filed tax return
or on a timely filed tax return for the year
immediately following the year the qualified
capital investment is made.
5. Clarifies that the credits can be applied to a
gas reserve regardless of whether or not there
has been previous gas production in the area.
6. Clarifies that the credits do not apply to North
Slope gas that is brought into Southcentral.
7. Extends the sunset date of the investment tax
credit from January 1, 2013 to January 1, 2020.
This legislation makes no changes to definitions of
qualified capital investment or qualified services.
Annual natural gas production and supply in the Cook
Inlet area have been declining for a number of years.
During the same time, demand has been increasing
steadily. Therefore, a sharp increase in drilling to
find new reserves is drastically needed. The original
Investment Tax Credit enacted in 2003, while modestly
successful in stimulating new drilling, needs to be
made a much more effective incentive to developers to
increase capital spending in a large manner. These
changes will go a long way to achieving that goal.
1:06:42 PM
REPRESENTATIVE P. WILSON understood that HB 229 is needed to
increase exploration, but asked why it is necessary to continue
giving these tax breaks to the producers once they have found
the new gas.
REPRESENTATIVE CHENAULT responded he does not believe there are
any big pockets of gas left in Cook Inlet. Most of the
remaining gas is in small pockets that are harder to find and
require lateral drilling or jack-up rigs. This gas is expensive
to find, and many more dry holes are drilled than producing
holes. He said the bill is intended to encourage exploration in
areas that have not yet been drilled and to look at newer
drilling technology for more drilling in the formations
currently producing gas.
1:09:54 PM
REPRESENTATIVE P. WILSON asked how much credit would be given
under HB 229.
REPRESENTATIVE CHENAULT replied the bill would change the 10
percent tax credit to a 25 percent tax credit.
1:11:31 PM
REPRESENTATIVE SEATON recalled that in the past, testimony has
indicated that the lack of exploration in the Cook Inlet is
because the Regulatory Commission of Alaska (RCA) has kept the
price of gas so low that it is unprofitable to explore further.
He understood that recent gas finds were in conjunction with oil
exploration.
REPRESENTATIVE CHENAULT replied that while he could address
this, it would be better to have the Cook Inlet producers to
speak the question.
1:13:15 PM
REPRESENTATIVE SEATON understood this proposed tax credit would
be written off against corporate tax instead of production tax.
REPRESENTATIVE CHENAULT answered yes, capital investment,
qualified services.
REPRESENTATIVE SEATON, in regard to page 2, lines 4-9, surmised
that qualified services would include any expenditure, as well
as the drilling cost, that is made on any gas reserve.
REPRESENTATIVE CHENAULT responded yes.
1:15:16 PM
REPRESENTATIVE SEATON noted that in the Cook Inlet basin the
production tax on oil is zero and the gas tax is extremely low.
He offered his belief that there are exploration tax credits in
addition to the zero or low tax rates. He said it seems that
absorbing a 25 percent tax credit for qualified services is
making a subsidy investment in the companies instead of trying
to stimulate a certain behavior, so he is trying to determine
how all of these inter-relate.
REPRESENTATIVE CHENAULT replied the intention is to incentivize
more drilling. The current tax credit system does help, but
drilling is not happening in Cook Inlet. He allowed that one
reason why is the low price for the gas. He related that other
people have stated it is hard to get capital investment dollars
when competing worldwide for money because the basin is
expensive to drill.
1:17:56 PM
REPRESENTATIVE GUTTENBERG noted that House Bill 61, the bill
that HB 229 is amending, called for a report on the effect of
exploration and development tax credit no later than 2008. He
asked whether this report was completed.
REPRESENTATIVE CHENAULT answered he does not know and deferred
to the administration.
REPRESENTATIVE GUTTENBERG said he is asking the question because
he is wondering whether the report is the impetus for increasing
the tax credit.
MARCIA DAVIS, Deputy Commissioner, Office of the Commissioner,
Department of Revenue, said she believes the report has been
done and will have it distributed to the members.
1:20:42 PM
REPRESENTATIVE GUTTENBERG inquired what qualifies as qualified
services, qualified costs, and capital investments.
MS. DAVIS responded that HB 229 does not modify qualified
services. According to statute, qualified services are
expenditures for labor, seismic, and other services that are
directly applicable to the qualified investment, and qualified
investment is addressed by HB 229. However, she is puzzled
because it has a subsection that excludes lease operating
expenditures. Clearly, the expenses that should be covered are
the labor services involved with leasing and operating a drill
rig, building the infrastructure, such as roads, docks, port
facilities, and bringing in and operating maintenance equipment
and facilities, maintenance camps, and so forth. She deferred
to Robynn Wilson as to whether the Department of Revenue has
interpreted a definition of lease operating expenditure under
existing law.
ROBYNN WILSON, Income Audit Manager, Tax Division-Income Audit
Group, Department of Revenue, stated she does not believe the
definition of lease operating expenditure has yet been
interpreted by the department.
1:22:28 PM
MS. DAVIS said her reason for asking Ms. Robynn Wilson this
question is that lease operating expenses are generally those
that are charged back to owners and are ordinary and typical.
However, this credit provision is targeted at new development.
She explained that development happens in phases: the seismic
phase involves labor and possibly some qualified capital
expenditure, both of which would be covered; if prospects are
discovered, the next phase is the exploration phase which
involves costs for exploratory wells, labor, waste disposal, and
transport where there are not roads, all of which would be
covered; the development phase is the major construction phase
where the gathering centers, compressors, and so forth are built
for operating the facility, but production of oil or gas has not
yet been produced for sale. The qualified expenditures in this
buildup are what would be targeted by HB 229. Once production
begins, labor and capital investments for maintenance and so
forth fall under what is typically called operating expenses,
and she believes that that is what this exclusion is intended to
cover.
1:24:51 PM
REPRESENTATIVE GUTTENBERG inquired whether the state has access
to the seismic work once a well is abandoned, given that the
seismic work is a qualified expense.
MS. DAVIS replied that since these are state oil and gas leases,
she is confident the State of Alaska requires the sharing of the
seismic information. She deferred to Mr. Kevin Banks for
confirmation of her answer.
KEVIN BANKS, Director, Division of Oil & Gas, Department of
Natural Resources, said Ms. Davis is correct. When seismic is
shot over state land, whether it is under lease or not, the
State of Alaska acquires the seismic data. The state does not
receive the information for seismic that is shot over private or
federal land.
MS. DAVIS added that an exploration incentive credit is built
into the production tax. Production tax is owed on all land
within state boundaries, so private, state, and federal land are
included. A consequence of accepting that credit is that the
seismic information must be shared with the State of Alaska.
However, that would not be the structure under HB 229.
1:27:03 PM
REPRESENTATIVE SEATON asked whether someone previously claiming
a credit can also receive a credit for production and operating
expenses under the provision on page 2, lines 6-9, Version E.
MS. DAVIS deferred an answer until she receives a copy of
Version E.
1:30:02 PM
REPRESENTATIVE SEATON reiterated his earlier question regarding
the interaction of the exploration tax credits in Cook Inlet and
this qualified service tax credit against corporate income tax.
MS. DAVIS surmised Representative Seaton is asking how the gas
exploration and development tax credit under AS 43.20.043
interfaces with the exploration incentive credit.
REPRESENTATIVE SEATON responded yes, as well as any other
credits or deductions that would be allowed.
MS. DAVIS deferred an answer until she has talked with Ms.
Robynn Wilson because there are two other bills currently in the
legislature that propose additional Cook Inlet-targeted tax
credits against the corporate income tax. On first blush, the
credit under HB 229 would be dominant and applied before any
other credits in this chapter. This credit removes the 50
percent cap, so presumably if the credits exceeded the corporate
income tax there would be no interaction with any other
corporate income tax credit. To the extent there is any
remaining corporate income tax liability, the corporate income
tax payer would then drop down the list to the next credit
available and apply the amount of that credit against those
income taxes. She presumed the expenditure could only be used
once should it also qualify elsewhere, but she would like to
verify that with Ms. Robynn Wilson.
1:33:31 PM
REPRESENTATIVE P. WILSON inquired whether it is a good
probability that the producer would not have to pay any taxes.
MS. DAVIS replied she must answer hypothetically because each
taxpayer's information is confidential. She said most taxpayers
in Cook Inlet are smaller companies targeting exploration plays
that do not have much ongoing production elsewhere in the state.
These companies may not have a significant amount of corporate
income tax, so the amount of expenditures incurred on the front
end associated with seismic, exploration, and development would
be expected to swamp their corporate income tax liability.
However, these companies are relatively new players and not
currently contributing to the state general fund through their
corporate income tax. For large producers with ongoing
production elsewhere in the state, the proposed Cook Inlet
credits may not significantly dampen their overall income tax.
Thus, it would depend on the entity and would range from wiping
out the corporate income tax altogether to dampening it
somewhat.
1:36:48 PM
REPRESENTATIVE P. WILSON asked whether HB 229 is enough of an
incentive for companies that are not now exploring to start.
MS. DAVIS answered that several factors affect investment and
the bill goes as far as it can to ensure that corporate income
tax is not a disincentive and provides some financial incentive
to incur costs and move forward. However, the bill cannot
affect factors such as market prices.
1:38:06 PM
MS. ROBYNN WILSON, in response to Representative Edgmon,
explained that the Department of Revenue calculates the taxable
corporate income on a combined basis that includes the income
for the whole corporate group. The first question is what
amount of the group's activity happened in Alaska versus
everywhere else; so, in effect, the state taxes a slice of the
pie. Of that slice, it is a graduated rate with a top marginal
rate of 9.4 percent.
1:40:07 PM
CARRI LOCKHART, Production Manager, Marathon Oil Corporation,
spoke in support of HB 229 by paraphrasing from the following
written testimony [original punctuation provided]:
By way of background, Marathon Oil Company's Alaska
operations are focused on natural gas production
operations, limited to Cook Inlet. In 2009, our
natural gas sales from Alaska averaged 87 mmcf/d
[million cubic feet per day]. We sold to essentially
every natural gas market available including the local
utilities - Enstar and Chugach Electric, Tesoro, and
the Department of Defense. We also provided natural
gas to the ConocoPhillips/Marathon LNG plant.
Marathon has been in business in AK for over 55 years
and we remain committed to serving the natural gas
needs of SouthCentral AK through our various
contractual commitments.
As you are aware, in 2003 the Legislature passed, and
the Governor signed several bills directed at
providing incentives for new exploration and
development activities. Marathon was particularly
interested in House Bill 61, which was intended to
incentivize the exploration and development of natural
gas reserves in the Cook Inlet. The bill under
consideration by this committee, HB 229, will merely
strengthen the incentives provided for by the earlier
bill.
One might ask about the need to provide incentives for
natural gas development in the Cook Inlet. The answer
to this question is found by considering the long-term
decline in natural gas reserves and deliverability
which the Cook Inlet has experienced. What must be
addressed is whether there is currently sufficient
exploration and development activity to address such
decline in reserves and deliverability, and not simply
to ask whether the Cook Inlet is running out of gas.
At the current minimal level of Cook Inlet activity it
is unlikely that Cook Inlet reserve additions will
replace annual production on an ongoing long-term
basis. As such, natural gas reserves and
deliverability are at risk for continued decline in
the Cook Inlet, resulting in the exposure to unmet
utility needs in the future.
1:42:28 PM
The lack of Cook Inlet activity (especially
exploration) is an artifact of the historic oversupply
of natural gas which kept prices well below lower-48
indexed prices, creating a lack of incentive for
additional drilling. Furthermore the regulatory
processes and deterioration in market availability
have added to project uncertainty. The project
economics and market uncertainties have made it
difficult for projects to complete effectively for
finite funding.
So how will HB 229 help?
As we are all painfully aware, Alaskan project
economics are not considered solely on their absolute
merit. They are also scrutinized on a relative scale
in comparison to other worldwide opportunities in
which companies such as Marathon may invest. The
intent of HB 229 is to help level the playing field
between Alaskan projects and other investment
opportunities around the world.
HB 229 is intended to continue to provide an incentive
to oil and gas exploration and development activities
through an investment tax credit. You should have
before you the committee substitute for HB 229
(version E). Since this is the first hearing for HB
229, let me walk through the main points of this new
legislation: This legislation makes six significant
changes to current law:
1:43:57 PM
CO-CHAIR JOHNSON removed his objection to adopting the proposed
committee substitute as the work draft. There being no further
objection, Version E was before the committee.
MS. LOCKHART continued her testimony:
1. Section 1 increases the amount of the credit
from 10% to 25% of the amount of qualified
capital investment and qualified services
spending as well as clarifying that the
credits can apply to costs incurred for a gas
reserve for which the taxpayer previously
elected to claim a credit.
2. Section 2 adjusts the dates for when qualified
expenditures must be made to qualify for the
old 10% and new 25% credits. It also changes
the term "reserves" to "wells" to clarify that
"wells" produce gas whereas "reserves" are
what is being produced.
3. Section 3 removes the 50% limitation on the
amount of credits that can apply in a single
year, increasing the time value of money for
the credits.
4. Section 4 clarifies that the credits do not
apply to North Slope gas that is brought into
Southcentral.
5. Section 5 removes the "successful efforts"
requirement that developers must find and
deliver new gas resources to market to qualify
for the credit. It also clarifies that the
credits can be applied to a gas reserve
regardless of whether or not there has been
previous gas production in the area.
6. Section 6 clarifies that the credits can be
taken on a current tax return, on a timely
filed tax return or on a timely filed tax
return for the year immediately following the
year the qualified capital investment is made.
7. Section 7 adjusts the date the credits expire
from 2017 to 2024.
8. Section 8 extends the sunset date of the
investment tax credit from January 1, 2013 to
January 1, 2020.
9. Section 9 is gives this legislation an
immediate effective date.
In summary, Marathon Oil Company believes HB 229 is
one part of the equation to enhance Cook Inlet
exploration and development activities, attempting to
create more certainty in the overall natural gas
deliverability in Cook Inlet. I would also add that
timing is important. It takes multiple years to
properly plan and execute drilling activity in Cook
Inlet, which is necessary to meet future overall
deliverability needs in SouthCentral AK.
MS. LOCKHART added that to qualify for this investment credit,
the producer must make capital investments, which have value to
the State of Alaska through the addition of jobs and other
supporting services and activities.
1:47:38 PM
MS. LOCKHART, in response to Representative Seaton, explained
that when companies make investments such as drilling a well,
the cost of labor to drill that well is tied up in the whole
package of economics which she believes would be invested. The
everyday operations year after year, defined as operating
expenses under the original House Bill 61, would be excluded
under HB 229. It is the one time of drilling the wells and
developing the product that are the investments that would
qualify for these credits.
1:49:21 PM
REPRESENTATIVE SEATON surmised that under the expansion to
existing fields provided by HB 229, the qualified services would
exclude maintenance and operation costs, and the replacement of
pipelines.
MS. LOCKHART responded that is her understanding. To qualify,
an investment would have to be tied to drilling additional wells
looking for new reserves. It would not be for replacing a line
or piece of equipment in an existing area.
1:50:43 PM
REPRESENTATIVE SEATON referenced the provision on page 3,
Section 3, that would eliminate the 50 percent taxpayer
liability and inquired whether this has been a prior issue for
Marathon Oil Corporation.
MS. LOCKHART deferred to Ms. Nicole Busey.
NICOLE BUSEY, Tax Attorney, Marathon Oil Corporation, replied
no, it has not been an issue for Marathon. She said she
believes the change would be in line with other changes that are
being proposed to other taxes related to production tax. In
response to Co-Chair Johnson, she said she is not familiar with
the production investment tax credit, but she thinks there is
not this present 50 percent limitation; or, if there is, that
there is some current legislation proposed to remove that 50
percent limitation.
CO-CHAIR JOHNSON understood this elimination would be to
maintain consistency with other bills working their way through
the system.
MS. BUSEY answered yes.
1:52:38 PM
REPRESENTATIVE SEATON asked whether Ms. Busey is aware of any
companies that have hit the 50 percent limit.
MS. BUSEY responded she does not know.
REPRESENTATIVE SEATON, in regard to Ms. Lockhart's statement
about helping with long-term deliverability, requested a
definition of long-term.
MS. LOCKHART replied she defines long-term as sustainable and
being that when her children are grown they will have stability
in where there electricity and natural gas are coming from for
their homes. Based upon the production declines in Cook Inlet,
she said she does not believe the activity in Cook Inlet will
sustain the current deliverability needs for more than the next
couple of years.
1:54:29 PM
REPRESENTATIVE GUTTENBERG inquired how an increase to 25 percent
in the tax credit would play out for Marathon Oil Corporation.
MS. LOCKHART answered this is just one piece of the overall
economic and risks that Marathon looks at when deciding to make
capital investments. Projects in Alaska must be competitive at
the corporate level against projects in other states or the
world, so she cannot state that HB 229 would definitely result
in more exploration rigs next year; however, it would increase
the odds of getting exploration and development projects funded.
More importantly, it may enable companies that have yet to
entertain or commit to investment in Alaska to explore at a rate
of return that is needed to start the project. She sees this
as one enabler within a whole package that is reviewed as a
company goes through its planning process.
1:56:37 PM
MR. BANKS, in response to Co-Chair Johnson, stated that new
producers will be companies like Armstrong Alaska, a company
that is currently developing the North Fork gas field on the
lower end of the Kenai Peninsula. Armstrong Alaska is also
building a gasline to Anchor Point and ENSTAR is extending its
gasline from Ninilchik to Anchor Point, so that infrastructure
will provide incentive to others that are interested in
developing resources in that particular area. There is some
potential that Escopeta Oil & Gas will deliver on its promise to
bring in a jack-up rig this year to begin drilling its Kitchen
Lights Unit in Cook Inlet. He agreed with the bill sponsor that
smaller gas fields will be the wave of the future. Of the
current Cook Inlet players, Marathon is the most active
developer and is in the process of exploration developments. He
predicted that gas will be seen in Cook Inlet where it has not
been seen before. A tax credit like this would reduce at least
one of the high costs faced by these new producers.
1:59:49 PM
MR. BANKS, in response to another question from Co-Chair
Johnson, said it is anticipated that new development of gas
supplies in the Cook Inlet will be more costly than historical
gas supplies. One of those costs represents the various kinds
of income taxes that the producers have to pay, and HB 229 would
help reduce that particular cost and contribute to more
potential development. In further response, he said there are
lease sales proposed for May [2010] in the Cook Inlet, but it is
hard to say whether enactment of HB 229 would entice companies
to bid on those leases. Much of the best acreage in the Cook
Inlet is already under lease and some of the other acreage
belongs to the federal government. His prediction is that a
company would find a prospect slightly more attractive and would
bid on it should HB 229 be passed, but he does not think that
would be a very good indicator of whether this particular credit
was working or not.
CO-CHAIR JOHNSON said he is looking for anything that can be
done to entice companies to come to Alaska.
2:02:01 PM
REPRESENTATIVE GUTTENBERG reiterated his question about the
report that was due out in 2008.
MR. BANKS answered he has not seen the report.
MS. LOCKHART, in regard to whether HB 229 would attract more
development, said she thinks there is some incentive for new
producers as well as existing players. Many of the current
reservoirs are very old legacy reservoirs and Marathon is
constantly stepping out to try to understand the boundaries of
these reservoirs. She pointed out that this is a risked
business; for example, even a project in development mode can
end up being a dry hole because the sand packages being targeted
in many of the Cook Inlet reservoirs are discontinuous and a
step-over can miss the sand completely. This investment tax
credit will help enable projects that may be viewed as very
borderline as companies continue reaching out to determine the
extent of current reservoirs.
2:03:50 PM
REPRESENTATIVE P. WILSON understood that the average for oil
exploratory wells is one successful well out of six. She asked
what the average is for gas.
MS. LOCKHART responded there is not one magical number as it
varies by area. In exploration, the number is more like one
successful well in ten, and in development the odds are better.
MR. BANKS added that most of the obvious structures in the Cook
Inlet region have been drilled, and now the hunt is on for the
much more ephemeral seismic kinds of stratigraphic traps that
are more difficult to locate. The provisions proposed by HB 229
would allow companies with legacy fields, like Marathon, to look
for gas within their own units because gas potential within
those existing fields can still be developed with more drilling.
2:06:58 PM
CO-CHAIR NEUMAN, in regard to risk assessment, inquired where
Marathon places Cook Inlet compared to the rest of Alaska.
MS. LOCKHART replied Marathon is only active in Cook Inlet and
has not looked beyond that area. In further response, she said
compared to other projects across Marathon's portfolio, Alaska
is a risky place. From a subsurface standard, Alaska is
probably more risky than some, but maybe less than others.
Other risks come into play in Alaska that are not necessarily
faced in other areas, such as the regulatory risk and, in
particular, the marketing risk. When looking at the entire
package of risk, Cook Inlet and Alaska in its entirety are
fairly risky places to do business.
2:09:03 PM
CO-CHAIR NEUMAN asked whether Marathon utilizes the oil and gas
information put out in reports by the Division of Oil & Gas.
MS. LOCKHART answered the information used by the Department of
Natural Resources is the same information that Marathon has
access to. Because producers own the information they have
access to more information than does the department. She said
she can confidently say that Marathon knows the Cook Inlet area
better than anyone else since it has operated there for over 50
years. The reports can be complementary to companies because
they are an educational tool that helps people outside the
industry understand the potential that is out there. One thing
the report does not do is assess the economics, and that is
where everyone must work together to assess what will work and
what will not. This is where this bill can come into play and
help enable some of those targets that are outlined in that
report. Whether the report is accurate is unknown until
companies go out and spend money to test the concepts.
2:11:07 PM
REPRESENTATIVE SEATON, in regard to [the possibility that
Marathon's liquefied natural gas (LNG) export license for Cook
Inlet gas may not be renewed], inquired how much gas production
would be left available for Cook Inlet and how would that amount
of gas be absorbed.
MS. LOCKHART responded the LNG plant is a market outlet, so
development could proceed in the event of a wild discovery
because there would be a market for that gas. Additionally, the
LNG plant is very important to the current overall
deliverability in Cook Inlet because storage is not readily
available to all players. Without storage, a shutdown of the
LNG plant in 2011 would have implications on the wells due to
the large difference between summer demand and winter demand.
Without a home for the gas, the wells would have to be
curtailed. Many of the wells in Cook Inlet are tied to water;
when they are curtailed the water rushes in and the gas chokes
out, making the gas unavailable for cold winter days.
Therefore, she said she thinks there is some risk in the overall
system if the LNG plant shuts down prior to having other
infrastructure developed that can take its place.
2:12:57 PM
REPRESENTATIVE GUTTENBERG asked how HB 229 would affect gas
development at Red Dog Mine, Holitna Basin, Nenana Basin, and
Yukon Flats, given the bill would affect everything below the
68th parallel, which is the Brooks Range.
MR. BANKS replied that those players would receive the benefit
of these credits to the extent that any of them are paying some
sort of income tax. He said he also believes that the carry-
forward feature would provide five years for use of the credits.
The most likely candidates are Nenana Basin and Yukon Flats
because they are currently under active exploration, as is the
Red Dog Mine area.
2:15:08 PM
REPRESENTATIVE SEATON posed a scenario in which Red Dog Mine is
producing gas for itself and not for sale to others. He
inquired whether this 25 percent credit could be used against
the mine's corporate income tax for mining.
MR. BANKS deferred to Robynn Wilson, but said he thinks the mine
would be able to do this.
MS. ROBYNN WILSON answered that her reading of HB 229 is that
the credit would be applicable in this scenario.
2:16:07 PM
REPRESENTATIVE EDGMON surmised that the value of HB 229 is not
so much the increases to 9.4 percent and 25 percent, but rather
the provisions that broaden the definition of capital investment
and the amount of liability that can be written off each year.
MS. BUSEY reiterated that the 50 percent limitation has not been
an issue in the past for Marathon, so that is not where the
value is. The values to Marathon, when evaluating its worldwide
projects, are the increase from 10 to 25 percent on the
qualified capital investment and the removal of the successful
efforts requirement.
2:18:00 PM
MS. LOCKHART, in response to Representative Edgmon, said each
provision has a small amount of value and it is the collective
package that makes HB 229 attractive for enabling projects. She
likes the provision that would allow both successful and dry
holes to qualify because Marathon does not intentionally try to
drill dry holes. Extending the sunset provision to 2020 makes
sense because exploration activities are long-lead items.
Exploration planning can take four to six years, which is
already beyond the current sunset provision [of 2013].
2:20:00 PM
REPRESENTATIVE EDGMON commented that HB 229 would make the state
a bigger partner in terms of sharing in the upfront risk of
drilling, given that gas is not always found.
MS. LOCKHART said one could look at it that way. However, a
company must make the investments to qualify; it is not like a
company is getting something just for producing. It creates a
win-win situation.
2:21:14 PM
REPRESENTATIVE P. WILSON asked what would be more of an
incentive than HB 229, given that both Ms. Robynn Wilson and Ms.
Lockhart have stated that the bill's provisions are just a small
part of the overall picture.
MS. LOCKHART responded she does not want to downplay the
importance of HB 229, but it is a package of other things that
Marathon looks at. In an ideal world there would be unlimited
market access, limited regulations, sufficient storage, and
infrastructure to move gas at any time to any place, as well as
investment credits. Various aspects of the bills that are now
going through the legislature can help solve the problems in
Cook Inlet and are all pieces that need to come together.
2:23:05 PM
CO-CHAIR JOHNSON stated that HB 229 sends a message to industry
that the State of Alaska is willing to work with industry and is
open for business.
CO-CHAIR NEUMAN said there are so many up-front costs in Cook
Inlet that a small company cannot get started, and that is
coupled with the risk.
MS. LOCKHART replied there are a lot of up-front costs for any
location, but what hurts Alaska is the lack of competition in
some of the providers, which raises a company's costs. Drilling
a well in Alaska is significantly more costly than drilling in
Oklahoma. In addition to the higher costs, the regulations are
more stringent, although they are the right thing to do when
drilling in environmentally sensitive areas.
CO-CHAIR JOHNSON pointed out that gas is down 14 cents today to
$4.28 [per thousand cubic feet]. The lower the gas price the
more imperative it is for the state to spur development through
incentives to make Alaska competitive and to keep the heat and
lights on within the state.
2:26:19 PM
REPRESENTATIVE SEATON noted that the credit on corporate income
tax can only be used after making a profit and can only be
carried forward for five years. However, the potential for a
new player having development and profits within five years is
minimal. He inquired whether HB 229 would have more impact on
current gas producers that have corporate income tax liability
than it would on those that do not.
MS. LOCKHART said her guess is that it depends on what is found
and how fast it takes to get to production. The bill would help
existing players and could help players currently in Alaska that
want to expand into Cook Inlet, such as someone on the North
Slope; so, it may not be a company that does not yet have a
presence in Alaska.
CO-CHAIR JOHNSON added the jack-up rig that may be brought to
Alaska, as mentioned by Kevin Banks, could potentially be of
value to the other producers. A jack-up rig would drill for
more than one company, so it could promote more exploration and
this kind of credit would help further that along.
2:28:26 PM
MS. DAVIS addressed the issue of gas transportation by pointing
out that Section 4, page 3, Version E, expressly disallows a
credit for North Slope gas exploration and development, and
expressly disallows the cost of gas transport from North Slope
reserves to tidewater. This provision thus implies that for
Cook Inlet gas, qualified capital expenditures do pick up
transportation cost to the extent they are included in the
allowed property description on page 4, subparagraph (C)(ii),
which lists gathering lines, transmission lines, pumping
stations, and compressor stations. So, conceivably, to the
extent a taxpayer is an active explorer or operator of an oil
and gas lease, there would be some additional boost to Cook
Inlet deliverability through the transportation aspects. She
said she is thinking specifically about new entrants like
Armstrong Alaska, a company that is developing gas leases and
which she believes engaged with the gas utility, ENSTAR, to
share the cost of transmission lines for moving the gas from the
leases to ENSTAR.
MS. DAVIS cautioned that when looking at language the courts
assume that everything was put in for a specific purpose, and
the wording in Section 4 is confusing. The first clause
excludes investment associated with exploration and development
of North Slope gas and the second clause excludes any of the
cost to transport gas from the North Slope. Therefore, it is
unclear why the third clause would be needed if costs associated
with transporting gas from the North Slope have already been
excluded regardless of where it goes, because this would suggest
that only the delivery of North Slope gas to tidewater is being
excluded. This then begs the question of whether it means that
the cost of delivery of North Slope gas to Canada would be a
covered cost. She said she is confident the intent is not to
pick up a corporate income tax waiver for the large-scale Alaska
Gasline Inducement Act (AGIA) gas line. While she does not want
to lose sight of what HB 229 does for Cook Inlet gas transport,
she does not want to see a problem created by this one clause.
2:32:18 PM
CO-CHAIR JOHNSON said he is not sure he reads Section 4 the same
way as Ms. Davis.
CO-CHAIR NEUMAN said he finds that HB 229 would absolutely be of
benefit in assisting with the drilling and development of gas
wells. Help is needed in the development of infrastructure for
gas transmission and he thinks it is good the bill includes
this. Additionally, should gas go down even lower it will be
difficult to encourage gas development without further
incentives.
2:33:48 PM
REPRESENTATIVE P. WILSON asked how Section 4 could be changed to
ensure an unintended consequence.
MS. DAVIS responded that the clause to exclude qualified capital
investment and qualified services for North Slope gas is good
because it locks down the upstream side of North Slope gas
development. The second clause, "or that are made or incurred
to transport gas from reserves located in the area of Alaska
lying north of 68 degrees North latitude", means that any cost
to transport gas from the North Slope will be disallowed. She
said she thinks the third clause is already covered by the
second clause. Unless there is a specific concern that could be
explained to her, she would suggest that the second clause be
changed by deleting from page 3, line 22-24, "or for the
delivery of Alaska North Slope natural gas to tidewater below 68
degrees North latitude", and inserting "regardless of the
destination". That language would disallow all destinations
from the North Slope and would make it very clear that the cost
to transport gas from North Slope reserves to any destination is
not covered.
CO-CHAIR JOHNSON said he thinks that was the intent, so the
committee could entertain Ms. Davis's recommendation.
2:37:08 PM
REPRESENTATIVE TUCK inquired whether Marathon Oil Corporation
currently has operations in Oklahoma.
MS. LOCKHART replied yes.
REPRESENTATIVE TUCK asked what percent of Marathon's operations
are in Alaska versus the Lower 48, in regard to exploration.
MS. LOCKHART answered that over the past several years, Marathon
has had very little true exploration in Alaska versus elsewhere.
In further response, she said it is correct that Marathon has
had a lot of true exploration in the Lower 48. That exploration
has occurred in the shale plays, Gulf of Mexico, and Oklahoma.
2:39:08 PM
REPRESENTATIVE TUCK inquired whether Marathon would preference
exploration in Alaska over the other areas should HB 229 pass as
currently written.
MS. LOCKHART answered that HB 229 would provide for both
exploration and development. On the development side, the bill
would enable projects that are on borderline. On the
exploration side, Marathon would have to take its current
portfolio and make a comparison based on the new numbers. Since
that decision making would be part of the normal annual planning
process, she said she cannot state at this hearing that it would
drive wild exploration for Marathon in Cook Inlet, but she
thinks it would help projects compete.
2:40:31 PM
REPRESENTATIVE SEATON inquired whether expenses written off
against the 25 percent credit in HB 229 could also be used to
write-off against the 40 percent exploration tax credit in Cook
Inlet or any other tax credits.
MS. ROBYNN WILSON said AS 43.20.043(g) states that a taxpayer
obtaining a credit under this section may not claim a tax credit
or royalty modification provided for under any other title. She
interpreted this to mean that the expenditures, the subject of
which is this credit, cannot then be used for any other tax
credit, such as Chapter 55 production tax or the royalty
modification.
2:42:19 PM
REPRESENTATIVE SEATON requested future witnesses to state why a
company would apply for the 25 percent corporate tax credit in
Cook Inlet when it could receive a greater corporate tax credit
available under other provisions. He further requested that the
Department of Natural Resources provide the committee with a
definition of qualified services and whether the department
believes this provision would apply only to new well exploration
and development or would also extend to ongoing work within an
existing field.
MS. DAVIS, given the language would be contained in the state's
corporate income tax code, offered to work with Mr. Banks in
interpreting the qualified expenditures for the services side as
well as the for the capital side. She said the original version
only covered expenditures associated with a gas reservoir that
had not yet produced gas. However, Version E makes a
significant change by allowing a gas well to be drilled in an
existing reservoir, tapping gas reserves. It will be a finer
distinction for the Department of Revenue to ensure that the
labor services and the expenses being charged against that new
well are not actually associated with the adjacent wells and
their ongoing operating expenses.
2:46:29 PM
MS. DAVIS, in response to Co-Chair Johnson, said she is unsure
that anything the department would be able to say would
necessarily require language differences as she thinks the
language in Version E is really all about what an operating
expense is and the department's ability to distinguish that.
She said she and Mr. Banks will look at the language to see
whether any additional guidance is needed from the legislature
in assisting the Department of Revenue in interpreting what the
scope of the operating expense exclusion is.
2:47:29 PM
REPRESENTATIVE GUTTENBERG understood that House Bill 61 applied
to new oil or gas. He inquired whether a well drilled into an
existing field that does not change the production level, or a
well that is defined as stopping decline, would be eligible
under HB 229.
MS. DAVIS responded she believes that under the current language
of Version E the Department of Revenue would use the criteria
that the well produce development of any gas reserve, regardless
of whether there is commercial production in the area and
regardless of whether the outcome is a successful or
unsuccessful well. There is no requirement the well increase
overall production or stem decline, it is simply a well that
taps into gas reserve.
2:49:00 PM
CO-CHAIR NEUMAN, in regard to page 4, line 22, noted that the
line for 68 degrees North latitude goes through the middle of
Red Dog Mine as well as some other areas that are currently
being explored. He requested Ms. Davis to work with him to
ensure there is no interference with this development, since he
believes the sponsor's intent is that HB 229 not cover an in-
state pipeline to Southcentral Alaska or a pipeline to Canada.
MS. DAVIS replied there should be some kind of a descriptor that
would provide a geographic zone around that area that up to now
has no gas exploration so as to make it clear that would not be
part of the excluded area.
CO-CHAIR JOHNSON opened public testimony, but no one wished to
testify at this time. He kept public testimony open.
2:51:27 PM
REPRESENTATIVE SEATON noted that the property provision on page
4 has a lot of breadth in that it includes power plants, topping
plants, compressor stations, and so forth. He said he would
like to know how expansive this write-off of corporate income
tax could be on these issues if it involves gas. For example,
if some gas went through a port facility or power station, would
all of that then qualify for the 25 percent tax credit.
MS. DAVIS agreed to be the lead regarding this question.
CO-CHAIR JOHNSON held over HB 229 and recessed the meeting to a
call of the chair.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CS HB 229 v. E.pdf |
HRES 3/15/2010 1:00:00 PM |
HB 229 |
| CS HB 229 v. E Sectional.pdf |
HRES 3/15/2010 1:00:00 PM |
HB 229 |
| HB 229 Additional Information.pdf |
HRES 3/15/2010 1:00:00 PM |
HB 229 |
| HB 229 Fiscal Note.pdf |
HRES 3/15/2010 1:00:00 PM |
HB 229 |
| HB 229 Report from DOR 3.15.10.pdf |
HRES 3/15/2010 1:00:00 PM |
HB 229 |
| HB229 Testimony 3.15.10.pdf |
HRES 3/15/2010 1:00:00 PM |
HB 229 |